Commercial Biotechnology: an International Analysis (January 1984)

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Commercial Biotechnology: An International Analysis

January 1984

NTIS order #PB84-173608 —

Recommended Citation: Commercial Biotechnology: An International Analysis (Washington, D. C.: U.S. Congress, Office of Technology Assessment, OTA-BA-218, January 1984).

Library of Congress Catalog Card Number 84-601000

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402 —

Foreword

This report assesses the competitive position of the United States with respect to Japan and four European countries believed to be the major competitors in the commercial development of “new biotechnology.” This assessment continues a series of OTA studies on the competitiveness of U.S. industries. It was requested by the House Committee on Science and Technology and the Senate Com- mittee on Commerce, Science, and Transportation. Additionally, a letter of support for this study was received from the Senate Committee on Labor and Human Resources. New biotechnology, as defined in this report, focuses on the industrial use of recombinant DNA) cell fusion, and novel bioprocessing techniques. These techniques will find applications across many industrial sectors including pharmaceuticals, plant and animal agriculture, specialty chemicals and food additives, environmental applications, commodity chemicals and energy production, and bioelectronics. Over 100 new firms have been started in the United States in the last several years to capitalize on the commercial potential of biotechnology. Additionally, throughout the world, many established companies in a diversity of industrial sectors have invested in this technology. A well developed life science base, the availability of financing for high-risk ventures, and an entrepreneurial spirit have led the United States to the forefront in the commercialization of biotechnology. But although the United States is currently the world leader in both basic science and commercial development of biotechnology, continuation of the initial preeminence of American companies in the commercialization of biotechnology is not assured. Japan is likely to be the leading competitor of the United States, followed by the Federal Republic of Germany, the United Kingdom, Switzer- land, and France. In the next decade, competitive advantage in areas related to biotechnology may depend as much on developments in bioprocess engineering as on innovations in genetics, immunology, and other areas of basic science. Thus, the United States may compete very favorably with Japan and the European countries if it can direct more attention to research problems associated with the scaling-up of bioprocesses for production. Issues and options developed for Congress include Federal funding for the basic life sciences and for generic applied research, especially in the areas of bioprocessing engineering and applied microbiology, including the training of personnel in these areas. The United States may also need to be concerned with the continued availability of finances for new biotechnology firms until they are self- supporting. Additionally, there are changes in laws and policies that could improve the U.S. competitive position. These changes include clarification and modification of particular aspects of intellectual property law; health, safety, and environmental regulation; antitrust law; and export control laws. OTA was assisted in the preparation of this study by an advisory panel of individuals representing a wide range of backgrounds, including science, economics, financial analysis, law, labor, and new and established firms commercializing biotechnology. Additionally, over 250 reviewers from universities, the private sector, and government agencies, both domestic and foreign, provided helpful comments on draft reports. OTA expresses sincere appreciation to each of these individuals. As with all OTA reports, however, the content is the responsibility of the Office and does not necessarily constitute the consensus or endorsement of the advisory panel or the Technology Assessment Board.

Director

,.. Ill Commercial Biotechnology Advisory Panel

Michael Hooker, Chairman Bennington College Howard Bremer Robert R, Miller Wisconsin Alumni Research Federation University of Houston Robert Fildes Dorothy Nelkin Cetus Corp. Cornell University Julian Gresser Norman Oblon Massachusetts Institute of Technology Oblon, Fisher, Spivak, McClelland, & Maier Ralph Hardy David Padwa E. I. du Pent de Nemours & Co., Inc. Agrigenetics Corp. Zsolt Harsanyi David Parkinson E. F. Hutton & Co., Inc. Falk Clinic Peter Hutt Phillip A. Sharp Covington & Burling Massachusetts Institute of Technology David Jackson William J. Whelan Genex Corp. University of Miami William Maxon John Zysman Upjohn Co. University of California, Berkeley Laura Meagher North Carolina Biotechnology Center —

OTA Commercial Biotechnology Project Staff

H. David Banta * and Roger Herdman, * * Assistant Director, OTA Health and Life Sciences Division

Gretchen Schabtach Kolsrud, Program Manager, Biological Applications Program Project Director through August 1982

Nanette Newell, Project Director from September 1982 OTA Congressional Science Fellow through August 1982

Thomas Bugbee, Research Assistant from February 1983 Susan Clymer, Research Analyst Geoffrey M. Karny, Legal Analyst Kerry B. Kemp, Health and Life Sciences Division Editor Francis A. Packer 111, Research Analyst Kay Smith, Analyst James A. Thomas, Research Assistant from January 1983 Louise A. Williams, Senior Analyst Raymond Zilinskas, Analyst through October 1982

Special Contributor Robert M. Cook-Deegan, OTA Congressional Science Fellow

Administrative Assistants Susan Clymer through April 1982 Ted Wagner from May through August 1982 Fatimah Taylor from September 1982 through August 1983 Elma Rubright from September 1983

OTA publishing Staff

John C. Holmes, Publishing Officer John Bergling Kathie S. Boss Debra M. Datcher Joe Henson Glenda Lawing Linda A. Leahy Cheryl J. Manning

“Until August 1983, * *From Dec. 26, 1983 Major Contractors

Antonelli, Terry, & Wands Norine Noonan Washington, D.C. Georgetown University Washington, D.C. L. W. Bergman Bergman & Co. William O’Neill Princeton, N.J. Poly-Planning Services Los Ahos, Calif. Michael Borrus University of California Amelia Porges Berkeley, California Washington, D.C. Dike, Bronstein, Roberts, Cushman, & Pfund Gary Saxonhouse Boston, Mass. University of Michigan Ann Arbor, Mich. Foreman & Dyess Washington, D.C. Schwartz, Jeffery, Schwaab, Mack, Blumenthal, & Koch, P.C. Elmer Gaden Alexandria, Va. University of Virginia Charlottesville, Va. Southern Research Institute Birmingham, Ala. Genex Corp. Gaithersburg, Md. Philip Lee University of California Sheila Jasanoff San Francisco, California Cornell University Ithaca, N.Y. Madeline Vaquin Paris, France Kaye, Scholer, Fierman, Hays, & Handler Washington, D.C. Virginia Walbot Stanford University Management Analysis Center Stanford, Calif. Cambridge, Mass. Steven Zimmer James Millstein Brooklyn, N.Y. New York, N.Y.

vi Contents

Page Chapter 1: Executive Summary ...... 3 Chapter 2: Introduction ...... 25

Part I: The Technologies Chapter 3: The Technologies ...... 33

Part II: Firms Commercializing Biotechnology Firms Commercializing Biotechnology ...... 61

Part III: Applications of Biotechnology in Specific Industrial Sectors Chapter 5: Pharmaceuticals ...... 119 Chapter 6: Agriculture ...... 161 Chapter 7: Specialty Chemicals and Food Additives ...... 195 Chapter 8: Environmental Applications ...... 217 Chapter 9: Commodity Chemicals and Energy Production ...... 237 Chapter 10: Bioelectronics, ...... 253

Analysis ofU.S. Competitiveness in Biotechnology Chapter 11: Framework for Analysis...... 263 Chapter 12: Financing and Tax Incentives for Firms...... 269 Chapter 13: Government Funding of Basic and Applied Research ...... 307 Chapter 14: Personnel Availability and Training ...... 331 Chapter 15: Health, Safety, and Environmental Regulation...... 355 Chapter 16: Intellectual Property Law...... 383 Chapter 17: University/Industry Relationships ...... 411 Chapter 18: Antitrust Law ...... 435 Chapter 19: International Technology Transfer, Investment, and Trade ...... 453 Chapter 20: Targeting Policies in Biotechnology...... 475 Chapter 21: Public Perception ...... 489

Appendixes A. Definitions of Biotechnology ...... 503 B. Country Summaries ...... 505 c. A Comparison of the U.S. Semiconductor Industry and Biotechnology. . . . 531 D, Firms in the United States Commercializing Biotechnology ...... 542 E, OTA/NAS Survey of Personnnel Needs of Firms in the United States . . . . . 547 F. Recombinant DNA Research Guidelines, Environmental Laws, and Regulation of Worker Health and Safety ...... 55o G. Intellectual Property Laws ...... 564

H. Selected Aspects. of U.S. University/IndustrV“ Relationships. in Biotechnology./” 574 1, List of Acronyms and Glossary of Terms...... 586 J. Currency Conversion Factors ...... 598 K. Other Contractors, Contributors, and Acknowledgments ...... 599

Index ...... 605

vii 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)” respectively. 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, combines 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 usefulness 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, reliability, 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 commercialization. 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 national 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 devoting 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 molecular 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 diminished. 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 business 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 international 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 countries 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 promoting 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. Chapter 2 Introduction ● ✎

Contents

Page Impact of Biotechnology on the Research Community ...... 25 The Multidisciplinary Nature of Biotechnology ...... 25 Biotechnology in Developing Countries ...... 26 Local Efforts to Promote the Development of Biotechnology in the United States...... 26 Organization of the Report ...... 27 Chapter preferences ...... 27 Chapter 2 Introduction

This report assesses the international compet- technology, for instance, will very likely attract itive position of the United States with respect to students to bioprocess engineering, and an in- the development and commercialization of indus- crease in the number of engineers will probably trial applications of new biotechnology. New bio- improve bioprocess technologies applicable to the technology is defined as the use of novel technolo- traditional uses of biotechnology. Another reason gies–recombinant DNA (rDNA) technology, mon- biotechnology may increase in importance is the oclinal antibody (MAb) technology, and new tech- movement, albeit not very rapid, toward the use niques used in bioprocess engineering—to develop of renewable resources. Diverse micro-organisms commercial products and processes that use liv- able to convert biomass into useful chemicals, ing systems. some of which are a source of energy, are known, and these micro-organisms have yet to be ex- Despite its rather narrow focus on new biotech- ploited to the fullest extent. Furthermore, the nology, this report can be viewed as an intro- industries that use traditional biotechnology are duction to the entire subject of biotechnology, a showing interest in the novel techniques men- field that will become increasingly important in tioned above, and many of these industries will industrial production during the next few dec- probably be using these techniques, because of ades. Developments associated with new biotech- their broad applicability, in some aspect of their nology could spur a renaissance in traditional bio- operations in the future. technology. The lure of profitability in new bio-

Impact of biotechnology on the research community

A point to be mentioned that does not relate diseases such as diabetes and arthritis, and some directly to this report is the impact of the novel knowledge of brain function. Additionally, gene technologies, especially rDNA technology, on transplantation technology may reach a stage the biological research community. Recombinant where some genetic diseases could be cured. It DNA technology has already allowed a greatly may be that the main benefit of the new biological increased understanding of the basis of life, and technologies will be the advances in fundamental thus, of the genetic basis of disease. Research over knowledge that accrue. Thus, even if no commer- the next 10 years may yield an increased under- cial products were to result from them, these standing of the mechanism of carcinogenesis, technologies would still have a substantial impact genetic susceptibility to disease, the functioning on the quality of life. of the immune system, the basis of debilitating

The multidisciplinary nature of biotechnology

Biotechnology is unusual among most technol- example, need some knowledge of biochemistry ogies in that it spans an array of scientific disci - and microbiology as well as knowledge of engi- plines. Individuals seeking to be well versed in neering design so that the most efficient combina - applications of biotechnology must have inter- tion of micro-organism and bioreactor can be de- disciplinary training. Bioprocess engineers, for termined. Similarly, plant molecular biologists

25-561 0 - 84 - 3 26 ● Commercial Biotechnology: An International Analysis —————— -— need to know both plant physiology and molec- universities will need to draw on the resources ular genetics. People working in microbial en- of several departments. Diversified companies hanced oil recovery need training in microbiology may have an inherent advantage over other com- as applied to a specific geological environment. panies, because technologies perfected for the production of one product (e.g., a pharmaceutical The multidisciplinary nature of biotechnology product) can be modified and used for the pro- has extensive implications for educational and duction of another (e.g., a food additive). industrial structures. To excel in biotechnology,

Biotechnology in developing countries .

One area where biotechnology could certainly organization has proposed the construction of an have an impact, though not considered extensive- international center for biotechnology (2). The ly in this report, is in developing countries. Plants proposed center would have 50 staff scientists, that have been genetically manipulated for 26 postdoctoral fellows, and 100 visiting scientists; growth in tropical and desert climates could im- the annual budget would be $8.6 million; and the prove agricultural production. Vaccines that do research would concentrate on problems specific not need refrigeration could have widespread in- to developing countries. fluence on the health of the people and their This report does not cover developing countries livestock. Small local factories that convert for two reasons. First, developing countries are biomass to ethanol could help solve the problem not likely to compete with the United States for of costly petroleum imports for energy. market shares in biotechnology in the near future. The applications of biotechnology to developing Second, all countries in a competitive position countries was discussed in a workshop held by generally have equal access to markets in develop- the National Academy of Sciences and the U.S. ing countries, allowing them equal access to inter- Agency for International Development (l). The national market shares. Some developing coun- proceedings of this workshop include suggested tries give preferential treatment to the first priorities for research and time frames for company to market a product in that country, but development of various biotechnology products all countries have equal access for first introduc- important to developing countries, Additionally, tions. the United Nations Industrial Development

Local efforts to promote the development of biotechnology in the United States

Many State governments are actively promoting analyzed in another OTA report, Technology, the establishment of local high-technology centers Innovation, and Regionnal Economic Development, to stimulate the local economy, and many of these due to be published in 1984. It is important to include centers for biotechnology. The oldest and note, though, that it will take several years to best known of these is the North Carolina Biotech- recoup the costs of initiating one of these centers. nology Center. This report does not analyze the Local biotechnology centers cannot be viewed as development of these centers because they are a short-term solution to economic problems. Ch. 2—introduction ● 27 -. — — — --- —. ———.—- .—.

Organization of the report

This report is organized into four parts. Part are likely to occur first. Priorities for future I introduces the scientific background of the new research to promote the development of biotech- technologies and forms a basis for discussion of nology in each of the specific industrial sectors the commercialization of new biotechnology. The are outlined at the end of each chapter. three chapters consider the construction of rDNA, Part IV is an analysis of specific factors believed the formation of MAbs, and the relevant engineer- to influence a country’s competitiveness in bio- ing principles for the large-scale growth of micro- technology. It considers only those factors that organisms and the use of immobilized enzymes government policies could potentially affect. The to perform specific catalytic functions. Each em- first chapter of Part IV describes the framework phasizes the industrial use of the technologies and used for the analysis. Subsequent chapters ana- identifies the problems yet to be solved. lyze specific factors, more or less in order of their Part II is an overview of the companies using importance: private sector financing and tax in- biotechnology in the United States and its five centives, government funding of basic and applied major competitors in biotechnology: Japan, the research, personnel availability and training, Federal Republic of Germany, the United King- health, safety, and environmental regulation, in- dom, Switzerland, and France. The discussion tellectual property law, university/industry rela- considers the relative importance of and level of tionships, antitrust law, international technology collaboration between established companies and transfer and trade policy, targeting policies in bio- new biotechnology firms in determining a com- technology, and public perception. The analysis petitive advantage. This part also includes a of the relative importance of each factor in deter- discussion of the firms producing the necessary mining a country’s competitive position in bio- reagents and equipment for the commercial use technology and where the United States stands of biotechnology. Joint ventures among firms, is presented in Chapter 1.- Executive Summary. both foreign and domestic, are analyzed. Throughout Part IV, issues of congressional interest and a range of policy options are examined How specific industrial sectors are applying bio- with respect to improving the U.S. competitive technology is the subject of the several chapters position in biotechnology. in Part III. The sectors discussed are pharmaceuticals, agriculture, specialty chemicals and This report is a follow-on study to OTA’S April food additives, environmental applications, com- 1981 report entitled Impacts of Applied Genetics: modity chemicals and energy, and bioelectronics. Micro~rganisms, Plants, and Animals (3). Much The order of the chapters corresponds to the useful information is contained in that report and approximate time frames for the development of is not repeated here. The reader is advised to read products and processes in the various sectors– the earlier report for more information on the beginning with the sectors in which developments biological technologies and market forecasts.

Chapter 2 references

1. Board on Science and Technology for International 2. Newmark, P., “International Biotechnology: U.N. Development, Office of International Affairs, Na- Center To Be Based in India,” Nature 302:100, 1983. tional Research Council, Priorities in Biotechnology 3. US. Congress, Office of Technology Assessment, Im- Research for International Development: Proceed- paets of Applied Genetics: Microorganisms, Plants, ings of a Workshop (Washington, D. C.: National and Animals, OTA-HR-132, Washington, D. C., April Academy Press, 1982). 1981. PART I The Technologies Chapter 3 The Technologies Contents

Page Introduction ...... , ...... 33 Recombinant DNA Technology ...... 33 Structure and Function of DNA ...... 33 Preparing Recombinant DNA ...... 36 Recombinant DNA Technology in Industrial Processes ...... 37 Monoclinal Antibody Technology ...... 38 Preparing Monoclonal Antibodies ...... 40 Monoclinal Antibodies and Recombinant DNA Technology ...... 42 Large-Scale Production of Monoclinal Antibodies ...... 42 Industrial Uses for Monoclinal Antibodies ...... 43 Conclusion...... 43 Bioprocess Technology ...... 44 Bioprocess Essentials ...... 46 Processing Modes ...... 47 Raw Materials...... 51 Biocatalyst ...... 51 Bioprocess Monitoring and Associated Instrumentation ...... ~ ...... 52 Separation and Purification of Products ...... 54 Culture of Higher Eukaryotic Cells ...... 55 Priorities for Future Research ...... 56 Chapter 3 References ...... ~ ...... 57

Tables Table No. Page l. Volume and Value of Biotechnology Products ...... 44 2. Situations Potentially Requiring Large-Scale Eukaryotic Cell Culture ...... 55 3.Comparison of Microbial and Mammalian Cells ...... 57

Figures Figure No. Page 3.The Structure of DNA ...... 34 4.The Replication of DNA ...... 35 5.Mechanism of Gene Expression ...... 35 6. Recombinant DNA: The Technique of Recombining Genes From One Species With Those of Another ...... 36 7. Structure of an Antibody Molecule ...... 39 8. Preparation of Monoclinal Antibodies ...... 40 9. Steps in Bioprocessing...... 46 Chapter 3 The Technologies

Introduction —

This chapter reviews the scientific bases for the technology, allows the scaling-up of a biological technologies discussed in this assessment. The production process so that large quantities of a most publicized and broadly applicable of these product can be made. Bioprocess technology is, in technologies is recombinant DNA (rDNA) tech- many respects, the most difficult and least under- nology, which includes gene cloning, and is stood of the technologies, so it receives a more explained first. The second technology discussed intensive discussion in this chapter. Because of is monoclinal antibody (MAb), or hybridoma, the lack in the United States of broadly applicable technology. This technology, used to prepare knowledge in bioprocess engineering, the section complex molecules known as MAbs which can be on bioprocess technology also ends with priorities used to recognize or bind a large variety of for future research, giving a focus to where molecules, has an expanding number of applica- Federal research funds might best be spent. tions. The last technology discussed, bioprocess

Recombinant DNA technology

The development of rDNA technology-the joining of DNA from different organisms for a specific purpose—has allowed a greatly increased understanding of the genetic and molecular basis of life. This technology has also led to the founding of many industrial ventures that are addressing the production of numerous compounds ranging from pharmaceuticals to commodity chemicals. This section introduces some aspects of the scientific basis of rDNA technology, discusses methods that are used to construct rDNA, and notes several additional features of the commercial use of rDNA technology.

Structure and function of DNA

Throughout the spectrum of life, the traits Photo credit: Science Photo Llbraty and Porton/LH International characteristic of a given species are maintained The DNA of the bacterium Escherichia co/i and passed on to future generations, preserved simply and elegantly by the information system stranded, helical molecule, is composed, in part, contained within DNA. DNA can be thought of of four nucleotide bases—adenine (A), cwytosine (C), as a library that contains the complete plan for guanine (G), and thymine (T)-which are the let- an organism. If the plan were for a human, the ters of the chemical language. A gene is an library would contain 3,000 volumes of 1,000 ordered sequence of these letters, and each gene pages each. Each page would represent one gene, contains the information for the composition of or a unit of heredity, and be specified by 1,000 a particular protein and the necessary signals for letters. As shown in figure 3, DNA, a double- the production of that protein.

33 —

34 ● Commercial Biotechnology: An International Analysis

The mechanism by which DNA replicates is in- interest, and an intermediate product, messenger herent in the structure of DNA itself. As can be RNA (mRNA), a single-stranded, linear sequence of seen from figure 3, the nucleotide bases are nucleotide bases chemically very similar to DNA, paired to form the rungs of the twisted DNA lad- is synthesized. The transcription process dictates der. This pairing is absolutely specific: A always the synthesis of mRNA that is complementary to pairs with T and C always pairs with G. The pair- the section of unzipped DNA in a manner that ing is accurate, but not very strong. Thus, in cell is somewhat similar to the replication of DNA. In division, the DNA can “unzip” down the middle, the second step of gene expression, translation, leaving a series of unpaired bases on each chain. the mRNA, after release from the DNA, becomes Each free chain can serve as a template for mak- associated with the protein-synthesizing machin- ing a complementary chain, resulting in two iden- ery of the cell, and the sequence of nucleotide tical DNA molecules, each a precise copy of the bases in the mRNA is decoded and translated into original molecule. Figure 4 illustrates the replica- a protein. The protein goes on to perform its par- tion of DNA. ticular function, and when the protein is no longer needed, the protein and the mRNA coding The DNA present in every cell of every living for that protein are degraded. This mechanism organism has the capacity to direct the functions allows a cell to “fine tune” the quantity of its proof that cell, Gene expression, shown in figure 5, teins while keeping its DNA in a very stable and is the mechanism whereby the genetic directions intact form. in any particular cell are decoded and processed into the final functioning product, usually a pro- Proteins perform most of the necessary func- tein. In the first step, called transcription, the DNA tions of a cell. By far the most diverse group of double helix is locally unzipped near the gene of proteins is the enzymes, which are the proteins

t Figure 3.–The Structure of DNA

Base pairs

lgar-phosphate ckbone

A schematic diagram of the DNA double helix. A thr~dimensionai representation of the DNA doubie helix.

The DNA molecule is a doubie helix composed of two chains. The sugar-phosphate backbones twist around the outside, with the paired bases on the inside serving to hold the chains together. SOURCE: Office of Technology Assessment. Ch. 3—The Technologies ● 35

Figure 4.–The Replication of DNA Figure 5.—Mechanism of Gene Expression

I Transcription

mRNA released and transported to protein- synthesizing machinery

Translation

Protein

When DNA replicates, the original strands unwind and serve ~ ~~~~ as templates for the building of new complementary strands. The daughter molecules are exact copies of the parent, SOURCE: Office of Technology Assessment. with each having one of the parent strands organisms interpret that DNA in the same manner, all organisms, in essence, are related. It is that catalyze biological reactions. Another group this concept that forms the basis for the industrial is the structural proteins, which are found, for use of DNA. In nearly every instance, a produc- instance, in cell membranes. Other proteins have tion process using rDNA technology depends on regulatory functions; these include some hor- the expression of DNA from one species in mones. Still others have highly specialized func- another species. Only a universal genetic code tions (hemoglobin, for example, carries oxygen would allow DNA to be used in this manner. from the lungs to the rest of the tissues). Despite the existence of a universal genetic The code by which genetic information is trans- code, regulatory signals indicating starts and stops lated into proteins is the same for all organisms. of genes are known to vary among species. Thus, Thus, because all organisms contain DNA and all a gene removed from one organism and placed 36 . Commercial Biotechnology: An International Analysis in another will code for the same protein as it did Figure 6.-Recombinant DNA: The Technique of in its native system, but its synthesis needs to be Recombining Genes From One Species With Those of Another . induced by the proper host signal. one of the great challenges of rDNA technology is to construct DNA molecules with signals that optimally control the expression of the gene in the new ++ host . Donor DNA Preparing recombinant DNA

The amount of DNA present in each cell of a human (or most higher animals) is approximately 3 billion base pairs (2), and an average gene is about 1,000 base pairs, or about one millionth of the DNA. It is extremely difficult to study one gene in a million. Therefore, powerful tools have been developed to isolate genes of interest, place them in a foreign, simpler system, and replicate them many times to give a large amount of a single gene. The isolation of genes from higher organisms and their recombination in simple cells has already yielded a wealth of information, including insight into how genes determine the differences between different types of cells, how gene expression is regulated, and how genes may have evolved. For industrial uses, however, not only must the gene be cloned (reproduced), but SOURCE Off Ice of Technology Assessment that gene must also be expressed (the protein based on the gene be produced). The basic technique of preparing rDNA is shown in figure 6. Preparations of restriction enzymes (enzymes that are made in certain bacteria and cut DNA at specific sites) are used to cut donor DNA (usually from a higher organism) into fragments, one of which contains the gene of interest, The resulting DNA fragments are then inserted into a DNA “vector,” which is most often a plasmid. ” Each plasmid vector will contain a different donor DNA fragment. These rDNA plasmids are introduced into host cells in a process called ‘(transformation.” Once inside the host cells, the rDNA plasmids replicate many times, thus providing many copies of each donor DNA fragment. of the many bacteria transformed by plas - mids containing donor DNA, only a few will contain the DNA fragment of interest. The desired

“A plasmid is a circular, double-stranded piece of DNA which replicates in cells apart from the chromosome. Ch. 3—The Technologies ● 37

most genes do not produce large amounts of mRNA. More recently, a different technique has been used that allows a much greater diversity of genes to be cloned. If the amino acid sequence of a protein is known, then, working backwards through the gene expression scheme, the nucleo - tide base sequence can be determined. Because of the advent of automated DNA synthesizers, a portion of DNA can be synthesized that is complementary to the gene. This piece of DNA can then be used as a probe. Thus, if enough of a particular protein can be isolated and sequenced, its corresponding gene can be cloned. At present, rDNA is grown principally in simple

Photo credit: Science Photo Service and Po170rVLH International micro-organisms such as bacteria and yeast. Yeasts, in addition to bacteria, are being used as Molecular biologist in laboratory hosts for rDNA cloning because they more closely resemble cells of higher organisms. Yeasts per- gene is located among the vast number of bac- form functions similar to those of higher euka- teria containing plasmids with a suitable probe. * ryotic cells. These functions include adding sugar Vectors other than plasmids can be used for clon- groups to some proteins. For the function of many ing DNA. One method uses the DNA of viruses, proteins, these sugar groups are essential. Recent- and another uses cosmids, artificially constructed ly, scientists have learned how to introduce novel hybrids of plasmids and viruses. Another method genetic material into higher plants and animals. uses transposable elements, fragments of DNA The special techniques that pertain to cloning that can insert themselves into the host cell’s chro- DNA in plants are discussed in Chapter 6: Agri- mosomes. culture. All rDNA methods require the following: Recombinant DNA technology in ● a suitable vector that is taken up by the host, is capable of autonomous replication, and, industrial processes during the process, replicates the segment of The commercial use of rDNA technology has donor DNA faithfully; several features in addition to those just discussed. ● an adequate selection system for distin- In order to produce a product or improve a proc- guishing among cells that have, or have not, ess, the cloned gene must be expressed to give received rDNA; and a functional product. ● Since the signaIs that an appropriate probe for detecting the par- regulate gene expression vary from species to ticular DNA sequence in question. species, achieving the expression of a gene in a The most difficult part of the cloning process foreign cell may be difficult. The commercial is isolating an appropriate probe. The genes that development of biotechnology is highly depend- were first cloned were those that, in certain cells, ent on the ability to achieve gene expression, for produced large quantities of relatively pure it is proteins (or their metabolizes) that either are mRNA. Since the mRNA was complementary to the marketable products themselves or establish the gene of interest, the mRNA could be used as the cellular environment necessary for perform- a probe. This method severely limited the number ing such practical tasks as degrading toxic wastes of genes that could be cloned, however, because or increasing the efficiency of photosynthesis. To a large extent, the problem of gene expression

● ,4 probe is a sequence of DNA that has the same sequence as has been addressed through the manipulation of the desired gene and has been prepared in such a waj’ that it can the adjacent vector DNA so that it contains the be identified after it base pairs with that gene, host regulatory sequences. The cloned gene can 38 ● Commercial Biotechnology: An International Anaiysis then be “switched on” by using host-regulated were modified by mutagenizing the host cell and controls (l). Moreover, it is possible to alter then selecting or screening for mutants that con- specifically the regulatory sequences so that the tained an altered enzyme. Now, through use of gene is expressed at higher levels or so that its the techniques of X-ray crystallography, protein expression is more readily controllable in an sequencing, and computer modeling, the amino industrial situation (3). acid sequence and three-dimensional structure of the protein can be determined and amino acid The purification of a protein from an industrial changes that should bring about altered enzyme bioprocess is greatly simplified if the protein is properties can be selected. The DNA sequence of secreted from the cell into the growth medium. the cloned gene for an enzyme can then be modi- If the protein is secreted, it does not have to be fied to incorporate the amino acid changes. purified away from all the other cellular compo- Specific gene modification is made possible be- nents. It is possible to attach additional regulatory cause of technical advances resulting in rapid and signals to the vector DNA that direct the cell to inexpensive synthesis of small DNA segments that secrete the protein and, thus, simplify its purifica- can be used to change specific base pairs in a DNA tion. The successful development of methods to sequence. Near-term protein modification exper- enhance gene expression and product function iments could result in enzymes with increased and secretion will undoubtedly enhance the com- temperature and pH stability. Longer term experi- mercial applicability of rDNA technology. ments could define the structure of active sites The computer-aided design of proteins is of enzymes to be used for specific catalytic another technology that will expand the use of functions. rDNA molecules industrially. In the past, enzymes

Monoclinal antibody technology

The production of antibodies in higher animals This effecter region is associated with functions is one aspect of a complex series of events called such as the secretion of antibodies from the B lym- the immune response. Specialized cells called B phocyte and “signaling” to the immune system lymphocytes, present in the spleen, lymph nodes, after the antibody binds with the target antigen. and blood, recognize substances foreign to the The other end of the antibody, the variable re- body, or antigens, and respond by producing anti- gion, contains the site that recognizes and binds bodies that specifically recognize and bind to to a particular antigen, and the structure of this those antigens. Any given B lymphocyte can end varies greatly from antibody to antibody to recognize only one antigen. Thus, when a B lym- accommodate a wide range of antigens. phocyte meets and recognizes an antigen for the Apart from their natural functions in the first time, the B lymphocyte is stimulated and protection of organisms via the immune response, becomes committed to producing a single type of antibodies have long been important tools for antibody for the duration of its life. The end result researchers and clinicians, who use an antibody’s of this aspect of an immune response is the anti- specificity to identify particular molecules or cells gen’s removal from the body. and to separate them from mixtures. Antibodies Antibodies bind to antigens and carry out their also have a major role in diagnosis of a wide functions by virtue of the antibody’s unique struc- variety of diseases. Antibodies that recognize ture. All antibodies are comprised of four protein known antigens are used to detect the presence chains in a precise orientation, as shown in figure and level of drugs, bacterial and viral products, 7. One end of the antibody (the constant, or ef- hormones, and even other antibodies in sensitive fecter region) is nearly identical among antibodies. assays of blood samples. Ch. 3—The Technologies 39

Figure 7.—Structure of an Antibody Molecule ing and expensive, have not prevented the effec -

methods for continual production of large amounts of pure antibodies has continued. By what Cesar Milstein calls a “lucky circum- stance,” he and Georges Kohler began experiment- ing with the well-established technique of cell fusion in myeloma (antibody-producing tumor) cells adapted for cell culture. Milstein and Kohler fused myeloma cells with antibody-producing spleen B lymphocytes from mice that had been Constant region immunized with sheep red blood cells (SRBCS), and they found that some of the resulting hybrid Effecter functions cells, called hybridomas, secreted large amounts of homogeneous (monoclinal) antibodies directed against SRBCS (20)21). The myeloma parent cell conferred on the hybridoma the ability to grow permanently in cell culture and thus to support SOURCE Off Ice of Technology Assessment. almost unlimited antibody production, while the B lymphocyte parent contributed the genes The conventional method of producing anti- coding for the specific antibody against an SRBC bodies for diagnostic, therapeutic, and investiga- antigen. tional purposes is to inject an antigen into a laboratory animal and, after evoking an immune response, to collect antiserum (blood serum containing antibodies) from the animal. Although this method has been and continues to be widely used, there are several problems associated with conventional antibody technology, These include: minor contamination of the injected antigen with other molecules, so that the antiserum collected from the animal contains a mixture of antibodies against both the target antigen and the contaminating molecules; ● heterogeneous populations of antibodies with concomitant differences in activity, affinity for the antigen, and biological functions, especially when a number of different animals are used to prepare the antiserum; and ● the limited supply of quality antisera for any given purpose (10,28,32). Since these difficulties are almost unavoidable in standard antibody preparations, the standardi- zation of immunoassay and the accumulation of large amounts of reference antisera have been Photo credit: Scisnce Photo Service and PortodLH lnte?natlonal difficult. Such problems, although time-consum- Dr. Cesar Milstein, discoverer of monoclinal antibodies 40 ● Commercial Biotechnology: An lnternational Analysis

By using the method of hybridoma, or MAb, The many hybridomas that result are cloned, and technology, it is now possible to “immortalize” in- each clone is tested for the production of the dividual antibody-producing cells by fusion with antibody desired. A particular hybridoma clone tissue culture-adapted myeloma tumor cells in the either may be established in an in vitro culture laboratory (4,5,8,13,22,25). system or may be injected into mice, where the hybridoma grows in abdominal cavity fluid Preparing monoclinal antibodies (ascites) from which the antibodies are readily collected. The method used to prepare MAbs is summarized in figure 8. The purified antigen of choice This method allows the preparation of large is injected into a mouse, and a few weeks later, quantities of highly specific MAbs against almost the spleen of the mouse is removed, The B lym- any available antigen. The antibodies produced phocytes (antibody-producing cells) are isolated by MAb technology are homogeneous, and their from the spleen and fused with myeloma cells. production is predictable and repeatable, as com- The resulting cells are placed in a cell culture pared to polyclonal antibodies produced with con- medium that allows only the hybridomas to grow. ventional immunological methods.

Figure 8.—Preparation of Monoclinal Antibodies

Mouse myeloma (tumor) cells are removed and placed in tissue culture

Cells divide in liquid medium

The products of this fusion are grown in a selective medium. Only those fusion products Mveloma cells which are both “immor- ar~ mixed and tal” and contain genes 1 fused with from the antibody pro- B lymphocytes ducing 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 monoclinal antibodies.

SOURCE: Off Ice of Technology Assessment, adapted from Y. Baakln, “In Search of the Magic Bullet,” Technology f7ev/ew, pp. 19-23. Ch. 3—The Technologies ● 41

Photo credit: Sctence Photo Service and Por@n/LH international

Scanning electron micrograph of human hybridoma cells

Photo credit: Science Photo Library and PortmlLH International

Despite the great promise of MAbs, there are One step in the isolation of hybridomas several persistent technical problems to be considered: Another problem being addressed is the development of hybridomas for specific species. Some ● obtaining MAbs against certain weak antigens suitable myeloma cell lines exist for mice, rats, (antigens that do not produce a large immune and humans (12,20,27), but a wider variety of response) remains difficult (11,24); human cell lines and cell lines for other species ● homogeneous antibodies cannot perform are needed if wider applications of MAb tech- some functions such as forming a precipitate nology are to be made. Hybridomas are often with other antigen-antibody complexes, a made with cells from two different species, but necessary function for some diagnostic assays; these fusions regularly result in the preferential ● low frequency of fusion is a continuing prob- loss of the spleen B lymphocyte chromosomes, 1em in the preparation of hybridomas, as is resulting in an absence of antibody production the stability of the hybridomas and antibodies (24). For therapeutic applications, it is desirable (14); and to treat people with human antibodies to avoid ● some MAbs are sensitive to small changes in allergic reactions and other problems of antibody pH, temperature, freezing and thawing, and cross-reactivity. Thus, MAbs from a human can be inactivated during purification. myeloma/human spleen cell fusion are needed. Many of these problems are being alleviated or Several investigators have reported the develop- solved as research with MAbs progresses. ment of human myelomas that are suitable for

25-561 0 - 84 - 4 42 ● Commercial Biotechnology: An International Analysis

The first cloning and expression of a complete antibody molecule in a bacterial system was announced recently by the U.S. firm Genentech and the City of Hope Medical Center and Research Institute (19). The protein chains were expressed separately in bacteria and reconstituted by the researchers. The pharmaceutical applications of bacterially produced antibody genes will be limited. Antibody molecules must be modified by the cell to function in most diagnostic and therapeutic applications. Bacteria do not perform the modifications necessary for proper function. However, it maybe possible to clone the antibody genes in a cellular system such as yeast where the proper modifications can be made. The production of MAbs in rDNA systems may prove useful for making reagents used in industrial applications where only the antigen-binding function may be necessary. With genes cloned for the antigen-binding regions of the antibody, portions of MAbs may be produced more economically in bacterial rDNA systems than in a large-scale mouse ascites or cell culture protocols.

Large-scale production of monoclinal antibodies

Photo credit: Science Photo L/brary and PortonlLH International Although MAbs can be produced by several In vitro identification of specific cells using fluorescently methods, manufacturers primarily use mouse labeled monoclinal antibodies ascites to produce the modest amounts of MAbs needed to service current diagnostic and research hybridoma preparation (9,17,23,27). Successful markets. As applications for MAbs to human fusions apparently result from using these cell therapy are developed, the need for larger quan- lines (6). tities of MAbs (free from mousederived contami- nants that might cause allergic reactions) may . encourage a switch to the use of large-scale cell Monoclinal antibodies and culture to produce MAbs. If MAbs are to be used recombinant DNA technology in industrial applications (e.g., in the purification of proteins), production methods will be needed The combination of MAb technology and rDNA to produce even larger quantities of antibodies, technology offers intriguing possibilities for fur- In these cases, efficient cell culture or microbial ther technological exploration. Recombinant DNA bioprocess techniques will probably be necessary techniques could be used to produce portions of to provide enough antibodies to fill these needs. antibody molecules in bacteria to circumvent some of the problems (e.g., hybridoma instability) Improved, more controllable cell culture associated with MAb production in mice or tissue systems will be needed for the production of culture. Additionally, these MAbs would be free MAbs in the future. A crucial need for large-scale of impurities, such as viruses, found in animal cell culture is either the isolation of hybridoma cells and possibly could be produced in large cell lines that attach to surfaces or the use of tech- amounts with a concurrent savings in cost. niques for immobilizing cells on a solid matrix. Ch. 3—The Technologies ● 43

Immobilized cells could be grown in large quanti- diagnostic or therapeutic applications so that the ties in culture; the MAbs secreted from the cells binding can be reversed easily. could then be routinely collected from the Various important proteins, including alpha- medium. Immobilized cell methods may prove fetoprotein and leukocyte interferon, are now valuable for large-scale MAb production. Such purified using MAbs (29,30). MAb purification methods are already used industrially, for exam- systems may be used in the future to purify a vast ple, in growing cells that produce polio virus for number of compounds, particularly substances subsequent vaccine production (26,31). present in small amounts. Damon Biotech Corp. (U. S.) has recently intro- A simple extension of the procedure just de- duced the technique of microencapsulation to scribed involves using MAbs to bind unique sur- MAb technology (7). This method uses a porous face proteins and, with them, the cells to which carbohydrate capsule to surround the hybridoma they are attached. This permits separation of cells cells and to retain the antibodies while allowing with surface proteins of interest and is carried the circulation of nutrients and metabolic wastes. out by passing the cells over a suitable matrix to After several days in culture, the encapsulated which the antibodies have been bound. In another colonies are harvested and washed to remove the procedure, fluorescence-activated cell sorting, growth medium, the capsules are opened, and the cells are mixed with fluorescently labeled MAbs, antibodies are separated from the cells. Accord- and the mixture is passed through a special instru- ing to Damon Biotech, 40 to 50 percent (by weight) ment called a flow cytometer, which responds to of the harvested medium is made up of MAbs. the fluorescent marker and sorts the cells into The company claims the microencapsulation labeled populations at rates of 50,000 cells per method for producing MAbs is significantly less minute (15,16). So far, fluorescence-activated cell expensive than the ascites method, provides a sorting has been used mostly for research pur- high concentration of antibodies, and does not poses, but as the method is improved, it may be require the maintenance of animals (18). employed in a range of clinical applications. Industrial uses for monoclinal antibodies Conclusion Because of their unique properties of homoge- Many fields of biological research are being neity, specificity, and affinity, MAbs can be used affected by MAb technology. Researchers now effectively in downstream purification systems use MAbs to study problems in endocrinology, for molecules, especially proteins, A MAb purifica- biochemistry, cell biology, physiology, parasi- tion system relies on the binding of a target tology, and many other fields, because the prod- molecule to a MAb immobilized on a solid support ucts of MAb technology are easily standardized such as a bead, The beads are packed in a column, and reproduced. Furthermore, many diagnostic, and a mixture containing the target molecule is therapeutic, and industrial uses for MAbs are passed through the column. The MAb binds the becoming apparent, and, as outlined in subse- molecule while the impurities wash through the quent chapters of this report, several U.S. and column. Then the binding is reversed, and the foreign firms are developing these applications. target molecule is released and collected from the Industrial purification applications of MAbs and column. the widespread advantages of MAb technology Before MAb-based purification systems can be in preparing pure and easily standardized anti- used in large-scale, several practical and technical bodies offer substantial benefits in industrial, factors must be optimized. These include cost, research, and clinical laboratories. Recombinant purification of the antibody itself, and elution of DNA and MAb technologies can complement each the desired product after purification by the anti- other, because rDNA technology can lead to the body. Elution requires the use of an antibody of production of new compounds, and MAbs can aid somewhat lower affinity than one would use for in their identification and purification. ——

44 . Commercial Biotechnology: An International Analysis

Bioprocess technology*

Bioprocesses are systems in which complete vitamins and enzymes was initiated at about this living cells or their components (e.g., enzymes, time, although only on a small scale. Thus, in the chloroplasts, etc.) are used to effect desired decade from 1940 to 1950, there occurred a com- physical or chemical changes.** Since the dawn plete transformation of industrial bioprocesses. of civilization, bioprocesses have been used to pro- Production of high-volume, low-value-added induce alcoholic beverages and fermented foods. dustrial chemicals (e.g., acetone, butanol) by Until the 19th century, alcoholic fermentation and anaerobic processes employing primarily yeasts baker’s yeast production were carried out in the and bacteria was largely replaced by more mod- home or as local cottage industries. As industrial- est-scale production of high-value-added products ization occurred, both these bioprocesses moved (e.g., pharmaceuticals, vitamins, enzymes) made into factories. by highly aerobic processes in a variety of less familiar bacteria (e.g., the actinomycetes) and Although other minor products made with some fungi (see table 1). These aerobic processes bioprocesses were added over the years, bio- are generally quite vulnerable to contamination processes did not become significant in the overall by other micro-organisms and require much spectrum of chemical technology in the United closer control of process conditions. Such aerobic States until the introduction of commercial processes continue to be used in industry today. acetone and butanol production during and after World War I. Somewhat later, large-scale micro- The advent of new biotechnology has sparked bial production of citric acid was introduced, and renewed interest in the industrial use of bioproc- by the beginning of World War II, the U.S. bio- esses. The discussion that follows examines the process industry was thriving, with solvent alco- dependence of new biotechnology, including hols and related low molecular weight compounds rDNA and MAb technology, upon bioprocess tech- comprising the bulk of bioprocess production, nologies. Two aspects of the interrelationship be- The rapid growth of the petrochemical industry tween new genetic technologies and bioprocess during World War H caused the displacement of technologies are emphasized: microbial production of industrial solvents, ● the engineering problems unique to genet- however, and by 1950, microbial production of ically modified organisms, and such solvents (including nonbeverage alcohol) had ● the ways in which genetically modified virtually disappeared in the United States. organisms or parts of organisms maybe used This contraction of bioprocess manufacturing to enhance the efficiency and usefulness of might have been the death-knell for old biotech- bioprocesses. nology had it not been for the introduction of, In order to be viable in any specific industrial and the proliferation of markets for, antibiotics context, bioprocesses must offer advantages over during the 1940’s. The unique qualifications of biological processes for the synthesis of complex molecules such as antibiotics rapidly became Table I.-Volume and Value of Biotechnology apparent. Microbial production of a number of Products Category Examples ● This section is based largely on a contract report prepared for the Office of Technolo~ Assessment by Elmer Gaden, University High volume, low value . . . Methane, ethanol, animal of Virginia. The information in that report was extensively reviewed feed, waste treatment and added to by James Bailey, California Institute of Technology; High volume, intermediate Harvey Blanch, University of California, Berkeley; and Charles value ...... Amino and organic acids, Cooney, Massachusetts Institute of Technology. food products, polymers Low volume, high value . . . Pharmaceuticals, enzymes, ● *The term bioprocess is used here in preference to the more familiar term “fermentation” because it more correctly identifies vitamins the broad range of techniques discussed. A fermentation process, SOURCE: Off Ice of Technology Assessment, adapted from A. T. Bull, G. HoIt, and M. D. Lilly, B/otechno/ogy: International Trends and Perspectives though often used to denote any biopmcess, strictly speaking refers (Paris: Organisation for Economic CoOperation and Development, only to an anaerobic bioprocess. 19s2). Ch. 3—The Technologies 45 competing methods of production. In most cases, Some of the conceivable disadvantages of bioprocesses will be used industrially because bioprocesses, on the other hand, are the they are the only practical way in which a desired following: product can be formed. Biological processes may ● the generation of complex product mixtures be desirable: requiring extensive separation and purifica- . in the formation of complex molecular struction, especially when using complex sub- tures such as antibiotics and proteins where strates as raw materials (e.g., lignocellulose); there is no practical alternative, ● problems arising from the relatively dilute . in the exclusive production of one specific aqueous environments in which bioprocesses form of an isomeric compound, function [e.g., the problem of low reactant ● because microa-ganisms may efficiently ex- concentrations and, hence, low reaction ecute many sequential reactions, and rates; * the need to provide and handle large ● because bioconversions may give high yields. volumes of process water and to dispose of equivalent volumes of high biological oxygen Examples of the categories of current uses of demand wastes; complex and frequently bioprocesses are the folIowing: energy intensive recovery methods for production of cell matter ((’biomass” itself) removing small amounts of products from (e.g., baker’s yeast, single-cell protein); large volumes of water); production of celI components (e.g., enzymes, ● the susceptibility of most bioprocess systems nucleic acids); to contamination by foreign organisms, and, production of metabolizes (chemical products in some cases, the need to contain the of metabolic activity), including both primary primary organism so as not to contaminate metabolizes (e.g., ethanol, lactic acid) and the surroundings; secondary metabolizes (e.g., antibiotics); ● an inherent variability of biological processes catalysis of specific, single-substrate conver- due to such factors as genetic instability and sions (e.g., glucose to fructose, penicillin to raw material variability; and 6-aminopenicillanic acid); and ● for rDNA systems, the need to contain the catalysis of multiple-substrate conversions organisms and sterilize the waste streams, an (e.g., biological waste treatment). energy-intensive process. Bioprocesses may offer the following advan- Solutions to some of these problems through tages over conventional chemical processes: the use of biotechnology may make bioprocesses more competitive with conventional chemical syn- ● milder reaction conditions (temperature, theses. Genetic intervention may be used in some pressure, and pH); instances to modify micro~rganisms so that they ● use of renewable (biomass) resources as raw produce larger amounts of a product, grow in materials for organic chemical manufacture, more concentrated media, have enzymes with providing both the carbon skeletons and the increased specific activity, or grow at higher energy required for synthesis; temperatures to help prevent contamination. ● less hazardous operation and reduced en- Recombinant DNA technology may lead to the vironmental impact; development of completely new products or ● greater specificity of catalytic reaction; modification of important existing ones. In the ● less expensive or more readily available raw past, some potentially useful bioprocesses have materials; ● less complex manufacturing facilities, requiring smaller capital investments; ● It is often said that biochemical catalysis is many times more ef- ● improved process efficiencies (e.g., higher fective than conventional chemical catalysis. ‘1’his contention is based yields, reduced energy consumption); and on the very high specific activities observed for individual enzymes ● in vitro. Such rates are seldom encountered under large-scale condi- the use of rDNA technology to develop new tions. In general, bioprocesses are extremely slow in comparison processes. with conventional chemical processes. 46 ● Commercial Biotechnology: An International Analysis

not been economical. Now, however, a combina- Bioprocesses require a closely controlled ention of improved engineering design and pro- vironment, and this necessity markedly influences cedures and rDNA technology may yield bioproc- their design. Biocatalyst generally exhibit great esses that are more efficient than they have been sensitivity to changes in temperature, pH, and in the past and therefore more competitive. even concentrations of certain nutrients or metal ions. The success of a bioprocess depends on the Bioprocess essentials* extent to which these factors are controlled in the medium where interaction between biocata- The steps in bioprocessing are presented sche- lyst and substrate takes place. matically in figure 9. The substrate and nutrients are prepared in a sterile medium and are put into the process system with some form of biocata- SUPPLY OF NUTRIENTS lyst–free or immobilized cells or enzymes. Under In addition to establishing a suitable environ- controlled conditions, the substrate is converted ment, the medium must provide for the nutri- to the product and, when the desired degree of tional needs of living cells. A primary requirement conversion has been achieved, byproducts and is a source of carbon, In addition to supplying the wastes are separated. energy needed for metabolism and protein syn- Water is the dominant component of the thesis, carbon sources contribute structural medium for virtually all current bioprocesses. elements required for the formation of complex Even when micro-organisms are grown on solid compounds. Often, the carbon source may itself materials, an unusual processing mode, the be the substrate for the catalyzed reaction, as in substrate must be dampened in order to permit the fermentation of sugar to ethanol. Sugars, microbial growth and enzyme action. Products starches, and triglycerides, and, to a lesser extent, must usually be purified from dilute, aqueous petroleum fractions, serve as carbon sources. solutions. Other important nutrients required by living cells are nitrogen, phosphorus, and sometimes ox- ● The bioprocesses discussed here exclude uncontrolled environ- ygen. Nitrogen and phosphorus are incorporated mental applications. into structural and functional molecules of a cell and may also become pafi of product molecules. Figure 9.—Steps in Bioprocessing Most of the microorganisms currently used by industry are highly aerobic and require an adequate supply of oxygen, but others are strictly anaerobic and must be protected from oxygen. A number of other nutrients, such as vitamins and metal ions, though required only in very small amounts, are nevertheless essential. Some of these nutrients, especially metals, may appear in the product. In order to make the substrate and nutrients accessible to the biocatalyst, the medium must be thoroughly mixed. Most bacteria and some yeasts used in bioprocesses commonly grow as individual cells or as aggregates of a few cells suspended in the medium, whereas fungi and actinomycetes grow in long strands. As they grow, all these types of cells increase the viscosity of the fluid in which they are growing in a batch process, making the fluid more difficult to mix, and thus more difficult SOURCE: Office of Technology Assessment. for nutrients to reach them. Ch. 3—The Technologies ● 47

Since most of the micro~rganisms currently Processing modes used by industry perform their conversions aerobically, they demand a constant supply of Bioprocesses may, in principle, use any of the oxygen. Oxygen’s low volubility in water repre- operating modes employed by conventional chem- sents a significant stumbling block to efficient ical technology. These modes range from batch bioprocessing. Since oxygen is depleted during processing to continuous steady-state processing. conversion, the medium must be constantly aer- In batch processing, the reaction vessel is filled ated; the more viscous the medium, however, the with the medium containing the substrate and more difficult it becomes to supply oxygen. Ap- nutrients, the medium is sterilized, the biocata- proaches to maintaining an adequate oxygen sup- lyst is added, and conversion takes place over a ply include: period ranging from a few hours to several days. ● increasing reactor pressure to increase ox- During this period, nutrients, substrates, agents ygen volubility, for pH control, and air are supplied to, and prod- ● the use of oxygen-rich gas for aeration, and uct gases are removed from, the reaction vessel. ● changes in process design and operation. When conversion is complete, the reaction vessel is emptied, and the purification process begins. PURE CULTURES AND STERILIZATION Turnover time between batches can account for a significant portion of total processing time. Most of the products of bioprocesses are formed through the action of a single biocatalyst, In continuous steady-state processing, which either a microorganism or an enzyme. * If foreign lies at the other end of the operational spectrum organisms contaminate the process system, they from batch processing, raw materials are supplied may disrupt its operation in a variety of ways. to, and spent medium and product are withdrawn They can directly inhibit or interfere with the from, the reaction vessel continuously and at biocatalyst, whether it is a single enzyme or a volumetrically equal rates. Potential advantages complete cell, and they may even destroy the offered by continuous processing over batch biocatalyst completely. Alternatively, contami- processing include significantly higher productivi- nating organisms may leave the catalyst un- ty, greater ease of product recovery due to the affected, but modify or destroy the product. lack of contaminating biocatalyst, and lower cost Foreign organisms can also generate undesirable due to reuse of biocatalyst. substances that are difficult to separate from the The simplest approach to the implementation primary product. In the manufacture of pharma- of a continuous processing system is to modify ceutical products, the risk of toxic impurities is a batch reactor so that fresh substrate and of particular concern. nutrients can continually be added while a To avoid or minimize contamination, most cur- product stream is removed. This simple arrange- rent bioprocess technologies employ pure culture ment has one serious drawback: the biocatalyst techniques. The medium and its container are leaves the reactor continuously with the outlet sterilized, and a pure culture consisting of a stream and must be separated from the product. population of a particular species is introduced. Several techniques, all of which involve fixing the

In order to avoid subsequent contamination, all biocatalyst in some reamer) have been developed materials entering the system, including the large to avoid the biocatalyst’s escape with the reaction amounts of air required for aerobic processes, are mixture and allow its repeated use. The develop- sterilized. The apparatus must be designed and ment of techniques for the immobilization of operated so that opportunities for invasion by biocatalyst has greatly expanded the possibilities unwanted organisms are minimized. for continuous bioprocesses. Although still not widely employed for large-scale bioprocesses, the biocatalyst immobilization techniques now avail- *A significant exception to this generalization is the broad group able offer a diversity of new opportunities for of biological waste treatment processes. These processes use mixed and varied populations of microorganisms developed naturally and more effective bioprocessing (see Box A.-Contin- adapted to the waste stream being treated. uous Bioprocessing). 48 • Commercial Biotechnology: An International Analysis Ch. 3—The Technologies . 49

Figure BXA-1 .—Techniques for Immobilizing Enzymes and Whole Cells

Enzymes can be immobilized by adsorption or chemical bonding (a), by entrapment in a polymer matrix (b), or by microencapsulation (c).

Carrier Lattice Membrane SOURCE Adapted from E Gaden, “Production Methods in Industrial Microbiology)” Scientific American, September 1981, p. 182,

Table BXA”l.—Characteristics of Immobilization Methods for Enzymes and Cells

Immobilization method Physical Chemical Entrapment; Characteristic adsorption bonding encapsulation Preparation ...... Easy Difficult Moderate Activity ...... Low High High Specificity ...... Unchanged Changeable Unchanged Binding force (retention) . . . . . Weak Strong Strong Regeneration ...... , . Possible Impossible Impossible cost ...... Low High Low

SOURCE Gaden, personal communication, 1983

● Biological. BiocataIwvst stability may be difficult to maintain for long periods of continuous operation. The phenomenon of “culture degeneration,” reported in many instances, deserves careful study. The results of such studies will surely be case-specific and may simply reflect inadequacies in the lmoivledge of nutrient requirements necessary to sustain long-term productivity. As the use of rDNA organisms grows, this matter will require close attention because of concerns over the stability of these types of organisms. (Operationaf. The primary technical factors acting to limit continuous bioprocessing in the past have been difficulties in maintaining sterile conditions and in handling biocatalytic suspensions, especially those of filamentous fungi or large cell clumps. The perplexing contamination problem has focused improvement efforts on the deficiencies of equipment (mainly pumps) for moving liquids and slurries and on valves and transfer lines. Many specific difficulties have already been overcome in connection with batch operations, and improved equipment design and more rigorous operating procedures may result in successful continuous processes. — —

50 ● Commercial Biotechnology: An International Analysis

Figure BXA.2.– Packed-Bed and Fluidized-Bed Reactors

Packed-bed reactor Fluidized-bed reactor Fresh medium Settling region

r Outlet ,.:”~”f stream

u Packed bed u i t Spent medium and product Fresh medium SOURCE: Adapted from E. Gaden, “ProductIon Methods in Industrial Microbiology,” Sckwrtlfk Arnerlcan, September 19S1, p. 19S.

Batch operation currently dominates specialty line to another. Furthermore, a switch from batch chemical and pharmaceutical bioprocesses and is to continuous processing is expensive, and, if a likely to continue to do so in the near future, In company has unused batch equipment, it may addition to technical limitations on continuous find that a switch to continuous processing is not processing (see box A), other considerations have economically warranted in the near term. led manufacturers to choose the batch mode. Increased use of genetically manipulated bio- Batch processing is often used, for example, be- catalyst could affect the design and operation of cause it offers the operational flexibility needed bioconversion units. Harvey Blanch points out when a large number of products are manufac- (33): tured, each at fairly low production levels; each process unit, more or less standard in design, can . . . one of the difficulties which arises from the easily and rapidly be switched from one product insertion of foreign DNA into the organism is re - Ch. 3—The Technologies 51

version. This can be minimized by placing the cell Less important raw materials are some byprod- in an environment in which cellular replication ucts of agricultural and food processing, such as is minimized, while cellular activity, such as the “corn steep liquor” and “distillers solubles. ” Pe- production of enzymes and products, is main- troleum hydrocarbons are little used because of tained at high levels. their high cost. The potential for relatively pure Achieving the dual objective of minimal growth cellulose (e.g., delignified wood) remains unreal- and maximum conversion activity requires re- ized. * For various carbohydrate wastes—agricul- strictive nutrient supplies and high cell densities. tural, food, industrial, or municipal—in spite of Immobilized biocatalyst could be used to achieve frequent claims of their availability and low cost, these objectives. no economical bioprocess applications have yet been found. Bioprocesses, unlike petroleum refining or petrochemical operations which completely con- Biocatalyst vert raw materials to products or consume them as process fuels, regularly produce large amounts The substances that actually cause chemical of waste, mainly cell matter and residual nutri- change in bioprocesses are the enzymes produced ents. Bioprocesses also require large volumes of by a living cell. For simple enzymatic conversions, clean water, discharge equivalent amounts of isolated enzymes can be used as biocatalyst. dilute, high biological oxygen demand wastes, and When biological transformation of the substrate produce products in low concentrations. One involves several sequential and interrelated solution to problems associated with bioprocess- chemical reactions, each catalyzed by a separate ing might be the use of cleaner, more defined enzyme, however, whole cells (most commonly, media, which produce fewer byproducts. An- but not exclusively, micro-organisms-bacteria, other solution might be the use of more concen- yeast, or fungi) are used as biocatalyst. Bioproc - trated media. The latter option is normally con- esses used for the synthesis of complex molecular sidered in bioprocess development, but the micro- structures (e.g., antibiotics or proteins such as in- organisms now in use are limited in their toler- sulin), for example, require entire systems of en- ance for high nutrient concentrations. Genetic zymes, Such systems do not yet function in con- manipulation may provide micro-organisms that cert outside a living cell. Indeed, when the desired are less sensitive to increased product concen- product is the cell itself (e.g., baker’s yeast or tration. single-cell protein), all the enzymes comprising the cell’s growth machinery are components of the Raw materials catalytic system. Current bioprocess technology uses an extreme- An inspection of the immense spectrum of orga- ly limited range of raw materials. Just a few agri- nisms whose biochemical capabilities have been cultural commodities—starch, molasses, and veg- reasonably well defined reveals that bioprocesses etable oil—are employed as raw materials in many employ only a small, select group of biocatalyst. of the existing industrial bioprocesses, Industry If one eliminates those organisms considered chooses these feedstocks for several reasons. “natural populations” in food fermentation or There are established markets for these materials biological waste treatment, the range of biocata- and, for primary products like starch, reasonably lyst employed in bioprocesses is even more defined quality standards and assay procedures. limited. Some animal cells and tissues are Several competing suppliers guarantee uniform employed for vaccine production and related quality and fairly stable prices. Bioprocess applica- activities, but the catalytic capabilities of plant tions constitute only a relatively small fraction of cells, except for some algae, have not yet been the market for agricultural commodities. The employed commercially. It is possible that biotech- need for raw materials for bioprocesses, however, nology will provide a means whereby important could become a major factor in commodity grain catalytic activities from poorly understood markets if bioprocesses find a place in large-scale fuel or chemical production. ● See Chapter 9: Commodit}r Chemicals and Energv Production, 52 . commercial Biotechnology: An International Analysis organisms can be transferred to cells whose large- then, it is difficult to determine key characteristics scale growth is well understood. accurately. When measuring cell mass (an indicator of growth), for example, most process oper- Wider availability of thermotolerant biocatalyst ators simply note such crude indicators as packed is important for all industries using bioprocesses. cell volume, turbidity, or, at best, dry weight. Recent research on the development of thermotolerant biocatalytic agents has advanced the It is possible to measure the compositions and potential efficiency of bioprocesses. The advan- flow rates of gaseous streams entering and leaving tages of thermotolerance include: the reactor and to use the values obtained from such measurements to help estimate key process ● reduced susceptibility to contamination; conditions indirectly. Such procedures have been ● easier removal of metabolic heat; greatly facilitated by the use of computers. The ● more complete and rapid conversions when real potential of computer control, however, will volatile inhibitors are present (but oxygen not be realized until a greater range of reliable volubility is reduced); and on-line sensors becomes available. * ● easier recovery of volatile products (e.g., ethanol). A number of European, Japanese, and Amer- ican groups have developed improved sensors for Biocatalyst that can withstand high pressure bioprocess control, but, so far, most devices may also be useful industrially. For instance, require removal of samples for off-line analysis higher pressures will increase the volubility of because the sensors cannot withstand steriliza- oxygen. tion. Continuous sampling combined with various Finally, research investigating the relationship types of rapid instrumental analyzers offers a between the structure and the function of en- reasonable compromise, but, with this approach, zymes is proceeding. Ultimately, the aim is to be there is a time lag between the actual sample time able to design, with the help of computers, an and the time at which the assay information enzyme to perform any specific catalytic activity becomes available. under given conditions. Although this procedure Sophisticated instrumentation will have increas- will not be done routinely for many years, it will ing use in bioprocess monitoring. High perform- soon be possible, using rDNA technology, to ance liquid chromatography, for example, is used modify the structure of an enzyme to improve to identify particular compounds in a mix of com- its function in a given condition, such as at a par- pounds and is one of the fastest growing instru- ticular pH or temperature. Thus, biotechnology mentation fields. Flow cytometry has potential use could greatly affect the efficiency of bioprocesses. in measuring process variables such as cell size (an indicator for adjusting nutrient flows) and cell Bioprocess monitoring and viability. Other instrumentation will surely be associated instrumentation used as bioprocess monitoring becomes more widely investigated. Despite the need for close control of process variables during a bioprocess operation, the tech- Computer-coupled bioprocesses can greatly im- niques available for making measurements on-line prove monitoring and controlling the growth con- are extremely limited. Existing equipment can ditions during a bioprocess run. Computers can readily monitor only temperature, pH, dissolved be used to analyze the data from sensors and oxygen concentration, and evolution of gases. Al- other monitoring instrumentation and respond though many other sensors have been developed to these data by adjusting process variables, such to measure other variables (e.g., glucose levels), as nutrient flow. Additionally, computer inter- all are sensitive to steam sterilization. Thus, their faces can be used: usefulness in monitoring most bioprocesses is lim- ● to schedule efficiently the use of equipment; ited. Many critical variables are able to be moni- . to alarm operators when necessary; tored only by withdrawing samples from the reaction vessel and analyzing them off-line, and, even *For a discussion of biosensors, see Chapter 10: Bioeleetronics. Ch. 3—The Technologies 53

Photo credif: Porfon/LH /nternationa/ 100-liter pilot plant bioreactor with computer controls

● to log, store, and analyze data; and because of increased interest in bioprocesses by ● to inventory raw material depletion and electronics experts, as evidenced by the recent product synthesis. joint venture between Genentech and Hewlett- Packard. * These functions optimize the methodology and organization of bioprocessing within a plant. Com - The automation of bioprocessing will be of crit - panies are only now starting to use computer- ical importance in the future as companies com - controlled bioprocesses because of cost, lack of pete for shares in biotechnology product markets. good sensors, and interfacing problems. Yet advances in this field are sure to occur soon ‘See Chapter 4: F’irrns Commercializing Biotechnolo@. 54 ● Commercial Biotechnology: An International Analysis

As automation reduces the labor intensity of of their electrical charge. The advantage of laboratory tasks, the pace of competition will this separation method over some others is quicken, and countries with sophisticated soft- that it can run continuously and can effec- ware to direct the automation will possess an ad- tively separate molecules in large sample vantage in the commercialization of biotech- volumes. The potential of continuous-flow nology. electrophoresis for producing commercial quantities of high purity substances such as Separation and purification pharmaceuticals was demonstrated on a of products recent space shuttle mission. The electrophoresis experiment, cosponsored by Mc- Separation and purification techniques used in Donnell Douglas and the National Aeronau- bioprocesses are the aspect of bioprocess engi- tics and Space Administration, demonstrated neering most in need of attention, especially for that under weightless conditions an electro- the production of novel products such as proteins. phoresis system, identical to one tested on Research is needed to find highly selective recov- Earth, separated about 700 times more ma- ery techniques that leave as little residual product terial in a given period of time and also as possible in the medium and thus lessen the la- achieved four times the purity while process- bor intensity associated with downstream proc- ing 250 times more material. essing. An example of the effort expended in ● Monoclinal antibodies. Immobilized MAbs downstream processing is provided by the new are being used as purification agents for pro- plant Eli Lilly built to produce human insulin tein products (see “Monoclinal Antibody (Humulin”). The plant employs 220 people, 90 Technology” section above). This technique percent of whom are involved in recovery best suits large molecular weight and high- processes. value-added products such as proteins, Some of the possibilities for improving recovery Genetic modifications of micromganisms used techniques now under consideration include the in bioprocessing could also aid in recovery proc- following: esses. Two changes in particular would greatly improve the yield and ease recovery of proteins. ● Ultrafiltration. Membranes and other filtra- First, microorganisms could be developed that tion systems, such as porous metals, offer have minimal intracellular proteindegrading en- many advantages, and considerable ex- zymes. The presence of these enzymes will de- perience in other areas of chemical tech- crease the yield of protein product. Second, a pro- nology is already available. Some U.S. com- tein is much more easily purified if it is secreted panies, such as Millipore, Amicon, and from the cell into the surrounding medium. The Nucleopore are making advances in this area. genetic incorporation of protein secretion mech- ● Continuous chromatography and high anisms will lower production costs dramatically. performance liquid chromatography. If these approaches, already available on the labora- Although purification and separation protocols tory scale, could be scaled-up, it would be have been developed for existing bioprocesses, possible, in principle, to collect a crude prod- new bioprocesses will present new challenges. uct from the medium and then, by selective For example, rDNA technology has led to a new elution, recover product, reusable nutrients, set of bioprocesses that synthesize protein and inhibitory substances separately, one products, and substantial work is needed to im- American manufacturer (Waters, a Millipore prove recovery strategies for large-scale protein subsidiary) claims to have developed a pilot- purifications. In addition, one of the factors that scale chromatographic unit. restricts the use of bioprocesses for producing ● Electrophoresis. Electrophoretic methods, commodity chemicals is the expense of recovering especially continuous flow, can separate pro- these low-value-added chemicals from dilute teins, peptides, and nucleic acids on the basis aqueous solutions. Ch. 3—The Technologies 55

Culture of higher eukaryotic cells

The organisms used most extensively in large- scale bioprocesses are prokaryotes (e.g., bacteria) or simple eukaryotes (e.g., yeast). These are hardy organisms which grow to high cell densities and consequently give high product yields.

Certain products can be obtained in some situations only from the large-scale cultivation of higher eukaryotic cells. As noted in table 2, for instance, many proteins that are potentially useful (e.g., in medicine) have not been isolated in large enough quantities to study adequately. If eukaryotic cell culture made these proteins available in larger quantities, their amino acid sequence could be determined, their genes cloned, and even more of the proteins could be produced. Furthermore, some proteins probably need “post- translational modifications” (changes in protein structure after the protein is made from mRNA) that only higher eukaryotes can perform. These modified proteins may onty be made in eukaryotic cells, Also, in many cases, the production of secondary metabolizes in plant cells is a function of several enzymatic functions, most of which are Photo credit: Sci&Jce Photo Library and Porion/LH International not known. Therefore, the growth of plant cells in culture might be the easiest way to produce Laboratory tissue culture production useful plant compounds. Finally, many individuals think that the growth of hybridomas would be The technologies developed for the growth of easier and more economic in culture if the culture microorganisms have limited applicability to the technology were better developed (see “Mono- growth of higher eukaryotic cells because of dif - clinal Antibody Technology” section above). As ferences between microbial and mammalian cells biotechnology becomes more integrated into the (see table 3). Mammalian cells are larger, more industrial structure, the development of more fragile, and more complex than microbial cells. * efficient and economic bioprocess technologies ● Most cell culture research has been done with mammalian cells, for higher eukaryotic cells will increase in so the work reported here focuses on those cells. Problems with importance. plant cell culture are similar to those of mammalian cell culture.

Table 2.—Situations Potentially Requiring Large-Scale Eukaryotic Cell Culture

Cell culture system Reason for large-scale eukaryotic cell culture Cells producing useful proteins ...... Not large enough quantity to determine amino acid sequence; therefore cannot use rDNA technology Cells producing modified proteins ...... Modification systems present only in higher cells Plant cells producing useful secondary metabolizes...... Enzymatic pathways for metabolic production not well understood; therefore cannot use rDNA technology Hybridomas ...... Mouse acites system has limited capacity and applicability

SOURCE: Office of Technology Assessment. .

56 . Commercial Biotechnology: An International Analysis

Furthermore, mammalian cells have very complex nutritional requirements, which have not been completely defined. They require serum from blood for growth, and the essential composition of serum is not well characterized. In contrast to microbial cells, mammalian cells are not normally exposed to the environment, but are constantly surrounded by a circulatory system that supplies nutrients and removes wastes. When these cells are grown in culture, the medium is initially clean and nutritionally balanced; as the cells take up the nutrients and excrete waste products, however, the medium becomes much less like the cells’ normal environment. This problem, along with the problem of fragility, requires modified reactor design (39).

Some mammalian cells grow in suspension like microbial cells, but most higher cells must attach to a solid surface. A major problem with large- scale cell growth of mammalian cells has been the availability of large, accessible surfaces for cell growth. The attachment of cells to microcarriers, or very small beads, has begun to solve many of the problems associated with large-scale mammalian cell culture. The beads provide a large amount of surface area and can be placed in a column where either a continuous-flow or fluidized-bed bioreactor can be used for cell growth and product formation (see box A). Either of these bioreactors is gentler than a stirred tank reactor. Additionally, because of the continuous nature of these bioreactors, fresh nutrients are added and wastes are removed continuously.

The instrumentation requirements for mammalian cell growth are different than those for microbial growth. The lower rates of metabolism and lower density of mammalian cells require more sensitive sensor systems than for microbial cell growth. Additionally, because the nutritional requirements are so much more complex, different strategies are needed to monitor and control cell growth. These problems are just beginning to be addressed (4o).

Priorities for future research Photo cmdlt: Porton/LH International

Bioreactor specially designed for the growth of plant Priorities for future generic research in bio- or animal cells process engineering that would be applicable Ch. 3—The Technologies ● 57

Table 3.—Comparison of Microbial and Mammalian Cells

Characteristic Microbial cells Mammalian cells Size (diameter) ...... 1-10 microns 10-100 microns Metabolic regulation ...... Internal Internal and hormonal Nutritional spectrum ...... Wide range of substrates Very fastidious nature Doubling time ...... Typically 0.5-2.0 hours Typically 12-60 hours Environment ...... Wide range of tolerance Narrow range of tolerance Other characteristics...... Limited life span of normal cells Lack of protective cell wall SOURCE: Office of Technology Assessment, adapted from R. J. Fleischaker, Jr., “An Experimental Study in the Use of instrumentation To Analvze Metabolism and Product Fermentation in Cell Culture,” thesis, Massachusetts Institute of Technology, Cambridge, Mass., June 19S2. to all industries using biotechnology include ● protein secretion mechanisms; research in the following areas: ● improved methods for heat dissipation during bioprocessing; and ● continued work on the practical use of and ● biochemical and physiological mechanisms design of bioreactors for immobilized cell and for temperature and pressure tolerance. enzyme systems; ● development of a wider range of sterilizable The large-scale culture of eukaryotic cells is sensors for process monitoring and control; beginning to receive some research attention. ● improved product recovery techniques, Because of the complex nutritional requirements especially for proteins; of eukaryotic cells, the cost of the medium is high. ● general reactor design and practical If industry is going to adopt eukaryotic cell culture approaches to better oxygen transfer; technology, the development of economic artifi- ● inhibition of intracellular protein-degrading cial media is important. Also important is the enzymes; development of new bioreactor design and instru- ● improving the genetic stability of rDNA mentation for the control of cell growth. organisms;

Chapter 3 references

Recombinant DNA technology *5. Business Week, “Biotechnology’s New Trust in references Antibodies,” May 18, 1981, pp. 147-156. 6. Cavagnaro, J., and Osband, M., “A Status 1. Guarente, L., Roberts, T., Ptashne, M., et al., ‘(A Review—Human-Derived Monoclinal Antibod- Technique for Expressing Eukaryotic Genes in ies, ” Genetic Engineering News, May/June 1983, Bacteria, ” Science 209:1428-30, 1980. Pp. 6-7. 2. Ris, H., and Kubai, D. F., “Chromosome Struc- 7. Chemical and Engineering News, “Method May ture, ” Ann. Rev. Genetics 4:263-94, 1970. Boost Monoclinal Antibody Output,” Jan. 11, 3. Shortle, D., DiMaio, D., and Nathans, D., “Directed 1982, p. 22. Mutagenesis,” Ann. Rev. Biochem. 15:265-94, *8. Chisholm, R., “On the Trail of the Magic Bullet,” 1981. High Technology, January 1983, pp. 57-63. 9. Croce, C. M., Linnenbach, A., and Hall, W., et al., Monoc]onal antibody technology “Production of Human Hybridomas Secreting An- tibodies to Measles Virus,” Nature 288:488, 1980. references * 10. Diamond, B. A., Yehon, D. E., and Scharff, M. D., *4. Baskin, Y., “In Search of the Magic Bullet,” “Monoc]onal Antibodies: A New Technique for Technology Review, October 1982, pp. 19-23. Producing Serological Reagents, ” New Eng. J. Med. 304:1344, 1981. “ Hvferemw ot gerwral ]nterest are marked wrth asterw.ks 11. Fox, P. L., Bernstein, E. H., and Berganian, R. P.,

25-561 0 - 84 - 5 58 . Commercial Biotechnology: An International Analysis

“Enhancing the Frequency of Antigen-Specific Hybridomas)” Eur. J. Immune]. 11:431, 1981. 12. Galfre, G., Milstein, C., and Wright B., “Rat x Rat Hybrid Myelomas and a Monoclinal Anti-Fd Por- tion of Mouse IgG,” Nature 277:131, 1979. *13. Gatz, R. L., Young, B. A., Facklam, T. J., and Scantland, D. A., “Monoclinal Antibodies: Emerg- ing Product Concepts for Agriculture and Food, ” Bioflechno]ogy, June 1983, pp. 337-341. 14. Gefter, M. L., Margulies, D. H., and Scharff, M. D., “A Simple Method for Polyethylene Glycol- Promoted Hybridization of Mouse Myeloma Cells,” Somat. Cc/] Genet. 3:231, 1977. 15. Herzenberg, L. A., and Herzenberg, L. A., “Analysis and Separation Using the Fluorescence 31 Activated Cell Sorter (FACS),” Handbook of Ex- perimental Immunology, vol. 2, D. M. Weis (cd.) (London: Blackwell Scientific Publications, 1978). 16. Hoffman, R. A., and Hansen, W. P., “Immuno- *32. fluorescent Analysis of Blood Cells by Flow Cy-tometry,’’lnt. J. Immunopharmac. 3:249) 1981. 17. Karpas, A,, Fischer, P., and Swirsky, D., “Human Plasmacytoma With an Unusual Karyotype Grow- ing in Vitro and Producing Light-Chain Immu- noglobulin, ” Lancet 1:931, 1982. 18. Kindel, S., “The Birth of Bioindustry,” Forbes, July 18, 1983, pp. 130-132. 19. Klausner, A., “Genentech Makes Monoclinal Precursors From E. coZi,” Bioflechnofogy, July 1983, pp. 396-397. 20. Kohler, G., and Milstein, C., “Continuous Cultures 35, of Fused Cells Secreting Antibody of Predefine Specificity,” Nature 256:495, 1975. 21. Kohler, G., and Milstein, C., “Derivation of Specific Antibody-Producing Tissue Culture and Tumor 36. Lines by Cell Fusion,” Eur. J. Immunol. 6:511, 1976. *22. Langone, J., “Monoclonals: The Super Anti- 37. bodies,” Discover, June 1983, pp. 68-72. 23. Lewin, R., “An Experiment That Had To Succeed,” 38. Science 212:767, 1981. 24. Melchers, F., Potter, M., and Warner, N. L. (eds.), 39. “Lymphocyte Hybridomas,” Curr. Top. Microbioi. Immunol., vol. 81 (New York: Springer-Verlag, 1978). 40. *25. Milstein, C., “Monoclinal Antibodies,” Scientific American 243:66-74, 1980. 26. Montagnon, B. J., et al., “Large-Scale Culture of Vero Cells in Microcarrier Cuhure for Virus Vac- cine Production: Preliminary Results for Killed 41. Polio Virus Vaccine, ” Inter. Deve]. Biol. 47:55, Microbiology,” Scientific American, September 1980. 1981, pp. 181-196. 27. Olsson, L., and Kaplan, H., “Human-Human “ *Most of these references are of general interest for those wishing to pur. Hybridomas producing Monoclinal Antibodies of sue the subject of bioprocess technology further, Ch. 3—The Technologies 59

42. Gaden, E. L., “Bioprocess Technology: An Analysis 46. Kindel, S., “Enzymes-The Bioindustrial Revolu- and Assessment,” contract paper prepared for the tion)” TechnoZo~, November/December 1981, pp. office of Technolo~V Assessment, U.S. Congress, 62-74. July 1982. 47. Klibanov, A. M., “Immobilized Enzymes and Cells 43. Gaden, E. L., University of Virginia, personal com- as Practical Catalysts,” Science 219:722-727, 1983. munication, 1982. 48. National Academy of Engineering, “Genetic En- 44. Hochhauser, S. J., ‘(Bringing Biotechnology to gineering and the Engineer” (Washington, D. C.: hlarket,” High Technology, February 1983, pp. National Academy Press, 1982). 55-60. 49. Wang, D. I. C., Cooney, C. L., Demain, A. L., et 45. Johnson, 1. S,, ‘(Human Insulin From Recombinant al., Fermentation and Enzuyme Technolo~ (New DNA Technology,” Science 219:632-637, 1983. York: John Wiley & Sons, 1979). PART II Firms Commercializing Biotechnology Chapter 4 Firms Commercializing Biotechnology Contents

Page Introduction ...... 65 Overview of U.S. and Foreign Companies Commercializing Biotechnology ...... 66 Pharmaceutical Industry ...... 72 Animal Agriculture Industry ...... 79 Plant Agriculture Industry ...... 81 Specialty Chemicals Industry ...... 83 U.S. and Foreign Support Firms ...... 84 Important Product Areas ...... 85 Conclusion ...... 90 U.S. Firms Commercializing Biotechnology and Their Role in Competition...... 91 New Biotechnology Firms ...... 91 Established U.S. Companies ...... 99 Collaborative Ventures Between NBFs and Established U.S. Companies...... 103 Collaborative Ventures Between NBFs and Established Foreign Companies...... 108 Findings ...... 109 Chapter preferences ...... 111

Tables Table No. Page 4. Companies Commercializing Biotechnologyin the United States and Their Product Markets ...... 67 5. Distribution of Sales by the Top 20 U.S. and Foreign Pharmaceutical Companies, 1981 ...... 73 6.Introduction of New Pharmaceutical Products by Country of Origin Between 1961 and 1983 ...... 74 7. Biotechnology R&D Budgets for Leading U.S. and Foreign Companies, 1982 ...... 74 8. Pharmaceutical R&D Expenditures by Country: 1964, 1973, and 1978, ...... 75 9. Diversification of Japanese Chemical, Food Processing, Textile, and Pulp Processing Companies Into Pharmaceuticals ...... 77 IO. Japanese Joint Ventures in Pharmaceutical Applications of Biotechnology ...... 78 11. Applications of Biotechnology to Plant Agriculture for Seven New Biotechnology Firms ...... 82 12. Estimates of U.S. Monoclinal Antibody Markets, 1982 and 1990 ...... 95 13. Equity Investments in New Biotechnology Firms by Established U.S. Companies, 1977-83 ...... 100 14. Some Collaborative Ventures Between New Biotechnology Firms and Established U.S .and Foreign Companies ...... , ,. 104

Figures Figure No. Page IO, Percentage of Firms in the United States Pursuing Applications of Botechnology in Specific Industrial Sectors ...... 71 ll,Ernergence of New Biotechnology Firms, 1977-83...... 93 12. Aggregate Equity Investments in New Biotechnology Firms by Established U.S. Companies ...... 101 Chapter 4 Firms Commercializing Biotechnology

Introduction

Biotechnology has the technical breadth and companies in Japan. The Japanese consider bio- depth to change the industrial community of the technology to be the last major technological rev- 21st century because of its potential to produce olution of this century (58). More immediate than substantially unlimited quantities of: its promise of helping to alleviate some world problems, biotechnology offers Japan an impor- ● products never before available, tant opportunity to revitalize its structurally de- ● products that are currently in short supply, pressed basic industries whose production proc- ● products that cost substantially less than esses are reliant on imported petroleum, products made by existing methods of production, This chapter provides an overview of U.S. and ● products that are safer than those now avail- foreign private sector research and development able, and (R&D) and commercialization efforts in biotech- ● products made with raw materials that may nology to help answer the broader question be- be more plentiful and less expensive than ing addressed by this report: Will the United those now used. States be able to translate its present technological lead into worldwide commercial success by secur- By virtue of its wide-reaching potential applica- ing competitive shares of biotechnology-related tions, biotechnology lies close to the center of product markets? The first section of the chapter many of the world’s major problems—malnutri- provides an overview of the types of companies tion, disease, energy availability and cost, and that are commercializing biotechnology in the pollution. It is because of biotechnology’s promise United States and the five foreign countries ex- that the developed countries of the world have pected to be the major competitors in the area commenced a competitive battle to commercialize of biotechnology. This section briefly examines its applications, the four fields where biotechnology is being ap- Nowhere in the world are efforts to commer- plied most vigorously —pharmaceuticals, animal cialize biotechnology stronger than in the United health, plant agriculture, and specialty chemicals. States. * Large established U.S. companies in in- The second section analyzes and compares the dustries ranging from pharmaceuticals to petro- strength of the U.S. support base with that of the leum have followed the lead in developing bio- competitor countries, using three important prod- technology that was set by entrepreneurial new uct areas for comparison: biochemical reagents, biotechnology firms (NBFs) in the United States instrumentation, and software. The third section whose dedication to biotechnology is unmatched analyzes the respective roles of the firms apply- anywhere. Major competitive challenges to the ing biotechnology in the United States—NBFs and United States in current product markets, as well established companies-in the domestic and inter- as in new biotechnology markets yet to be de- national development of biotechnology. It also defined, will be mounted by established companies scribes collaborative ventures between NBFs in in the Federal Republic of Germany, United King- the United States and established U.S. and foreign dom, Switzerland, and France—but the most for- companies that are seeking to commercialize bio- midable challenge will come from established technology. The chapter concludes by summariz- ing major findings with respect to the role of NBFs ● For a summary of activities in biotechnology in countries other and established companies in the U.S. commercial- than the United States, see Appendix B: Country Summaries. ization effort.

65 .

66 Commercial Biotechnology: An International Analysis

Overview of U.S. and foreign companies commercializing biotechnology

U.S. and foreign efforts to develop and commer- known* are pursuing applications of biotech- cialize biotechnology differ substantially in qhar- nology in the area of pharmaceuticals; 28 percent acter and structure. The manner in which the are pursuing applications in animal agriculture, United States and other countries organize their and 24 percent in plant agriculture.** In the area development efforts is important for two reasons: of specialty chemicals and food additives, com- it can influence their respective commercial capa- modity chemicals and energy, the environment, bilities; and it will ultimately shape the character and electronics, respectively, relatively fewer U.S. of international competition. firms are pursuing commercial applications of biotechnology. In some of these sectors, conventional In the United States, two distinct sets of firms technologies are working well or existing invest- are pursuing commercial applications of biotech- ments in capital equipment are very substantial. nology-NBFs and established companies. NBFs, In others, much uncertainty still surrounds the as defined by this report, are entrepreneurial ven- potential of biotechnology or the research needed tures started specifically to commercialize innova- to develop applications of biotechnology is long tions in biotechnology. For the most part, they term. have been founded since 1976–the same year the U.S. firm Genentech was founded to exploit the In Japan, the Federal Republic of Germany, recombinant DNA (rDNA) technology patented in Switzerland, France, and the United Kingdom, * * the United States by Cohen and Boyer, * Typical- biotechnology is being commercialized almost ex- ly, NBFs are structurally organized specifically to clusively by established companies. Most Euro- apply biotechnology to commercial product de- pean nations and Japan, unlike the United States, velopment. The established companies pursuing tend, for different reasons, to emphasize the im- applications of biotechnology are generally proc- portance of large companies instead of small ones. essa-iented, multiproduct companies in tradition- Thus, the development of biotechnology in these al industrial sectors such as pharmaceuticals, countries is biased considerably toward the large energy, chemicals, and food processing. These pharmaceutical and chemical companies. companies have undertaken in-house biotechnol- It should not be assumed that the small number ogy R&D in an effort to determine how and of NBFs in the European countries or the lack of where best to apply biotechnology to existing or new products and processes. Table 4 provides a ● This figure does not include the companies listed that are spe- list of NBFs and established companies currently cializing in bioprocessing, because the bioprocessing R&D may not applying biotechnology in the United States and be associated with specific products. See Appendix D.’ Firms Com- mercializing Biotechnology in the United States for an explanation the targeted commercial areas of their research. of how the list was obtained. Figure 10 illustrates the percentage of U.S. firms “ *These percentages add up to more than 100 percent because pursuing biotechnology R&D in specific applica- many of the fimns are engaged in more than one area of commercial application. tion areas. ● ● ● In the United Kingdom, some NBFs, not including Celltech and Agricultural Genetics, are beginning to form on the periphery of Sixty-two percent (135) of the 219 U.S. compa- universities. Plant Science, Ltd., for example, is linked to the Univers- nies for whom commercial application areas are ity of Sheffield; Imperial Biotechnology, Ltd., is linked to the Im- perial College in London; IQ(Bio) was formed by some Cambridge ● Two U.S. firms, Cetus and Agrigenetics, though established before University biochemists; Boscot, Ltd., a joint venture between two 1976, are considered to be NBFs. Cetus was founded to capitalize Scottish institutions, was established by the University of Edinburgh on classical gerwtic techniques for product development, but showed and Heriot-Watt University, and Cambridge Life Sciences pursues early interest in biotechnology and began aggressively pursuing biosensors based on work at Southampton University. As an indica- product development with the new techniques. Agrigenetics was tion of the increased number of NBFs forming in Britain, Biotech- formed in 1975 to link new genetic research with the seed business. nology Investments, Ltd., the venture fund managed by N.M. Roths- Thus, the behavior and research focus of both Cetus and Agri- child (the bank) now has for the first time since the fund was es- genetics place them in the new firm category despite their early tablished more proposals from British firms than from companies founding dates. in the United States (56). Ch. 4—Firms Commercializing Biotechnology ● 67

Table 4.—Companies Commercializing Biotechnology in the United States and Their Product Markets~~b

Commercial Company (date founded) application of R&Dc Ph.D.s d Abbott Laboratories ...... , ...... Ph Actagen (1982)...... Ph 5 Advanced Biotechnology Associates, Inc. (1981) ...... Ph Advanced Genetic Sciences, Inc. (1979) ...... PA 27 Advanced Genetics Research Institute (1981) ...... AA 8 Advanced Mineral Technologies, Inc. (1982) ...... Env Agrigenetics Corp. (1975) ...... PA,SCF 46 Allied Chemical Corp...... PA Alpha Therapeutic Corp...... Ph Ambico, inc. (1974) ...... AA American Cyanamid Co...... Ph,PA,AA American Diagnostics Corp. (1979) ...... Ph American Qualex (1981) ...... Ph,AA Amgen (1980) ...... Ph,PA,AA,SCF 45 Angenics (1980)...... Ph 5 Animal Vaccine Research Corp. (1982) ...... AA Antibodies, inc. (1960) ...... ,. .. Ph, AA.Ph,AA Applied DNA Systems, inc. (1982) ...... Ph,SCF,CCE,Env Applied Genetics, inc. (1981) ...... AA ARCO Plant Cell Research Institute ...... PA 18 Atlantic Antibodies (1973) ...... AA 2 Axonics ...... Ph Baxter-Travenol Laboratories, Inc...... Ph Becton Dickinson &Co...... ,. ..,Ph Bethesda Research Laboratories, inc. (1976) ...... Ph,AA Biocell Technology Corp. (1980)...... Ph Biochem Technology, inc. (1977) ...... Bioprocessing Bio-con, inc. (1971) ...... AA BioGenex Laboratories (1981)...... Ph Biogen, inc. (1980) ...... Ph,AA,CCE,Env 79 Biological Energy Corp. (1981) ...... CCE,SCF 3 Bio Response, lnc, (1972) ...... Mass cell culture 6 Biotech Research Laboratories, inc. (1973) ...... Ph,CCE 11 Biotechnica lnternationa~ inc. (1981) ...... PA,CCE,SCF,Env, 12 AA,Ph Bio-Technology General Corp. (1980) ...... PA,AA,Ph 5 Brain Research (1968) ...... Ph Bristol-Myers Co...... Ph BTCDiagnostic, inc. (1980)...... Ph 3 Calgene, inc. (1980) ...... PA 21 California Biotechnology, inc. (1982)...... Ph,AA 21 Cambridge Bioscience Corp. (1982)...... Ph,AA Campbell institute for Research & Technology ...... PA Celanese Corp...... CCE Cellorgan lnternationa~ inc. (1972) ...... Ph Celtek, inc. (1980) Ph 5 Centaur Genetics Corp. (1981) ...... Ph,PA,AA 4 Centocor (1979)...... ,..Ph 14 Cetus Corp. (1971) ...... Ph,AA,CCE 45 Madison (1981) ...... PA 25 Palo Aito (1980)...... Ph 2 Immune (IWO)...... Ph Chiron Corp. (1981)...... Ph,AA 26e Ciba-Geigy ...... Ph Clonal Research (1970) ...... Ph 3 Codon (1980) ...... CCE 15 Collaborative Genetics, inc. (1979) ...... Ph,SCF,CCE 12 Collagen, inc. (1977)...... Ph Cooper Diagnostics, Inc...... Ph Cooper-Lipotech, inc. (1981) ...... Ph Corning Glass Works ...... SCF M . Commercial Biotechnology: An International Analysis

Table 4.—Companies Commercializing Biotechnology in the United States and Their Product Marketsa*b (Continued)

Commercial Company (date founded) application of R&Dc Ph. D.sd Crop Genetics International (1981) ...... PA Cutter Laboratories, Inc...... Ph Cytogen Corp. (1981) ...... Ph 7 Cytox Corp. (1975) ...... Env Damon Biotech, Inc. (1981) ...... Ph 10 Dairyland Foods Corp. .,...... SCF Dart and Kraft, Inc...... SCF Davy McKee Corp...... Bioprocessing DeKalb Pfizer Genetics (1982) ...... AA Diagnon Corp. (1981) ...... Ph Diagnostic Technology, inc. (1980) ...... Ph Diamond Laboratories ...... AA Diamond Shamrock Corp...... AA,CCE DNA Plant Technology (1981) ...... PA 10 DNAX Corp...... Ph Dow Chemical Co...... Ph,PA,CCE,SCF, AA,Env Ean-tech, inc. (1982) ...... E~Env,Ph 3 Eastman Kodak Co...... Ph,Env Ecogen (1983) ...... PA

E. 1. du Pontde Nemours &Cov Inc...... Ph,PA,CCE,SCF Electro Nucleonics Laboratories, Inc...... Ph Eli Ltily &Co...... Ph,PA EnBio, inc. (1975) ...... Bioprocessing Endorphin, inc. (1982) ...... Ph Engenics, inc. (1981) ...... Bioprocessing 25 Enzo Biochem, inc. (1976) ...... Ph,AA,CCE,SCF,PA Enzyme Bio-systems, Ltd...... SCF Enzyme CenteL Inc...... SCF Enzyme Technology Corp...... SCF Ethyl Corp...... CCE,SCF,Env Exxon Research & Engineering Co...... CCE,Env,SCF Fermented Corp. (1978) ...... ,Bioprocessing FMC Corp...... Ph Frito-Lay, Inc...... PA Fungal Genetics, inc. (1982) ...... Ph,SCF Genencor (1982) ...... ,. ..SCF,CCE Genentech, inc. (1976) ...... Ph,AA,CCE,El 75 General Electric Co...... El,Env,Ph,SCF General Foods Corp...... ,.PA General Genetics (1982)...... Ph General Molecular Applications (1981) ...... Ph Genetic Diagnostics Corp. (1981)...... Ph 3 Genetic Replication Technologies, inc. (1980)...... Ph,AA Genetic Systems Corp. (1980) ...... Ph 14 Genetics Institute (1980) ...... Ph,PA,SCF,Env 24 Genetics lnternationa~ Inc. (1980) ...... AA,Ph,SCF,CCE, 17 Env,El Genex Corp. (1977)...... Ph,AA,SCF,Env 48 Gentronix Laboratories, inc. (1972) ...... EI Genzyme (1981)...... SCF 6 W. R. Grace&Co...... AA,SCF,Env,PA,Ph Hana Biologics, inc. (1978) ...... Ph Hem Research (1966) ...... Ph,AA Hoffmann-La Roche, Inc...... , .. .Ph...... Ph Hybridoma Sciences, lnc, (1981) ...... Ph Hybritech, inc. (1978)...... Ph 13 Hytech Biomedica~ inc. (1981) ...... E~Ph 10 IBM Corp...... EI IGI Biotechnology, inc. (1975)...... Ph lmmulok, inc. (1980)...... Ph Ch. 4–Firms Commercializing Biotechnology ● 69

Table 4.—Companies Commercializing Biotechnology in the United States and Their Product Markets~b (Continued)

Commercial Company (date founded) application of R&DcPh.D.s d lmmunetech, inc. (1981)...... Ph lmmunex Corp. (1981) ...... Ph 18 lmmuno Modulators Laboratories, inc. (1982) ...... Ph lmmunogen (1981) ...... Ph lmmunotech Corp. (1980)...... Ph Imreg, Inc...... Ph lndiana BioLab (1972)...... PA,AA,SCF,CCE Integrated Genetics, inc. (1981) ...... Ph 17 Interferon Sciences, inc. (1980) ...... Ph 7 International Genetic Engineering, inc. (lngene) (1980) ...... Ph,PA,CCE 16 International Genetic Sciences Partnership (1981) ...... PA,AA International Minerals &Chemical Corp...... AA,PA,Env,CCE International Plant Research Institute (IPRI) (1978)...... PA 35 Kallestad Laboratories, Inc...... Ph Kennecott Copper Corp...... Env Lederle Laboratories ...... Ph,AA The Liposome CoVlnc. (1981) ...... Ph,AA Liposome Technology, inc. (1981) ...... Ph,AA Litton Bionetics ...... Ph 3MC0...... Ph Mallinckrodt, Inc...... Ph Martin Marietta ...... SCF,PA Meloy Laboratories, inc. (1975)...... Ph Merck&Company, Inc...... Ph,AA Microlife Genetics (1981)...... SCF,Env Miles Laboratories, Inc...... Ph,SCF,CCE,AA Miller Brewing Co...... PA Molecular Biosystems, inc. (1980) ...... Ph 7 Molecular Diagnostics (1981) ...... Ph Molecular Genetics, inc. (1979) ...... Ph,PA,AA 20 Monoclinal Antibodies, inc. (1979) ...... Ph,AA 7 Monsanto Co...... PA,AA Multivac, Inc...... Ph,PA,AA,SCF Nabisco, Inc...... PA National Distillers &Chemical Co...... CCE NPI (1973)...... PA,CCE,SCF 25 Neogen Corp. (1981)...... PA,AA New England Biolabs ...... Ph New England Monoclinal Resources (1982) ...... Ph New England Nuclear Corp...... Ph Norden Laboratories ...... AA Novo Laboratories, Inc...... Ph,SCF Nuclear&Genetic Technology, inc. (1980) ...... Ph Ocean Genetics (1981)...... SCF Oncogen (1982)...... Ph Oncogene Science inc. (1983) ...... Ph Organon, Inc...... Ph Ortho Pharmaceutical Corp...... Ph Petrogen, inc. (1980)...... Env 7 PfizeL Inc...... , ..Ph,PA,CCE,AA, SCF,Env Phillips Petroleum Co...... Env,SCF,CCE Phytogen (1980)...... PA 5 Phyto-Tech Lab ...... PA Pioneer Hybrid International Corp...... PA Plant Genetics, inc. (1981) ...... PA 11 Polybac Corp...... Ph,SCF,Env PPG Industries ...... SCF Purification Engineering, Inc...... Bioprocessing Quidel Home (1982) ...... Ph 70 .Commercilal Biotechnology: An International Analysis

Table 4.—Companies Commercializing Biotechnology in the United States and Their Product Markets~*b (Continued)

Commercial Company (date founded) application of R&Dc Ph.D.s d Replicon (1982) ...... Ph,SCF Repligen Corp. (1981)...... , ...... Ph,AA,CCE,SCF Ribi Immunochem Research, Inc. (1981)...... AA,Ph 3 Rohm & Haas ...... PA Salk Institute Biotechnology/ Industrial Associates, Inc. (1981) ...... Ph,AA,CCE 9 Sandoz, inc...... Ph,PA,AA Schering-Plough Corp...... Ph,AA SDS Biotech Corp. (1983) ...... AA G. D. Searle &Co...... Ph,SCF Serono Laboratories, Inc...... Ph SmithKline Beckman ...... Ph,AA E. R. Squibb&Sons, Inc...... Ph A. E. Staley Manufacturing Co...... AA,PA,SCF Standard Oil of California ...... Env Standard Oilof Indiana ...... Ph,PA Standard Oil of Ohio ...... PA Stauffer Chemical Co...... PA Summa Medical Corp...... Ph Sungene Technololgies Corp. (1981) ...... PA 4 Sybron Biochemical ...... Env 13 Synbiotex Corp. (1982)...... Ph,AA Syncorlnternational...... Ph Synergen (1981)...... AA,SCF,CCE,Env 21 Syngene Products and Research, Inc...... AA 8 Syntex Corp...... Ph,AA Syntro Corp. (1982)...... AA,CCE 5 Syva Co. (1966) ...... Ph Techniclone international Corp. (1982) ...... Ph 6 Unigene Laboratories, inc. (1980)...... Ph,AA 12 Universal Foods Corp...... SCF,PA University Genetics CO. (1980) ...... Genetic Clinics ...... Ph

U.O.P V Inc...... SCF,CCE The Upjohn Co...... Ph,AA,PA Viral Genetics (1981) ...... Ph Wellcome Research Laboratories ...... Ph Worne Biotechnology, inc. (1982) ...... , .PA,CCE,Ph,AA, 10 Env,SCF Xenogen, inc. (1981) ...... Ph,PA Xoma Corp. (1981)...... Ph Zoecon Corp. (1968) ...... PA,AA Zymed Laboratories ...... SCF,CCE 5 Zvmos. CorD., (1982).. r ...... PhSCF aDoes not include support firms. %eeApperrdixD:lrrdexofFirmsinthe UnitedStatesCommerciaikingBiotechnology foradescrlptlonofhowthedatawere

C collected. ph: pharmaceuticals, pA:plant Agriculture, AA: Animal Agriculture, SCF: Specialty Chemicals ~d Food, CCE:Commodlty Chemicals and Energy, Env: Environmental (Microbial Enhanced Oil Recovery, Microbial Mining, Pollution Contro~ and Toxic Waste Treatement~ El Electronics. ‘AsofMarch1983. ‘M.D.s and Ph.D.s. SOURCE: Office of Technology Assessment. Ch. 4–Firms Commercializing Biotechnology ● 71

Figure IO.— Percentage of Firms in the Although there are few NBFs outside the United United States Pursuing Applications of Biotechnology States at present, some European countries are in Specific-Industrial Sectors* beginning to sense that small firms can make important contributions to innovation, particular- 140- 620/o ly in high-technology fields such as biotechnology. Total number of companies = 219 130 Thus, in contrast to the West German Govern- ment, which believes that the development of bio- 120 technology in West Germany is the province of 110 m= Established companies the large chemical companies for which the country is noted and that NBFs are “not in line with l(x) -= New biotechnology firms 11 the German mentality” (5), the British and French Governments have aided in the establishment of small firms such as Celltech, (U.K.), Agricuhural Genetics (U.K.), and Transgene (France’s leading biotechnology venture company). 28°10 Efforts in support of small company formation are also being undertaken by organizations else- 20V0 where in Europe. The Organisation for Economic 40 CoOperation and Development, for example, in 30 an effort to spur technological innovations, has made several proposals designed to support small 20 firm development (65). These proposals encom- 10 pass the promotion of new sources of venture capital, assistance to new startups in developing 0 high quality feasibility studies, and diverse meas- I ures to encourage high-technology startups. Venture capitalization is almost exclusively an E American phenomenon (5,69). Many would agree ‘E that the formation of venture capital and entrepreneurial drive necessary to start small high- technology firms and vigorously commercialize inventions has been inhibited in much of Europe by a historical labor attitude that gives priority to job security and a predictable business environ-

● The total percentage of firms exceede W percent bacauea aome compartiasamr ment rather than to aggressive risk-taking. In applying biotaohnofogy In mom than one industrial 8eotor, Japan, individualism and the creation of small, en- SOURCE Off Ice of Technology Assessment. trepreneurial and independent high-technology firms appears to be discouraged by cultural traits emphasizing group identity and acceptance. NBFs in Japan will retard those countries’ develop- Large, very successful firms typical of Japan pro- ment of biotechnology. Varying strategies, organi- vide workers with a group identity and a sense zational differences, and cultural factors all con- of security, and it is these firms that are commer- tribute to the competitive strengths of foreign cializing biotechnology in that country. countries’ established companies. It is important to note, however, that the complementary efforts The biotechnology-related activities of U.S. and of NBFs and established companies in the United foreign companies in the pharmaceutical and ani- States have been a major factor in providing the mal and plant agriculture sectors are introduced United States with an early competitive advantage below. Also discussed are foreign companies’ bioin the commercialization of biotechnology. technology-related activities in specialty chemi- 72 . Commercial Biotechnology: An International Analysis cals. Discussion of U.S. private sector activities produced human insulin, and interferon—are a in specialty chemicals, commodity chemicals, and direct result of the biomedical nature of the basic the environmental and electronics fields is re- research that led to these new technologies. Sec- served for the chapters in part III. It is important ond, pharmaceutical companies have had years to recognize that there is no “biotechnology indus- of experience with biological production methods, try.” Biotechnology is a set of technologies* that and this experience has enabled them to take ad- can potentially benefit or be applied to several vantage of the new technologies. Finally, since industries. some pharmaceutical products, such as large poly - peptides and antibiotics, can only be produced The industrial sector in which the earliest ap- by biological methods, there are no competing plications of biotechnology have occurred is the production methods that might inhibit the applica- pharmaceutical sector. Because of the rapid dif- tion of biotechnology to their production. fusion of the new genetic techniques into pharmaceutical R&D programs, the pharmaceutical Pharmaceuticals are profitable products be- sector is currently the most active in commer- cause they are low volume, high-value-added cializing biotechnology. For this reason, the phar- products. * This and other financial considerations maceutical sector serves as a model for the de- such as the following have led many U.S. com- velopment of biotechnology in this chapter and panies to apply biotechnology to the phar- in much of this report, It is important to recognize maceutical field. however, that the development of biotechnology ● The time required to develop some phar- in other industrial sectors will differ from its de- maceutical applications of biotechnology, in velopment in the pharmaceutical sector. Regula- particular MAb or DNA probe in vitro diag- tory and trade barriers and a marketing and dis- nostic products for humans, is much less tribution system unique to the pharmaceutical than that required to develop other industrial sector limit the applicability of the model to other applications (except possibly some animal industrial sectors. health applications). Many of the pharmaceutical products being Pharmaceutical industry* * developed with biotechnology are replace- The pharmaceutical industry is one of the most ments for or improvements in pharmaceuti- successful high-technology sectors of the world cal products already on the market, and they economy (80). Because research is the foundation can quickly generate income to finance the of competitive strength for modern pharmaceu- development of additional products. tical companies (55), and because pharmaceuticals The pharmaceutical industry offers high are the first products to which biotechnology has rates of return on both sales and equity and been applied, the first and perhaps most intense is thus an attractive and profitable industrial proving ground for U.S. competitive strength in sector into which firms might diversify. biotechnology will be in the area of pharmaceu- Many of the biotechnology pharmaceutical ticals. markets may be relatively small. Small firms with limited production and financial re- U.S. COMPANIES sources are able to compete more equally with large firms in small product markets The first applications of biotechnology have rather than in large markets, because econ- emerged in the area of pharmaceuticals for sev- omies of scale and costs of marketing in small eral reasons. First, rDNA and MAb technologies product markets are small. were developed with public funds directed toward biomedical research. The first biotechnol- “Value added is the value that a company adds to goods and serv- ogy products-MAb in vitro diagnostic kits, rDNA- ices that it purchases from other companies. It is the difference between the sales revenues and the cost of resources that it has purchased from other companies. For a “high-value+ idded” product, “See Chapter 3: The Technologies. therefore, the difference between the resources expended to pro- “ ‘Applications of biotechnology to the area of pharmaceuticals duce the product and the sales revenues generated by the product are discussed further in Chapter 5: Pharmaceuticals. is greater than average. Ch. 4—Firms Commercializing Biotechnology ● 73

U.S. pharmaceutical companies are quite active of the participants has changed considerably. Ap- internationally. Table 5 illustrates the distribution proximately 70 new US. companies have entered of sales by the top 20 U.S. and foreign pharma- the pharmaceutical field just to apply biotechnol- ceutical companies in 1981. Sales by the U.S. com- ogy. Many of these NBFs are wagering their exist- panies listed represented almost 60 percent of the ence on the success of commercial pursuits of bio- total pharmaceutical sales for the top 20 pharma- technology in nascent pharmaceutical product ceutical companies in the world. On the average, markets. In total, about 135 U.S. companies—78 almost 42 percent of the sales by these U.S. com- NBFs and 57 established companies—are known panies were foreign sales. According to the Insti- to be pursuing pharmaceutical product and proc- tute for Alternative Futures, foreign sales ac- ess development using biotechnology. * counted for roughly 43 percent of total U.S. pre- Since the early 1960’s, the U.S. share of world scription drug sales in 1980 (45), and U.S. phar- pharmaceutical research, innovation, production, maceutical subsidiary sales in foreign countries sales, and exports has declined, as has the number exceeded $10 billion in 1980. * Given established of U.S. companies actively participating in the U.S. pharmaceutical companies’ strong export various ethical drug markets compared to the performance in the past, the U.S. posture in world pharmaceuticals markets will be a subject of great ● The high level of US. firms’ interest in pharmaceutical applica- interest as biotechnology develops. tions of biotechnology is in part a reflection of the large number of old and new firms producing MAbs. Many companies included Up until about 1976, the average participant in in table 4 are using hybridoma technology to produce MAbs for the markets traditionally addressed by the pharmaceutical industry. the U.S. pharmaceutical industry could be de- In some cases, OTA did not have sufficient information to deter- scribed as a research-based, integrated, multina- mine the specific application for MAbs. For example, some com- tional company that spent (and still does) approx- panies indicated that they were engaged in the production of MAbs, but would not specify their intended use (i.e., research, separation imately 11.5 percent of its annual pharmaceutical and purification, diagnostic or therapeutic products for humans, sales on R&D (67). Since about 1976, the profile animals, or plants). Because a majority of firms producing MAbs are manufacturing MAbs for pharmaceutical use, OTA placed firms ● This figure is from a survey of Pharmaceutical Manufacturers for whom data were incomplete in the pharmaceutical sector, even Association member companies that had not been published as this though hybridoma technolo~v is also essential to fundamental mo- report went to press. lecular research on plants, animals, and bacterial systems.

Table 5.–Distribution of Sales by the Top 20 U.S. and Foreign Pharmaceutical Companies, 1981

1981 total Percent of Percent of pharmaceutical Share of Home sales in sales in other sales pharmaceutical Company country home country countries (millions of dollars) sales American Home Products ...... Us. 660/0 440/0 $2,303 Merck...... Us. 53 47 2,266 Bristol-Myers ...... Us. 71 29 2,190 Warner Lambert ...... Us. 55 45 2,045 Smith Kline Beckman ...... Us. 59 41 1,782 Pfizer ...... Us. 43 57 1,777 Eli Lilly ...... Us. 62 38 1,664 580/o Johnson & Johnson ...... Us. 56 44 1,308 Upjohn ...... Us. 62 38 1,242 Abbott ...... Us. 65 35 1,182 Schering-Plough ...... Us. 51 49 924 I Hoechst...... F.R.G, 28 72 2,555 Bayer ...... F.R.G. 24 76 2,400 190/0 Boehringer-lngleheim ...... F.R.G. 37 63 1,197 / Ciba-Geigy , ...... Switz. 2 98 1,891 Sandoz...... Switz. 5 95 1,515 160/0 Hoffmann-La Roche ...... Switz. 3 97 1,629 [ Takeda...... Japan 94 6 1,195 ) 40/0 Rhone-Poulenc...... France 41 59 1,008 ) 3Y0 SOURCE: Adapted from Arthur D. Little, estimates based on publicly available company data.

25-561 0 - 84 - 6 74 . Commercial Biotechnology: An International Analysis

number of foreign firms (80). At least one study ogy R&D budgets lag somewhat behind the budgets has suggested that substantially fewer U.S.-orig- of established U.S. companies and some U.S NBFs inated new chemical entities will appear on the as well (see table 7). As biotechnology processes gain market in the mid to late 1980’s than are appear- wider acceptance in the pharmaceutical industry, ing today because of a decline in self-originated however, European manufacturers-e.g., the investigational new chemical entities since the West German companies Bayer AG and Hoechst, mid-1970’s (83). Table 6 indicates the number of the Swiss companies Hoffmann-La Roche, Ciba new pharmaceutical products introduced by the Geigy, Sandoz, and the French company Rhone United States, four European countries, and Japan Poulenc—are expected to challenge U.S. compa- in the period 1961-80 and each year since. As the nies, if for no other reasons than their prevail- figures in that table show, the United States and ing strength in bioprocessing, their strength in France were the leaders in 1961-80, with 23.6 and international pharmaceutical markets (see table 18.1 percent of new product introductions, re- 5)* and their intentions to maintain this strength, spectively. They were followed by West Germany, *Although no British pharmaceutical companies appear in table Japan, Switzerland, and the United Kingdom. The 5, British companies such as Beecham, Welkome, Glaxo, and ICI world leader for the years 1981-83 is Japan, with are important international manufacturers of biologically produced products and are applying biotechnology to product develop- an average of 27 percent of new product intro- ment. Additionally, Beecham and Glaxo are amcmg the world’s largest ductions. Although the United States had an aver- producers of biologically made products (48). age of only 16 percent of new product introductions for the years 1981-83, the drive by NBFs and Table 7.–Biotechnoiogy R&D Budgets for Leading U.S. and Foreign Companies, 1982s established U.S. companies to apply biotechnology to the development and production of pharma- Biotechnology R&D ceuticals could help reverse the downward trend Company b budget (millions of dollars) in U.S. innovation and thereby contribute to the Hoechst (F. R.G.)...... $42C competitive strength of U.S. companies in world Schering A.G. (F, R. G.) ...... 4.2 Hoffmann-La Roche (Switz.) . 59 pharmaceutical markets. Schering-Plough (U.S.)...... 60 Eli Lilly (U. S.) ... , ...... 60 FOREIGN COMPANIES Monsanto (U. S.) ...... 62 DuPont (U. S.) ...... 120 Established European and Japanese companies, Genentech (U.S.)* ...... 32 following the lead of NBFs and established compa- Cetus (U.S.)* ...... 26 Genex (U.S.)* ...... 8.3 nies in the United States, are now vigorously pur- Biogen (U.S.)* ...... 8.7 suing pharmaceutical applications of biotechnol- Hybritech (U.S.)* ...... 5 ogy. * On average, European companies’ biotechnol- Sumitomo (Japan) ...... 6+ Ajinomoto (Japan) ...... 6+ “Japanese companies are though to have begun making a serious Suntory (Japan)...... 6+ commitment to biotechnolo~v as early as late 1981 (7o). West Ger- Takeda (Japan) ...... 6+ man companies were among the last European companies to begin Eif-Aquitaine (France) ...... 4+ commercializing biotechnology and did not intensify their R&.D ef- aBiotechnology R&D figures for Brltlsh companies not available. forts in biotechnology until late 1982. Other European countries bCompanie9 with asterisks are NBFs. have paralleled the Japanese in their date of entry into biotech- C1983 figure. nolog,v. SOURCE: Off Ice of Technology Assessment.

Table 6.—introduction of New Pharmaceutical Products by Country of Origin Between 1961 and 1983

Number of new products introduced by year Country 1961-80 1981 1982 1983 (est.) Japan ...... 155 (10.30/0) 15 (23.10/’0) 9 (23.1 0/0) 17 (35.40!0) West Germany...... 201 (13.40/0) 8 (12.30/o) 1 ( 2.60/o) 7 (14.60/o) United States...... 353 (23.60/o) 9 (13.9”/0) 9 (23.1 ~0) 6 (12.5Yo) France ...... 271 (18.1 0/0) 3 (4.60/o) 5 (12.80/o) 5 (10,4!40) United Kingdom ...... — ( — ) 3 (4.60/o) –( –) 3 ( 6.20/o) Switzerland ...... 109 ( 7.3”/0) 6 ( 9.20/o) 4 (10.2%0) –( – ) aNurnbOrS In parentheses indicate share of total rwmbr of new pharmaceutical products introduced for the Years indicated. SOURCE: Nomura Research Institute, “Trends of Biotechnology in Japan,” Tokyo, July 19s3. Ch. 4—Firms Commercializing Biotechnology . 75 and their increasing shares of worldwide pharma- important step for biotechnology research in Ger- ceutical R&D expenditures as compared to U.S. many (29). companies. (Pharmaceutical R&D expenditures by In terms of total sales, pharmaceutical com- country for the years 1964, 1973, and 1978 are panies in the United Kingdom are not among the shown in table 8). world’s top 20, and historically, the United The average European company’s involvement Kingdom has been slow to commercialize the re- in biotechnology is largely characterized by sults of much of its basic research. It is impor- research contracts with universities and research tant to note, however, that some British pharma- institutes rather than by investments in new in- ceutical companies (e.g., Glaxo and Beecham) pos- house biotechnology facilities. * Some of the large sess substantial bioprocessing knowledge, a ca- pharmaceutical companies of Switzerland have, pability that may provide them with a competitive however, begun to make substantial investments advantage as biotechnology develops. Further- in biotechnology facilities. Hoffmann-La Roche, more, some British pharmaceutical companies for example, spent $59 million on biotechnology have made in-house investments in biotechnology. R&D in 1981 (26) and ranks eleventh in world- ICI and Wellcome appear to be among the most wide pharmaceutical sales (28). CibaGeigy, which strongly committed of the British pharmaceutical commands 3.1 percent of the global drug market, companies commercializing biotechnology. ICI, is building a $19.5 million biotechnology center for example, has the world’s largest continuous in Switzerland and a $7 million agricultural bioprocessing plant and is considered an inter- biotechnology laboratory in North Carolina national leader in bioprocessing technology. This (11,12). company recently developed a new biodegradable thermoplastic polyester, Biopol@, formed by a ge- West German chemical and pharmaceutical netically manipulated microorganism. Although companies have been among the last foreign com- @ Biopol is not a pharmaceutical, it does give some panies to move into biotechnology. Many of the indication of ICI’s innovative capacity in the bio- companies have signed contracts with universities technology field. instead of investing in facilities to support their research (10). Some West German companies, in- The pharmaceutical and chemical companies of cluding Schering AG and Boehringer Ingleheim, France appear less aggressive than British com- however, are making significant contributions to panies in developing biotechnology expertise. the German biotechnology effort. Schering AG, Three major French companies have R&D pro- for example, in a joint agreement with the State grams in biotechnology-Elf Aquitaine (67-percent of Berlin is establishing a $10.7 million institute Governmentawned), Rhone Poulenc (l00)-percent of ‘(genetic engineering,” which is regarded as an Government-owned), and Roussel Eclaf (40-percent Government-owned and a Hoechst subsid- ● Many of the established U.S. companies have made substantial investments in new in-house facilities. See section below on iary). Of these three, Elf Aquitaine has committed “Established Companies.” the most to biotechnology. It owns Sanofi, a phar-

Table 8.-Pharmaceutical R&D Expenditures by Country: 1984, 1973, and 1978

1964 1973 1978 Level World share Level World share Level World share (millions of dollars) (percentage) (millions of dollars) (percentage) (millions of dollars) (percentage) United States ...... $282 60% $640 34% $1,159 28% Federal Republic of Germany 40 310 16 750 18 Switzerland ., ...... 38 : 244 13 7ooa 17 Japan ... ., ., 27 6 236 13 641 15 France ... ., ...... 28 6 166 9 328 8 United Kingdom . . 29 6 105 6 332 8 a Estimated Note Data are m current dollars and represent expenditures for both human and veterina~ research SOURCE National Academy of Sciences, The CompetWe Status of the U S Pharmaceutical Industry Washington, O C , 1983 76 . Commercial Biotechnology: An International Analysis

maceutical company that is applying biotechnol- companies pursuing pharmaceutical applications ogy to human and animal health in areas including of biotechnology in Europe lack the dynamism diagnostics, neuropeptides, serums, vaccines, and and flexibility to compete with the combined ef- antibiotics, and has established Elf-Bioindustries forts of NBFs and established companies in the and E1f-Bioresearch to develop biotechnology in United States, Europe could initially beat a com- the foodstuffs and agriculture sectors. To support petitive disadvantage. If the timing of market en- some of its new biotechnology R&D, Elf is cur- try for therapeutic and diagnostic products be- rently building a $10 million “genetic engineer- comes the most important factor in competition ing” plant (5). Rhone Poulenc is the world’s second for market share and market acceptance, how- largest producer of animal health products (84) ever, the marketing strength of the European and is considered to be the second most com- multinationals could help balance competition in mitted of the three French companies actively pharmaceuticals between the United States and commercializing biotechnology (50). To support Europe. its biotechnology effort, in 1980, Rhone Poulenc The potential competitive challenge that will be established a small specialty biotechnology sub- mounted by Japan in the area of pharmaceuticals sidiary named Genetica. is more difficult to estimate than the challenge Despite the efforts of companies such as Elf and from the European countries for two reasons: 1) Rhone Poulenc, the initial hesitation France ex- Japanese pharmaceutical companies such as Ta- pressed in the early stages of biotechnology de- keda, Sumitomo Chemical, Mitsubishi Chemicals velopment has put French companies at a distinct traditionally have not had a significant presence disadvantage internationally, particularly vis-a-vis in world pharmaceutical markets (55); and 2) pres- U.S. companies. The French Government has a ent Japanese commercialization efforts, most be- formal policy designed to promote biotechnology, ing proprietary, are difficult to assess either quan- but it is not clear that whatever impetus this titatively or qualitatively. One set of factors char- policy provides will be great enough to compen- acterizing Japanese efforts to apply biotechnology sate for France’s slow entry into biotechnology. to pharmaceutical development suggests a rather Historically, the French Government’s plans to formidable challenge facing U.S. companies in fu- promote national champions (e.g., the Plan Calcul, ture biotechnology-related pharmaceutical mar- the Concord) have failed. As the pace of biotech- kets, while a different set of factors suggests less nology commercialization quickens, a strong pri- of a future challenge. Each set of factors is dis- vate sector effort may be necessary in order to cussed in turn below. launch France into a more competitive position. Factors that suggest that Japan will have inter- Overall, Europe is considered to be farther national competitive advantages in the application behind the United States in the application of bio- of biotechnology to pharmaceutical development technology to product-related research areas than include the following: in fundamental research (23). Strong commercial- ● The application of biotechnology to pharma- ization efforts by the major chemical companies ceuticals in Japan has stimulated the involve- of West Germany or by the pharmaceutical comment in pharmaceuticals of many Japanese panies of Switzerland or the United Kingdom, companies from a broad variety of bioproc- however, could significantly improve West Ger- ess-based industries. Table 9 shows the diver- many’s, Switzerland’s, or the United Kingdom’s sification of Japanese chemical, food process- current competitive positions in the commer- ing, and textile and pulp processing com- cialization of pharmaceutical applications of bio- panies into pharmaceuticals. technology. A 1982 Keidanren* survey of 132 Japanese com- Some would argue that large companies have panies using biotechnology found that 83 percent an inertia that is difficult or impossible to change, making rapid changes in research policy and di- “Keidanren, the Japan Federation of Economic Organizations, is rection impracticable (5). To the extent that large a national organization composed of about 700 of the largest —

Ch. 4—Firms Commercializing Biotechnology 77

Table 9.—Diversification of Japanese Chemical, of the 60 companies that responded were pursu- Food Processing, Textile, and Pulp Processing ing applications in the area of pharmaceuticals Companies Into Pharmaceuticals (70), compared to only 62 percent of U.S. com- Company Pharmaceutical field of entry panies (see table 4). Intensified competition is ex- Chemical companies: pected to push technical advances in the area of Sunstar...... Antibiotics, interferon pharmaceuticals along in Japan at a rate that is Hitachi Chemical ...... Antibiotics, vaccines Hokko Chemical Industry . . Antibiotics comparable to or greater than the rate in the Mitsubishi Chemical United States. Among the companies using bio- Industries ...... Physiologically active technology in Japan, it is already a widely ac- agents, anticancer drugs, cepted view that Japan can catch up with the diagnostic reagents, monoclinal antibodies United States within 5 years. This point is very Denki Kagaku Kogyo ...... Physiologically active agents well illustrated by the Nikkei Sangyo Shirnbun Sumitomo Chemical ...... Monoclinal antibodies, interferon, growth (Japan Industrial Daily) survey undertaken in June hormone 1981. According to the survey, 48 percent of the Daicel ...... Anticancer drugs 128 responding firms thought Japan could catch Mitsubishi Petrochemical up to the United States in the commercial develop- Industries ...... Diagnostic reagents Chisso ...... Diagnostic reagents ment of biotechnology in 5 years, and 24 percent Mitsui Toatsu Chemical . . . Urokinase estimated that catching up would take only 2 to Food processing companies: 3 years (57). Ajinomoto ...... Antibiotics Suntory...... Antibiotics, interferon, ● The Government of Japan, which has tar- anticancer drugs, drugs geted the pharmaceutical industry for inter- for treatment of high blood pressure national expansion, has improved the en- Meiji Seika Kaisha ...... Antibiotics, interferon vironment for pharmaceutical innovation, Sanraku-Ocean ...... Antibiotics and thus, for the application of biotechnol- Kikkoman Shoyu ...... Physiologically active agents, antibiotics, ogy. immune suppressors Takara Shuzo ...... Physiologically active agents The Japanese Government through targeting of Meiji Milk Products ., . . . . . Physiologically active the pharmaceutical industry, changes in patent agents, interferon laws to prevent imitation, and pricing policies in Yakult Honsha...... Physiologically active agents, anticancer drugs, the Government-administered national health in- diagnostic reagents for surance system has begun an effort to coordinate liver cancer trade, pricing, and health care policies to promote Kyowa Hakko Kogyo ...... Physiologically active agents, interferon pharmaceutical innovation and overseas expan- Kirin-Seagrams ...... Interferon sion (74). These Government efforts are expected Kirin Brewery. ., ...... Anticancer drugs to facilitate the application of biotechnology in the Sapporo Breweries ... , . . . . Anticancer drugs Toyo JO ZO ...... Immune suppressors Japanese pharmaceutical industry. Morinaga & Co...... Diagnostic reagents for liver ● cancer, drugs for Joint pharmaceutical research projects and treatment of high blood collaborative arrangements among compa- pressure nies, sometimes in conjunction with Govern- Snow Brand Milk Co...... Interferon ment research institutions, promote biotech- Textile and pulp companies: nology transfer throughout Japanese indus- Asahi Chemical Industry . . . Interferon Toray Industries ...... Interferon try and accelerate the pace of technical ad- Teiji Limited ...... Interferon vances. Table 10 provides a list of some Japa- Kirin-Seaarams ...... Interferon nese joint ventures in pharmaceuticals de- SOURCE: Office of Technology Assessment. rived from the Keidanren survey of 1982. As early as 1979, the Japanese Ministry of Health Japanese companies. It enjoys the regular and active participation set up a study group between Green Cross and of the top business leaders working closely with a large professional staff to forge agreements on behalf of business as a whole. It often Toray Industries to speed the development of surveys its members on issues of economic importance. interferon, because the Ministry had concluded 78 . Commercial Biotechnology: An International Analysis

Table 10.–Japanese Joint Ventures in Pharmaceutical Applications of Biotechnology

Companies Product area Otsuka PharmaceuticallHayashibara/Mochida Pharmaceutical ...... Production of alpha, beta, and gamma interferon Yamanouchi PharmaceuticallAjinomoto ...... Large-scale production of thrombolytic agent Yoshitomo Pharmaceutical/Takeda Chemical...... Large-scale production of thrombolytic agent AjinomotolMorishita Pharmaceutical ...... R&D on pharmaceuticals Yoshitomi Pharmaceutical Industries, Ltd./ Yuki Gosei Kogyo Co., Ltd...... Developing rDNA products for circulatory system Takara Shuzo/Taiho Pharmaceutical ...... Development of heart drugs using rDNA Toray lndustrieslKyowa Hakko KogyolGan Kenkyu Kai (Cancer Research Association) ...... Development of beta and gamma interferon by rDNA Asahi Chemical lndustrylDainippon Pharmaceutical/Tokyo University ...... R&D on alpha and gamma interferon Toray lndustrieslDaiichi Seiyaku Co., Ltd...... Using rDNA to produce gamma interferon Ajinomoto~akeda Chemical Industries, Ltd...... Development of interleukin-2 Asahi Chemical Industries Co., Ltd./ Dainippon Pharmaceutical Co...... Development of tissue necrotic factor SOURCE: Office of Technology Assessment. that the separate approach being taken was costly maceuticals (see table 6). In 1982, Japanese com- both in terms of funds expended and time taken panies again accounted for roughly 23 percent (73). Many other examples of technical collabo- of the new pharmaceutical products introduced. ration in biotechnology in Japan can be cited, and They also accounted for over 16 percent of all many more Japanese companies have intentions U.S. patents issued for pharmaceutical and to cooperate with one another in research or de- medicinal products and for 38 percent of all U.S. velopment and/or in commercialization in the fu- pharmaceutical and medicinal patents granted to ture. In 1981, a scientist from the Fermentation foreign firms (14). Research Institute of Japan’s Ministry of Interna- ● Japanese companies applying biotechnology tional Trade and Technology acknowledged that to pharmaceutical development (in contrast almost half of the companies who work or intend to U.S. companies) appear to be dedicating to work in “genetic engineering” will cooperate relatively more research effort to the later or have already cooperated in some biotechnology stages of commercialization (i.e., bioprocess- activities (79). Joint ventures such as those listed ing) and cancer treatment. Seventy-five per- in table 10 might provide Japanese companies cent of all Japanese medical and drug com- with commercial advantages for two reasons: 1) panies are engaged in MAb research, and a each firm participating in the venture brings dif- large proportion of the MAb R&D is targeted ferent resources and expertise to the project, toward developing a “magic bullet” for cancer thereby making the group effort more efficient; treatment, monitoring bioprocesses, and re- and 2) the intention of some of the joint ventures covering pioteins (70). is to secure patents in fields not yet pre-empted by foreign competition (e.g., new host-vector sys- Factors that suggest that the Japanese may not tems and sophisticated sensors for bioprocessing) have significant advantages in future biotechnol- or to undertake joint clinical testing (70). ogy-related pharmaceutical markets include the following: ● Japan’s share of world pharmaceutical R&D expenditures has been increasing steadily ● Barriers to entering foreign pharmaceutical since 1964 (see table 8) as has its share of the markets are high, and Japanese companies worldwide total of newly introduced pharma- at present have neither distribution channels ceuticals (see table 6). in place nor a sufficient sales force to permit aggressive marketing of pharmaceutical In 1981, Japanese companies ranked first in terms products in Western markets. of the largest number of major new drugs introduced into world markets, being responsible for Japanese companies’ lack of distribution channels 15 (23 percent) of the 65 newly introduced phar- in Western pharmaceutical markets is one fac- Ch. 4—Firms Commercializing Biotechnology ● 79 tor that has limited Japanese companies’ ability above, it cannot be assumed that the Japanese will to penetrate these markets. It is expected that the be major competitors in biotechnology-related mode by which Japanese companies will pene- pharmaceutical markets. trate these markets in the future will be through Japan’s traditional bioprocess-based indus- joint ventures with U.S. or European companies tries, including pharmaceuticals, rely large- that allow Japanese companies to take advantage ly on conventional microbiology, genetics, of existing distribution channels. * Although Japa- and bioprocess feedstocks. These traditional nese companies tend to seek opportunities to pen- approaches in bioprocessing could be chal- etrate foreign markets directly through manufac- lenged by new biotechnology (4 I). turing subsidiaries rather than through licensing contracts, only two Japanese companies have Japan is considered to be behind the United States established equity joint ventures with U.S. firms * * in fundamental biology. This weakness in funda- and only three have established U.S. subsidiaries. * * * mental biology could reduce the potential compet- However, the international expansion of Japan’s itive threat of Japanese companies applying bio- pharmaceutical industry has only just begun. technology to pharmaceutical development. Almost half of the Japanese companies now ● Biotechnology R&D investments by Japanese using biotechnology- expect to “catch up” companies are still low in comparison to the technologically to the United States in 5 years. investments by U.S. companies. These companies therefore intend to set their Although Japan’s aggregate investment in phar- own R&D and commercialization targets maceutical R&D has increased steadily since 1964, beyond the 5-year catch-up period at consid- investments by individual Japanese companies in erable commercial risk. biotechnology R&D are still low compared to in- The intention of Japanese companies to catch up vestments by NBFs and established companies in to U.S. companies and to set their own R&D tar- the United States (see table 7). According to the gets is a unique phenomenon. In the past, even Nikkei SazIgyo Shiznbun survey (June 1981) and in high- technology fields such as computers and the Keidanren survey (1982), only 5 Japanese electronics, the R&D and commercialization tar- companies spent more than $6 million per year , gets have been demonstrated in advance by U.S. on biotechnology R&D. The average R&D ex- and Western European companies, so Japanese penditure of 49 of the 60 Japanese companies that companies have not had to worry about the mar- responded to the Keidanren survey was under ketability of their R&D and commercialization ef- $1 million. Although it is difficult to translate R&D forts. By selecting the best technology available investment into commercial success, on a quan- and refining it, Japanese companies have been titative basis, Japan falls far behind the United able to minimize the time required to catch up States in terms of industrial expenditures on bio- with the front runners and sometimes surpass technology research. them at the product marketing stage (70). Given the lack of established commercial targets in bio- Animal agriculture industry* technology and considering the barriers to entering foreign pharmaceutical markets mentioned U.S. COMPANIES The animal agriculture industry encompasses ● In support of this expectation is a study by the Japanese Pro- ductivity Center in 1982 of the potential for Japanese drug firms companies engaged in the manufacture of prod- in the United States. The study estimated that the establishment ucts, the prevention and control of animal dis- of a U.S. subsidiary by a Japanese company would require an in- eases, animal husbandry, growth promotion, and vestment of about $80 million over a 4-year period. The study recommended that Japanese companies form joint ventures with U.S. com- genetic improvement of animal breeds. The companies rather than establish a Japanese company or purchase a U.S. panies that dominate the production of most ani- company (75). * *Takeda with Abbott (U. S.) and Fujisawa with SmithKline (U.S.). mal health products are established U.S. and * ● *The three U.S. subsidiaries are Daiichi Pharmaceutical Corp., Otuska Pharmaceutical, and Alpha Therapeutics (subsidiary of Green ● Applications of biotechnology to animal agriculture are discussed Cross), further in Chapter 6: Agriculture. 80 ● Commercial Biotechnology: An International Analysis

foreign pharmaceutical and chemical compa- veterinary vaccines to enter the market typi- nies. ” Most of these companies have global mar- cally can be completed in about 1 year (17). keting and distribution networks and undertake Thus, the lower costs of commercialization animal drug production as a diversification of for veterinary vaccines in comparison to their principal activities. In recent years, the ad- human pharmaceuticals and the potential for vent of biotechnology, the rising industrialization short-term product revenues may reduce of animal agriculture, and changing dietary habits NBFs’ financial need to collaborate extensive- in foreign countries have increased the demands ly with established companies. * for improvements in old products and for com- Some veterinary vaccine research (e.g., on fe- pletely new products. NBFs may have a major role line leukemia vaccines) could serve a~ a mod- to play in expanding animal health markets. el for developing human vaccines for similar viruses that could launch some NBFs into Sixty-one companies in the United States are the more profitable human pharmaceutical known to be pursuing animal health related appli- markets. cations of biotechnology, as shown in table 4. Thirty-four (56 percent) of these companies are The fact that 34 of the 61 U.S. companies pur- NBFs. Of special note is the role new firms ap- suing applications of biotechnology in animal pear to be playing in three major segments of the agriculture are NBFs suggests the evolution of an industry-diagnostic products, growth promo- expanding animal health market in which NBFs tants, and vaccines. possible explanations for why such as Molecular Genetics, Inc. (MGI), Amgen, some NBFs might be interested in these three ani- Chiron, Bio-Technology General and Cetus per- mal health markets include the following: ceive opportunities. In contrast to human pharmaceutical products, animal vaccines and diag- ● Recombinant DNA methods used to make nostic products are in many cases being devel- human vaccines are suited to making safe oped by NBFs independently of established U.S. and effective animal vaccines against both or foreign companies. viral and bacterial infections, just as the MAb or DNA probe technology used to produce In the development of animal growth promot-

● human products is suited to making passive ants, however, established U.S. companies are vaccines or diagnostic products for ani- more involved. The market for animal growth mals. * * promotants is the second fastest growing market ● The markets for many animal health prod- in the animal health field, and because it may be ucts (e.g., vaccines or diagnostic products) are the most significant commercial development area relatively small and therefore allow NBFs to (26), it is also one of the most competitive. Global compete equally with larger companies with- sales for growth promotants are expected to out suffering from scale disadvantages. reach $515 million by 1985 (84). Several estab- ● The commercial introduction of veterinary lished U.S. companies, including American Cyana- vaccines can generally be achieved more mid, Eli Lilly, Monsanto, and Norden (a subsidiary quickly than can that of human therapeutic of SmithKline Beckman), have displayed interest products. The regulatory process allowing in the field by sponsoring research contracts with NBFs such as MGI, Biotechnica International, ● Major U.S. producers of animal health products include Syntex, Genentech, and Genex. Other established U.S. Pfizer, Eli Lilly, Upjohn, SmithKline Beckman, American Cyanamid, companies have shown interest by conducting ini- Merck, Johnson & Johnson, Tech America, and Schering-Plough. Major foreign producers include Burmn@s-Wellcome (U.K.), Rhone- tial evaluations of growth promotants developed Merieux (France), Hoechst AG (F.R.G.), Bayer AC (F.R.G,), Connaught by NBFs, as Eli Lilly did in the case of a product (Canada), Beecham (U.K.), Solvay (Belgium), Boehringer Ingleheim developed by the NBF Biotechnology General. (F. R.G.), Intervet (Netherlands), and Elf Aquitaine (France). ● *The NBFs Chiron and Cetus both became involved in the vet- In an effort to expand their own technical capa- erinary products business as extensions of their research in the field of human health care (17,20). The NBF Monoclinal Antibodies, Inc., bilities and reach new product markets, some es- as a spinoff from research on detection kits for human pregnancy and ovulation, is developing an ovulation detection kit for large ani- “Collaborative ventures betweenNBFs and established U.S. and mals which will be useful in animal breeding management. foreign companies are discussed further below. Ch. 4–Firms Commercializing Biotechnology ● 81 tablished pharmaceutical and chemical companies health, probably because meat does not constitute have contracted with NBFs for animal health proj- as large a portion of the Japanese diet as it does ects including the development of animal growth of the diets in Western European countries and promotants and vaccines for foot-and-mouth dis- the United States. Recently, however, the Japa- ease, rabies and colibacillosis (a diarrheal disease nese chemical company Showa Denko and the that kills millions of newborn pigs and calves each U.S. company Diamond Shamrock set up a bio- year). Norden, for example, funded research by technology joint venture, SDS Biotech Corp., in the NBF Cetus to develop a vaccine to prevent coli- Ohio exclusively for animal health research (13). bacillosis in hogs. This vaccine received the US. Food and Drug Administration’s (FDA’s) approval Plant agriculture industry* in 1982. As other examples, American Cyanamid and Merck have both contracted with NBFs for U.S. COMPANIES projects involving bovine growth hormone and The plant agriculture industry encompasses a vaccine for foot-and-mouth disease. Many of the companies engaged in R&D activities to modify products under joint development are already specific plant characteristics (e.g., tolerance to undergoing testing. stress, nutritional content, yield, and growth rate) Several NBFs are in a strong competitive posi- or to modify traits of micro-organisms that could tion vis-a-vis established U.S. and foreign compa- be important to plant agriculture (e.g., nitrogen nies in animal-related biotechnology. Most of the fixation, disease suppression, and insecticide pro- established U.S. companies have made relatively duction). The importance of plants as a food small investments in this area-equal to or less source and renewable resource and the poten- than investments in animal health by most of the tial of biotechnology to alter plant characteristics leading NBFs (54), As established U.S. companies has attracted a diverse set of firms to the plant in the animal health field increase their biotech- agriculture industry. Fifty-two U.S. firms listed nology investments, the U.S. competitive position in table 4, 30 established companies and 22 NBFs, in domestic as well as foreign animal health mar- are applying biotechnology to plants. Table 11 kets should strengthen. provides some examples of the diverse application areas that NBFs are pursuing. FOREIGN COMPANIES Established U.S. companies from industries Established U.S. and European companies con- ranging from oil and chemicals to food and phar- trol world animal health product markets, but col- maceuticals appear to be dominating the U.S. in- lectively, European companies’ efforts to produce vestment in biotechnology R&D in plant agricul- new or replacement animal vaccines or growth ture (25). U.S. chemical companies that have made promotants using biotechnology do not appear considerable in-house investments in plant-related to be as strong as the collective efforts underway biotechnology research include American Cyana- in the united States. European companies appear mid, Dow, Allied, DuPont, and Monsanto. These on the basis of reported research projects almost companies already produce chemical pesticides exclusively dedicated to the development of prod- and herbicides and already have research using ucts for the world’s two largest animal vaccine plant cell and molecular biology techniques di- markets, rabies and foot-and-mouth disease. U.S. rected toward increasing the resistance of crop companies dominate the world market for ani- plants to these chemicals (15). American Cyana- mal growth promotants, and few European ani- mid, which has the expertise to synthesize her- mal health companies have indicated an interest bicides, and the NBF MG1, which has the exper- in entering the growth promotants product mar- tise to develop novel corn strains tolerant to new ket. Furthermore, few European companies have herbicides, have a joint program to develop her- established R&D joint ventures with the leading bicide-resistant corn. New corn strains developed U.S. NBFs engaged in growth promotant R&D. for herbicide resistance might make it possible

Japanese companies have exhibited relatively ● Applications of biotechnology to plant agriculture are discussed little commercial interest in the area of animal further in Chapter 6: Agriculture. 82 Commercial Biotechnology: An International Analysis

Table 11 .—Applications of Biotechnology to Plant products from plants (e.g., morphine and Agriculture for Seven New Biotechnology Firms codeine). Advanced Genetic Sciences, Inc.: One route by which some established U.S. com -Development of plant varieties with increased resistance to disease, stress, herbicides and pests, and panies have entered the plant agriculture field is tolerance to extreme weather conditions through the acquisition of seed companies. Seed -Development of antagonistic bacteria that do not con· companies provide both an in -place marketing tain ice nucleation properties to optimize frost pro tection system and high -quality, commercially successful Blotechnlca International: gene pools, often representing as much as 10 to -Improvement of nitrogen-fixing capability of Rhizobium 20 years of R&D. Through their ownership of -Introduction of nitrogen-fixing capability in plants that rely on fertilizer seed companies and investments made both in -Herbicide resistance in selected plants house and through sponsored research with -Improved protein content in alfalfa NBFs, some established companies are assuming Blo· Technology Gene,al Corp: -Development of a biofertilizer, Azospirillum active roles in the modern research impetus for -Development of several strains of trichoderm, a micro- seed improvement. By assuming stronger roles organism that controls soil-borne fungi that cause in basic plant science research, U.S. companies damage to many plants. Infematlonal Genetic Engineering (Ingene): like AReO, ShelL Allied, Monsanto, and DuPont -Modification and production of bacteria that are lethal hope to play a leading role in the development to four specific weeds and three groups of insects of future agriculture markets. -Production in micro-organisms of plant growth regulators-hormones that affect many biological func tions including flowering, fruit ripening, and water loss. FOREIGN COMPANIES -Modification of organisms that are responsible for ice The commercialization of plant-related biotech nucleation in an effort to interfere with the organisms' ability to adhere to plants nology is occurring more slowly in the European Cetus Madison: competitor countries than in the United States. -Development of soybean and corn hybrids to increase vigor For example, most West German plant tissue cul -Development of microbial inocculant for corn, soybean, ture research is going on in universities (6). Some cotton, wheat, and rice to protect plants against fungal of the large European pharmaceutical companies and insect diseases and to increase plant growth are reportedly interested in plant tissue culture, through nitrogen fixation and other biological processes but only Boehringer Mannheim (F.R.G.) and the -Exploration of ways to add genes to make plants Society for Biotechnology Research (GBF, Gesell unpalatable to insect pests and to make plants resis schaft fUr Biotechnoiogische Forshung) have made tant to diseases Ecogen, Inc.: their interests public. Boehringer Mannheim is -Development of microbial and viral pesticides also engaged in research to produce digitalis using Molecular Genetics, Inc.: (10). -DeveloDment of herbicide-resistant corn and nutri· immobilized plant cells Although excellent tionally enhanced field corn basic research is conducted in centers such as the SOURCE: Company prospectuses and annual reports. Max Planck Institute for Plant Research in Co logne, '" few commercial pursuits are known. to develop markets for broad-spectrum herbicides Great Britain possesses some of the strongest that might not otherwise be used. Some U.S. basic research in interdisciplinary plant sciences chemical companies may be investing in plant and recently a new firm launched by the British related biotechnology to compensate for possible Technology Group, Agricultural Genetics, was reductions in future sales due to the development established to exploit discoveries made at the of plants that do not require chemicals (e.g., plants Agricultural Research Council. Whether or not that fix nitrogen) plants that produce pesticides) the basic research will be commercialized suc or due to competition from microbial insecticides cessfully is difficult to predict. or nonchemical treatments (30). Some pharma ceutical companies may invest in plant -related biotechnology, for example J to seek new sources *Bayer signed a 3-year agreement with the Max Planck Institute of therapeutically active substances or to develop for research in plant cultivation with special attention to rDNA to a commercial process for producing secondary improve plant resistance to phytotoxins. Ch. 4—Firms Commercializing Biotechnology 83

The Japanese are very interested in the develop- technology, a prerequisite for efficient bio- ment of amino acids and high-value compounds logical production. by selecting and engineering plant cells to pro- ● Japanese chemical companies view special- duce secondary metabolizes in vat culture. MITI ty chemicals as a profitable area in which to has identified secondary compound synthesis as diversify. Showa Denko, a leading chemical a major area for commercialization, and this area company in Japan, is expecting to become a of plant-related biotechnology research will re- major world producer of the amino acid tryp- ceive approximately $150 million from MITI dur- tophan, first by using a new low-cost semi- ing the next 10 years (15). With their experience synthetic production method, and second by in large-scale bioprocessing, the Japanese are well rDNA production. ahead of the United States in this aspect of plant ● Two Japanese companies, Kyowa Hakko and biotechnology. Japanese companies have already Ajinomoto, are currently the world’s major reported repeated success in growing plant cells producers of amino acids. Both companies in 15,000 liter batches (68). The upper limit in the have operating production plants in the United States is only 300 liters (68). United States, and both have strong biotechnology R&D programs in Japan. Ajinomoto, Although biotechnology is not expected to pro- for example, has succeeded in improving the vide foreign countries with an ability to reduce production of the amino acid threonine by U.S. dominance in world grain markets, it may rDNA technology using E. coli, and Showa provide foreign countries with opportunities to Denko has cut in half the production cost for seize specific agricultural markets. In both France tryptophan through a semisynthetic produc- and Italy, for example, there are major commer- tion process. cial activities in plant tissue culture techniques for eliminating viruses and propagating fruit and The commercialization of biotechnology will re- nut trees (15). quire many small, incremental improvements in bioprocess technology, superb quality control, Specialty chemicals industry* and mass production to progress along the learning curve. As biotechnology development reaches The specialty chemicals industry promises to large-scale production stages, well-developed bio- be a particularly competitive industry as biotech- processing skills will be necessary to compete in nology develops, because large chemical compa- world product markets. Nowhere is the art of bio- nies from both Japan and the Federal Republic processing better refined than in Japan. Certain- of Germany as well as the United States are hop- ly Japan’s expertise in this area will provide coming to switch from the stagnant commodity chem- petitive strengths in many future biotechnology icals industry into the more profitable specialty product markets. chemicals industry. Two West German companies that have expe- The general chemical and petrochemical firms rienced declining profits for the last 10 years be- of Japan are leaning strongly to biotechnology, cause of poor chemical sales are Hoechst and Bay- and some of them are making rapid advances in er, the world’s largest chemical exporters and the R&D through their efforts to make biotechnology world’s two largest pharmaceutical companies a key technology for the future. Japanese com- (see table 5). These two companies spend more panies are expected to be especially strong com- on R&D than any other pharmaceutical compa- petitors in future specialty chemical markets for nies. Both these companies have targeted specialty reasons including the following: chemicals as an area where biotechnology might increase corporate sales and profits (10). Bayer ● Japanese bioprocess-based companies are known to possess highly developed enzyme has a longstanding collaboration with its two U.S. subsidiaries, Miles and Cutter, and these two sub- *Applications of biotechnology to specialty chemicals are discussed sidiaries help keep Bayer informed of biotech- further in Chapter 7: Specialty Chemicals and Food Additives. nology developments in the United States. Much 84 Commercial Biotechnology: An International Analysis

of Bayer’s specialty chemical research is taking Schering’s main research focus is on the genetic place in the United States through these two sub- manipulation of micro-organisms to produce sidiaries. Bayer has opted for specialty chemicals amino acids such as lysine (10), and BASF is build- as its main R&D focus; Miles is important in the ing a $24 million “Biotechnicum)” a combination enzyme and organic acid field using bioprocess- of research laboratory and pilot plant with a prod- ing, and Cutter is expanding its R&D activity in uct focus on optically active intermediate chemi- purifying enzymes and proteins on a large scale cals and vitamins. Schering has also signed two (10). Two other German companies, Schering AG research agreements with Genex, one of which and BASF AG, are also actively applying biotech- involves the development of a genetically manip- nology to the production of specialty chemicals. ulated microbe to produce an amino acid. .

U.S. and foreign support firms

Companies engaged in biotechnology research In most support areas, European and Japanese have increased and expanded the demands placed support sectors are underdeveloped compared to on the infrastructure that has traditionally sup- that of the United States, although both are ex- plied biochemical reagents, instrumentation, and panding quickly. Two factors might account for software for biological research and production. weak support sectors in Japan and Europe as As “scaled-up” production of biotechnology prod- compared to that of the United States: ucts comes on line, the demand for these supplies ● The United States is a recognized leader in as well as for new production instrumentation basic biomedical research, and over the is likely to increase further. years, public funds, notably from the Nation- The United States, with an assortment of com- al Institutes of Health, have created a large panies supplying biochemical reagents, instru- well-defined market for specialty products mentation, and software, has the strongest bio- used in biological research (l). technology support sector in the world. The U.S. ● Because so many large and small U.S. com- biotechnology support sector is characterized by panies are currently applying biotechnology, a large number of small specialty firms that com- the specialty research product needs are pete in small specialty product markets such as greater in the United States than in any other biochemical reagents used in rDNA research (e.g., country, and opportunities exist for many BioSearch, Vega, P-L Biochemical (a subsidiary small manufacturers. In fact, the U.S. market of the Swedish company Pharmacia), Bethesda for custom oligonucleotides (DNA fragments) Research Laboratories, * Collaborative Research, and biochemical reagents for synthesis of New England BioLabs, Applied Biosystems, Crea- DNA is equal to that of the rest of the world tive Biomolecules, and Intelligenetics) and several (51). medium-sized to large firms that produce ana- In Europe and Japan, there are few biotechnol- lytical and preparative instrumentation as well ogy support firms supplying biochemical. Thus, as bioprocess equipment* * for larger, more di- European and Japanese companies developing verse product markets (e.g., Beckman, Perkin El- biotechnology generally have to manufacture mer, Varian, Hewlett Packard, Waters, New oligonucleotides and other biochemical reagents Brunswick). in-house. Consequently, the expense for biochemical in European countries and Japan is often “Bethesda Research Laboratories was recently pumhased by Dex- greater than in the United States, where many ter Corp.’s GIBCO division. The new name for the merged company will be Life Technologies, Inc. support firms have achieved significant econ- * ● See Chapter 3: The Technologies for a discussion of bioprocess omies of scale (51). The alternative to in-house equipment. production of support materials in Europe and Ch. 4—Firms Commercializing Biotechnology . 85

Japan is reliance on a foreign supplier. Such pected to rise further. The total synthetic DNA reliance could impede technical advances (21) and market for 1983 to 1984 is estimated at $3 million retard commercialization in the short run. Al- to $4 million, and demand is expected to increase though there are Japanese and European instru- 25 to 30 percent a year (36). mentation manufacturers, U.S. instrumentation Until rather recently, most oligonucleotides is considered superior to both Japanese and Euro- were made in-house in the United States; how- pean instrumentation and dominates the Euro- ever, as demand for these materials has increased, pean market (51). The Japanese instrumentation small specialty support firms have been started market is supplied by Japanese manufacturers, to exploit these small markets. One source be- which have not made significant inroads in lieves that the evolution of small support firms foreign markets (52). in the United States is gradually shifting many skilled biochemists in U.S. companies commercial- Important product areas izing biotechnology from routine laboratory duties to basic research and that the net result has For purposes of analysis, OTA examined three been an increase in the progress of biotechnology product areas thought to have significant short- research in the United States (51). term implications for research developments and Small U.S. support firms are estimated to supply technical developments in the biotechnology field: about 25 percent of the total reagents used in ● biochemical reagents used specifically in biotechnology research in the United States at rDNA research (e.g., oligonucleotides and represent (51). Some expect this figure to increase striction enzymes); to about 50 percent as small firms achieve econ- . instrumentation used in product R&D (e.g., omies of scale, and their prices become lower DNA and peptide synthesizers) and separa- than those of in-house manufacture. others be- tion and purification instruments such as lieve an estimate of 50 percent might be some- high-performance liquid chromatography what high, because some of the major users of (HPLC); and reagents, in order to control availability, quality, ● software designed to drive the microproces- and cost, are opting for in-house manufacture sors that automate instruments as well as rather than purchase (40). In-house manufacture software designed to analyze DNA and pro- may in fact limit the growth of the reagent mar- tein sequence data in data banks. ket. The Canadian firm Bio Logicals no longer manufactures oligonucleotides at all, because the The United States is a world leader in all three market is smaller than was originally estimated, product areas. If adequate supplies of the above and the business is becoming one of low profit products and services can sustain the present rate margin (4). of growth of biotechnical advancement, the United States could possess a short-term advan- The unavailability of specific DNA sequences tage in bringing biotechnology products to inter- will clearly slow any research development on national markets. those sequences. Research at the U.S. firm Genen- tech was slowed, for example, when the company had to wait weeks for a reagent that is only avail- BIOCHEMICAL REAGENTS able from Sweden (43). In the United States, the The availability of quality biochemical reagents existence of many small custom reagent suppliers such as oligonucleotides (DNA fragments) and re- makes delays of this kind rare, In Europe, how- striction enzymes (enzymes used to cut DNA) is ever, delays of 1 to 2 months occur more often. crucial to sustaining the rapid development of the Nonetheless, there is little competition in Europe new biotechnology field and making it viable on among firms making custom synthesized frag- a large scale. Between 1980 and 1990, sales of bio- ments, because European researchers are will- chemical for DNA and peptide synthesis in the ing to wait a couple of months for special reagents United States are expected to increase at an an- (51). DNA probes (small pieces of DNA that rec- nual rate of 20 percent (81). As more research ognize specific genes) are not even manufactured is undertaken in plant agriculture, sales are ex- there (21). 86 . commercial Biotechnology: An International Analysis

The biochemical supply situation is somewhat to the Japanese market, is exporting them to the different in the United Kingdom, a nation strong United Kingdom. Because of the increasing rate in basic research but weak in commercial applica- at which biotechnology research is being carried tions (51,69). As early as 1980, a well-known Brit- out in Japan, and because of the underdeveloped ish Government biotechnology report, the Spinks’ support industry there, the current supply of oli- report, recognized that the United Kingdom had gonucleotides and restriction enzymes for bio- a shortage of suppliers of suitable equipment and technology research in Japan is inadequate. In reagents for biochemical laboratories (2). The fact, Japanese distributors are still looking for U.S. number of new small British suppliers of bio- suppliers (40). chemical reagents and restriction enzymes is in- The biotechnology support structure in Japan creasing, but British firms using these products is expected to develop differently from that of the as well as instrumentation still purchase much of United States, because most companies commer- them overseas. * British firms’ reliance on foreign cializing biotechnology in Japan will continue to biochemical suppliers could be reduced as an in- manufacture or import their own specialty bio- creasing number of small supply companies are chemical supplies. In order to meet their own beginning to form in the United Kingdom. needs, Japanese companies have integrated ver- The demand for support materials in Japan has tically and are increasing their efforts to develop increased significantly since MITI designated bio- products such as reverse transcriptase and other technology a priority area for the 1980’s. In an- enzymes that will reduce the cost and speed up ticipating the increased demand for research sup- the rate of biotechnology R&D. This pattern of plies, the Science and Technology Agency (STA) vertical integration and in-house manufacture is sponsored an industrial research team** whose not likely to change in the short term. The Japa- objective is “DNA extraction, analysis, and syn- nese supply structure could retard research and thesis technology development” (70). create an early commercial disadvantage for Jap- anese companies in the short run. Until recently, oligonucleotides were produced in Japan only on an experimental basis and for- INSTRUMENTATION eign products were used for domestic consumption. Now, three Japanese companies and their The instrumentation field includes all the instru- affiliated trading firms produce and market syn- mentation used in biotechnology from the analysis thetic DNA in Japan, * * * and two of them are mem- and synthesis of DNA molecules to the monitor- bers of the MITI research team. Only two Japa- ing and control of large-scale separation and puri- nese companies, Nippon Zeon Co, and Takara fication of commercially important biological com- Shuzo, produce restriction enzymes for the pounds. of particular importance to the pace of estimated $4.5 million Japanese market (35). Nip- biotechnical development is the newly designed pon Zeon Co., a subsidiary of Kongo Pharmaceu- or recently modified instrumentation that is meet- tical Co., is manufacturing 35 kinds of restriction ing the special needs of biotechnology research enzymes and 87 different synthetic DNA frag- and production. Two of the most important in- ments mostly for research institutes in Japan (37). strument areas are DNA and peptide synthesizers Takara Shuzo, in addition to supplying enzymes and bioprocessing separation and purification instruments such as HPLCS. “The British firm Amersham recently launched new product lines Automated DNA and Peptide Synthesiz- to meet the gruwing need for restriction enzymes in the United King- dom, but rather than manufacturing the enzyme itself, Amersham ers.—Automated DNA and peptide synthesizers will be supplied with 22 restriction enzymes by the Japanese firm significantly reduce the number of persomel and Takara Shuzo Co. (9). Typically, Japanese companies do not pur- the amount of time required for synthesis. Such sue small foreign markets; in this case, however, Amersham’s distribution network provided easy access to the European enzyme synthesizers will have significant impacts on the market. timing of research outputs and technical devel- ● ● Ajinomoto, Wakinaga Yukuhin, Yamasu Shoyu, Yuki Gosei opments in biotechnology in the United States Yakuhin Kogyo, Toyo Soda Manufacturing Co., Ltd. ● * ● Nippon Zeon Co.-Mitsui Trading Co,, Yamasa Shoyu-Sumitomo (61). An increased availability of specifically syn- Shoji, Yoshitomi-Yuki Gosei. thesized gene fragments arising from automated Ch. 4—Firms Commercializing Biotechnology ● 87 synthesis may give researchers more flexibility synthesis, Japanese research could be slowed be- in the manipulation of genetic information. Auto- cause Japanese companies have not developed mated synthesizers can, among other things, ex- their own automation. pand the availability and variety of linkers and The only two DNA synthesizer manufacturers adapters* for cloning DNA, provide probes for in Europe are Celltech and Cruachan Chemicals finding messenger RNA and DNA gene sequences, Co., Ltd. (U.K.). However, companies in France, or manufacture whole genes themselves. the Federal Republic of Germany, Switzerland, The United States leads the world in synthesizer and the United Kingdom have introduced peptide technology. The support companies that manufac- synthesizers to the market or plan to soon. Sem- ture DNA and/or peptide synthesizers in the pa (France) is not aggressively marketing its ma- United States include Vega Biotechnologies, Bio- chine in the United States. The relatively small Search, Beckman Instruments, Sys-Tee, Applied size of the European market discourages many BioSystems, P-L Biochemical, Syncor, Genetic De- potential large European manufacturers from en- sign, and Sequemat. Generally, these companies tering the market. The inherent risks of introduc- have very good communication with the U.S. coming a new product might also discourage small panies and laboratories they supply. BioSearch European companies from entering the market customers, for example, keep BioSearch contin- as well. ually informed of their needs so that automation Over the next 5 years, the U.S. market for auto- can be designed based on these needs. Communi- mated DNA synthesizers is expected to grow to cation networks between European instrument between approximately 500 (81) and 1,000 units suppliers and their European customers are not (21). Since March 1983, Applied BioSystems (U. S.) so well developed.** US. companies might, there- has shipped 30 synthesizers, and in just over a fore, gain some competitive lead time in biotech- year, BioSearch (U. S.) has shipped about 50 (37). nology, because they will be among the first to Some observers expect that the largest biotech- benefit from automation developments in the nology support markets in the near term will be United States. those for synthesized whole genes and purifi- There are no Japanese companies actually man- cation systems (2 I). Though some firms doubt that ufacturing DNA or peptide synthesizers for com- a market for whole genes is developing, other mercial use (21)81), but some U.S. manufacturers firms, including Creative BioMo]ecules (U.S.), have of DNA and peptide synthesizers have established aIready begun to market whole genes. Creative distribution agreements in Japan.*** The reasons BioMolecules’ synthetic gene for human pancre- given most often for the dearth of Japanese man- atic growth hormone releasing factor. ufacturers are the high risks of bringing synthe- New developments in continuous-flow peptide sizers to market and the small size of the Japanese synthesizers have led to an upsurge in interest synthesizer market. A 1982 market survey by in this different type of instrument technology. American Commercial Co. (Vega Biotechnoloy’s The U.S. market for peptide synthesizers 5 years Japanese trading company) found the Japanese from now is expected to be 500 units—the same market at that time to be approximately 150 ma- size market that is forecast for DNA synthesizers chines (81). Without automation to synthesize the (81). genes or fragments necessary for research, the Japanese may find it difficult in the short run to In a situation of rapidly changing technology, keep pace with American research advances. Ad- the United States is at a clear advantage in the ditionally, if future markets develop for total gene short run because of the supply of automated instrumentation, an automated synthesis instrument supply standpoint, because many small U.S. *Short nucleotide sequences that encode restriction enzyme sites. companies are willing to address these small, high- ● “See the Spinks’ report recommendations. ● ● “A U.S. synthesizer manufacturer contacted by OTA was not risk markets, In Europe, few small or large firms aware of any Japanese companies that manufacture synthesizes (4o). are willing to do the same. 88 . Commercial Biotechnology: An International Analysis

Bioprocessing Separation and Purifica- HPLC is one of the most commonly used sep- tion Instrumentation.—Technical advances in arative techniques and also one of the fastest separation and purification as well as monitor- growing instrumentation fields in the world (76). ing will affect both laboratory research and com- The growing sales are due in part to its expanded mercial production and ultimately the U.S. com- use in both analytical and preparative areas. petitive position in biotechnology (61). * The use HPLCS are considered standard analytical tools of rDNA technology to produce low-volume, high- in the laboratory to accurately isolate and purify value-added products as well as high-volume organic molecules, drugs, and some peptide hor- products has greatly increased the need to devel- mones. More recently, HPLCS have been scaled- op more economic bioprocesses. As large-scale up successfully to monitor bioprocesses and puri- production draws closer, the ability to isolate and fy large quantities of proteins such as leukocyte purify large quantities of desired products will interferon. be a determinant in how fast companies can reach Half of the $300 million worldwide HPLC mar- international product markets. Those countries ket belongs to U.S. producers, and the European that possess the most advanced technology to sep- HPLC market is dominated by three U.S. compa- arate and purify commercially important com- nies, Varian, Beckman Instruments, and Waters. pounds might gain some commercial advantages Japanese and European companies have tried in the early stages of production. Without more with little success to penetrate segments of the economic production, financial and commercial U.S. instrument market. Pharmacia, a Swedish success in biotechnology may be difficult to company, is the only exception. Large American achieve. companies such as Hewlett Packard, Perkin In the United States, Europe, and Japan, there Elmer, and Beckman are so firmly entrenched by is intense competition in R&D to develop im- virtue of their service and applications networks proved large-scale separation and purification that foreign firms (e.g., Shimadzu, a Japanese methods for biological compounds as well as company) are having a difficult time making in- methods for monitoring and controlling a bioproc - roads. An absence of major foreign companies in ess itself.** There is widespread effort to apply the U.S. market and the dominance of American HPLC, continuous-flow electrophoresis, and flow companies abroad highlights the prominent U.S. cytometry to bioprocesses to decrease the man- position in instrumentation markets. ufacturing costs of compounds such as proteins. Although U.S. companies dominate world HPLC Increasingly, R&D efforts are being undertaken markets, the Swedish company Pharmacia is a to scale-up analytical instruments, particularly major competitor in separation and purification HPLCS, for use in larger volume production proc- technology, especially chromatography (52). In esses. The United States is a recognized leader fact, it is the only company in the world doing in analytical instrumentation used in biological large-scale industrial chromatography. Waters research and thus stands at the forefront of many and Beckman are thought to be catching up (52). of the technical innovations being made in the According to John McTaggart of Tag Marketing, bioprocess field. As automation and the use of U.S. companies are catching up to Pharmacia in sophisticated instrumentation to monitor and con- procedures for reducing the bulk of material at trol the production process begins to transform initial stages of isolation and purification (52), The bioprocessing from an art to a science, thereby gap is narrowing, because U.S. companies strong making production more economic, U.S. compa- in hardware support (i.e., advanced solid matrix, nies will be in a strong competitive position. membrane, and hollow fiber design) such as Millipore, Amicon, and Nuclepore are making advances in product recovery through ultrafiltra- *The reader is directed to Chapter 10: Bioelectrom”cs for a discussion of sensor technology. tion. The United States is considered the tech- ● ● See the discussion of bioprocess technolog-- in Chapter 3: The nological leader in hollow fiber and membrane Technologies. technology. Ch. 4–Firms Commercializing Biotechnology 89

SOFTWARE cleic Acid Sequence Database (1,200,000 nucleo- The United States holds a commanding position tide bases), operated by the National Biomedical in software designed for molecular biology and Research Foundation, Georgetown University bioprocessing. with a superior capability to ana- Medical Center; and the Genetic Sequence Data lyze and manipulate sequence data or to purify Bank (GENBANK) (1,800 DNA sequences totaling large quantities of valuable products, for exam- 2 million nucleotide bases) founded on data col- ple, the United States might gain some commer- lected, organized, and annotated by the Los Ala- cial lead by hastening research in some product mos National Laboratory and developed through development areas. funding from the U.S. National Institutes of Health. The latter data bank will be a repository Automation will be necessary to develop more for all published nucleic acid sequences of more efficient bioprocesses and to lower the costs of than 50 nucleotide base pairs in length. George- biological production. U.S. instrumentation and town also operates the world’s largest protein se- software manufacturers such as Perkin-Elmer quence data base, which currently contains 2,100 and Fisher Scientific are designing a wide range sequences and about 360,000 amino acids. of software for use in biological research and production processes. The United States is the recog- The United States is not unique in its creation nized leader in software design in general and in of such data bases; however, in terms of size, sophisticated computer applications to biological there are no foreign equivalents. The Europeans research specifically. Because of the dominant have their own nucleic acid data base, the Nucleo- role U.S. companies play in instrumentation mar- tide Sequence Data Library (operated by the Euro- kets, and because of the increasing importance pean Molecular Biology Laboratory, EMBL), and microprocessors and automation are having in the Japanese will have their own equivalent soon. biological research and production, the United In addition to these foreign DNA data bases, small States is expected to gain some short-term advan- private foreign protein data banks exist for the tages in the commercialization of biotechnology. exclusive use of the institutions with which they are affiliated. Software controls all processes automated by microprocessors. Current software applications A research advantage for the United States is in biotechnology are wide ranging and include expected to arise not only from the availability the manipulation of DNA sequence data contained of data bases, but also from the software being in data banks, the automatic ordering of nucleo- designed by academic institutions, nonprofit re- tide bases to synthesize pieces of DNA, the model- search foundations, and private companies to ana- ing of protein structures, and the monitoring and lyze the data in the banks. Since GENBANK’s de- control of large-scale bioprocessing. on the ana- velopment was made possible through public lytical level, purification of peptides and DNA money, the data are available to the public, do- fragments, for example, is expected to become mestically as well as internationally. Additional- more sophisticated through technical advances ly, subscribers to Georgetown’s Nucleic Acid Data- in automation (40). on a preparative level, the base can use the accompanying programs to ac- utility of FIPLCs, for example, is being increased cess both the GENBANK and EMBL’s bank. With by interfacing HPLCS with other instruments (e.g., equal international accessibility to the data bases, infrared and mass spectrometers) and computers. competitive advantage will flow to the country that has the ability to perform sophisticated se- The availability in the United States of software quence manipulation through specially developed designed to analyze the data in the private and software. In fact, the utility of the data bases will public DNA and protein data banks that have been be defined by the available software. created worldwide may give U.S. companies commercializing biotechnology some competitive ad- The U.S. company 1ntelligenetics is specializing vantages. Both public and private DNA sequence in the application of data processing and artificial banks exist in the United States. The two largest intelligence techniques to biological problems, and private and public banks respectively are: the Nu- this company has created specific software pack-

25-561 0 - 84 - 7 50 ● Commercial Biotechnology: An International Analysis ages to assist researchers with molecular genet- short-term advantages in the earlier stages of ics analysis. Some of the subscribers include commercialization. It should be noted, however, SmithKline Beckman, DNAX, Hoffmann-La Roche, that these materials can be exported without dif- Biogen, and Pfizer. ficulty, and that any U.S. advantage derived from their manufacture in the United States is short Conclusion term. The fourth advantage, information exchange The U.S. support sector provides competitive between support firms and the companies devel- as well as commercial advantages to U.S. com- oping biotechnology, promotes technology trans- panies developing biotechnology through: 1) the fer within the United States and stimulates im- timely and sufficient supply of biochemical such provements in instrumentation and software as oligonucleotides and restriction enzymes for design for biotechnology application. Not only do rDNA R&D, 2) new or modified instrumentation support companies constantly improve on the such as DNA and peptide synthesizers as well as products that they themselves manufacture, but large-scale purification instruments such as the companies that they are supplying in turn HPLCS, 3) the design of new software for research strengthen the U.S. support base by developing and production, and 4) a continuous exchange of customized and automated instrumentation and information between suppliers and companies equipment for in-house use, which they may then using biotechnology that results in the creation make available to other companies once their proof new products and in constant improvements prietary position has been secured. Examples of in existing instrumentation, equipment, and soft- companies in the latter category include Genen- ware used in biotechnology R&D. tech, Cetus, and Bio Logicals (Canada). Bio Logi- The first advantage, timely and sufficient supply cals’ DNA synthesizer grew out of in-house tech- of biochemical reagents for rDNA R&D, can af- nology to produce oligonucleotides for itself. fect the rate at which some biotechnology re- Cetus recently established a new subsidiary, Cetus search is carried out. An increasing number of Instrument Systems, to capitalize on the commer- small U.S. companies specializing in custom DNA cial value of novel instrumentation and computer synthesis has made available sufficient supplies systems developed for its own in-house R&D. of reagents in the United States that are priced Genentech and Hewlett Packard started a joint lower than European or Japanese supplies. In venture company, HP Genenchem, to develop for Europe, although the number of companies sup- themselves and other companies automated in- plying custom reagents has increased, supplies strumentation for use in biotechnology R&D. still are not adequate and delivery is slow, espe- Genentech will provide the joint venture with in- cially when reagents are imported (43). strumentation already developed and add early insights for research and commercial instrument The second and third advantages, new or modi- opportunities (37). Possible areas of automation fied instrumentation and new software design, include DNA and protein sequencers and synthe- may provide U.S. companies with a short-term sizers and industrial-scale HPLC and flow cytom - advantage through more efficient research meth- eters for bioprocess monitoring and control. ods and production processes. DNA and peptide synthesizers, for example, are beginning to auto- In the current stage of biotechnology develop- mate the long and tedious manual task of assembl- ment, there is considerable interaction between ing DNA and peptides, thereby creating greater suppliers and potential users, particularly in the efficiency in the early stages of research. The area of sophisticated instrumentation. Ideas for scale-up of HPLCS for use in purification of com- new products are developed through in-depth mercially important compounds may also provide conferences with customers and potential cus- greater production efficiency. Software used to tomers to determine or anticipate what kinds of drive the microprocessors used in synthesizers R&D problems they might have. Also, in response or bioprocessing equipment, or to manipulate se- to customers’ needs, U.S. support firms are con- quence data in data banks, or to direct computer stantly upgrading and modifying instrumentation modeling of proteins may also give U.S. companies to maximize its utility. These interactions and Ch. 4—Firms Commercializing Biotechnology 91 tailoring of instrumentation and equipment to port strength, the United States holds research meet industrial needs will be critical to surmount- advantages over other countries-advantages that ing the numerous problems anticipated in the de- may or may not be translated into commercial sign, scale-up, control, and optimization of indus- products. For the United States to retain these ad- trial biotechnological processes (22). vantages in the future, U.S. support firms must remain poised to meet the immediate and expand- The U.S. biotechnology support sector currently ing supply needs of the U.S. firms commercializ- provides a sufficient and timely supply of bio- ing biotechnology. chemical, instrumentation, and software to U.S. firms using biotechnology. By virtue of its sup-

U.S. firms commercializing biotechnology and their role in competition

As noted at the beginning of this chapter, the companies that have most “quickly and successful- commercial development of biotechnology in the ly taken new technologies from the laboratory United States is being advanced by two types of and adapted them for large-scale production” (78). firms: NBFs and large established US. companies. Small firms move much more aggressively to mar- It is important to keep in mind throughout this ket than do established companies that have built- report the organizational nature of the U.S. bioin disincentives to advance the state-of-the-art technology development and commercialization quickly because of existing investment in estab- effort and the strength that the present NBF- lished product lines and production processes. * established firm competition and complementari- As a technology matures, many established com- ly lends to this effort. NBFs and established U.S. panies, as later entrants, begin to play a larger companies both have important roles to play in role in innovation, as well as production and mar- the present phase of biotechnology development. keting. Not until the technology is more fully developed That small firms contribute significantly to tech- will the parameters of responsibility for each nological innovation is widely accepted, although group of firms be more clearly defined. there is disagreement over the amount of their contribution. Some U.S. studies suggest that small New biotechnology firms businesses play a more important role in tech- The development of biotechnology is still at an nological innovation than do large firms. A recent early stage, and competition at present, both in study prepared for the Small Business Administra- the United States and abroad, is largely in re- tion by Gellman Research Associates, Inc., for ex- search and early product development (e.g., vec- ample, holds that: 1) small firms produce 2.5 times tor selection and gene expression). Development as many innovations as large firms, relative to the and commercialization have not yet progressed number of people employed; and 2) small firms to a point where competition for market shares bring their innovations to market much more rap- is of immediate concern. In the present research- idly than do large firms (32). Another study under- intensive stage of biotechnology’s development, taken by Human Services Research for the Na- NBFs are providing the United States with com- tional Science Foundation found that small firms petitive advantages in biotechnology through con- (i.e., firms with fewer than 1,000 employees) pro- tributions to innovation. In the early stages of a new technology, small firms in the United States *For example, a pharmaceutical firm with a vested interest in symptomatic treatment of colds may have little incentive to develop tend to dominate an industry and contribute most a vaccine against the cold~ausing viruses, since it would diminish to product innovation. As a group, it is the small the company’s sales of decongestants. 92 . Commercial Biotechnology: An International Analysis duced 24 times as many major innovations per According to the First Annual Technical Staffing R&D dollar as did large firms and 4 times as many Survey conducted by Scherago Associates in New as did medium-sized firms (44). Finally, an Office York, the average biotechnology firm* in the of Management and Budget study concluded that United States more than doubled its staff of scien- small firms (i.e., firms with fewer than 1,000 tists between 1980 and 1982 from 3.1 to 7.3 (72). employees) had a ratio of innovations to employ- Scherago expects the number of Ph.D.s to almost ment in R&D 4 times as great as that of larger double again by 1984. The results from the OTA/ firms (19). In combination, the results of these NAS survey of firms’ personnel needs** substan- studies suggest that small firms appear to be more tiate the Scherago survey findings, but they also efficient than large companies in the way they show that the average number of scientists per use the R&D funds available to them (32). firm might be growing at a faster rate than originally estimated. The average number of Ph. D.s THE EMERGENCE AND FINANCING* OF NBFs for the NBFs listed in table 4 as of March 1983 Since 1976, more than 100 NBFs have been was already 15. 7.* * * formed in the United States. The founders of NBFs, by virtue of their size, incentive plans, many NBFs recognized early that most develop- and innovative and academic-like environment ments in biotechnology would flow from basic re- have been able to attract many talented scientists. search carried out in academic institutions. For It is expected that NBFs will continue forming, in this reason, they formed their companies around part because new firms will continue to be able a nucleus of talented university scientists, fre- to attract good scientists. quently using nonproprietary technology. Several NBFs (e.g., Genentech, Centocor, Genetic Systems) The formation of the loosely organized and got started by placing R&D contracts with aca- highly competitive structure within which bio- demic researchers for the commercial develop- technology is developing in the United States has ment of a laboratory discovery. been shaped largely, but not exclusively, by the availability of venture capital and the willingness The character and record of the chief scientists of scientists to pursue commercial gain through in a new firm is important for several reasons: small, newly formed entrepreneurial companies. the amount of venture capital made available to The emergence and growth of venture-capital- the firm might be determined by the scientist’s backed NBFs in the United States began around reputation in the scientific community; the scien- 1976. As shown in figure 11, not until late 1982, tist may have some influence over the flow of when venture capitalists had satisfied much of other well-respected scientists and skilled tech- their portfolio requirements for biotechnology nicians to the company; and his or her reputa- stock (42) and over 100 new companies had been tion might attract the endorsement of established formed, did startup activity begin to taper off.1 companies which provides valuable reinforce- ment to the NBF (e.g., Genentech’s early relation- Many of the first NBFs (e.g., Genentech, Genex, ships with the U.S. company Eli Lilly and the Swiss Cetus) financed their own proprietary research company Hoffmann-La Roche). by providing large established U.S. and foreign companies with research services for initial prod- NBFs must be able to attract and retain qualified uct development or by entering into licensing personnel if they wish to attract venture capital,** agreements with such companies that would re- develop marketable products, and maintain their domestic competitive position. Competition in the *Scherago defines a biotechnology firm as a gene manipulation United States for skilled personnel is intense.*** company. ● *See Appendix E: OTA/NAS Survey of Personnel Needs of Firms ● The financing of NBFs is discussed in detail in Chapter 12: Financ- in the United States. ing and Tax Incentives for Firms. * ● *This average is based on the firms in table 4 for whom Ph. ● ● Because most NBFs are unable to meet many of the standard D. figures are given. int’ester requirements for such things as earnings, sales, rate of tThe pace of new biotechnology startups may also have been growth, etc., sometimes potential investors use the number of Ph. D.s slowed because many of the top university scientists who wanted per firm as a measure of future earning power. to join new firms probably had already done so. A year or two ago ● ” ● See (.”hapter 14: Personnel Availabih”twv and Traim”ng for a more a survey done by an investment company looking for an unaffiliated detailed discussion of personnel needs and availability in the United molecular biologist reportedly approached 20 researchers before States. it found one without a commercial tie (16). Ch. 4–Firms Commercializing Biotechnology 93

Figure 11 .–Emergence of —New Biotechnology ● profit margins from licensing technology to Firms, 1977-83 established companies are low and may not 43 provide sufficiently substantial earnings (26), m and . ● most NBFs do not want to be dependent on another company for financial survival. Instead of relying on contract revenues many NBFs are now obtaining financing through R&D limited partnerships, public stock offerings, or pri- . vate placements. By retaining the rights to pro- 26 duce and market some of the products they develop (rather than developing products for estab- 22 lished companies), some NBFs are seeking to become fully integrated producers and marketers. Genentech, for example, is hoping to manufacture and market four new products (human . growth hormone, tissue plasminogen activator, and two types of interferon), and a large portion of Genentech’s capital expenditures since 1981 has gone into a production plant for these prod- 6 ucts (24). Similarly, the NBF Amgen is building a 4 $10 million pilot plant in Chicago for preclinical -3 38 and clinical studies, and the NBF Genex has just purchased a manufacturing plant in Kentucky to iIIIl_ . n produce phenylalanine and aspartic acid (the two 1977 1978 1979 1980 1981 1982 1983 ‘fear amino acids used to produce the sugar substitute aspartame). aAs of November 1983. SOURCE: Off Ice of Technology Assessment COMMERCIAL PURSUITS OF NBFS Most NBFs are applying biotechnology to the suit in future product royalty income. Product development of pharmaceutical products or products for use in animal and plant agriculture. For development contracts between NBFs and estab- several reasons, the most popular area of com- lished companies generally provide for periodic mercial pursuit among NBFs at present is the de- cash payments from the established company to velopment of MAbs for research and in vitro diag- the NBF during the stages of research and early nosis of human and animal diseases. * product development and for additional payments to the NBF (royalties income) following product ● MAb in vitro diagnostic products require sales. Following early product development by the much shorter development times than do NBF, the established company is generally respon- many rDNA-produced pharmaceutical prod- sible for obtaining the necessary regulatory ap- ucts, because the technological development provals, manufacturing, and marketing of the of MAb products is less complex. Further- product. more, FDA’s premarketing approval process is less costly for in vitro products than for In the last couple of years, more and more NBFs products intended for internal use. have begun shifting away from developing products for larger companies for reasons including the following: *Pharmaceutical applications of MAbs are discussed in Chapter 5: Pharmaceuticals. The applications of pre- ● MAbs in the diagnosis, NBFs have decided to concentrate more on vention, and control of animal diseases are discussed in Chapter proprietary research, 6: Agriculture. 94 Commercial Biotechnology: An International Analysis

● Relatively short development times and mod- 1982 alone, FDA approved some 30 in vitro MAb est capital requirements for MAb in vitro di- diagnostic kits (26). agnostic products afford NBFs opportunities To increase their chances for commercial suc- to generate short-term cash flow from these cess, NBFs solely dependent on MAb-based diag- products with which to fund the more time- nostic products must find market niches. Al- consuming and costly R&D on pharmaceu- though, a focused strategy such as MAb produc- tical products intended for internal use. * ● tion could bring NBFs financial success with a Entering the MAb in vitro diagnostic products smaller investment of dollars and scientific exper- market is relatively easy for NBFs, because tise in a shorter time frame than a more diverse the diagnostic market is highly fragmented strategy typical of some of the more heralded, and the individual diagnostic markets rela- multipurpose companies, such a strategy could tively small. Thus, NBFs are likely to encoun- also limit their growth potential (26). The world- ter few scale disadvantages in competition wide diagnostic market represents only $2 billion with large established companies. out of the $80 billion annual human drug market ● The markets for in vitro MAb diagnostic (24). Until NBFs are capable of entering the larger products are growing, thus providing ex- drug markets, however, diagnostic products may panding opportunities for entry by NBFs. The prove crucial in supporting the high costs of phar- clinical immunodiagnostic market has grown maceutical development. at an annual rate of approximately 20 percent for the past few years, and this rate of Some NBFs are developing MAb therapeutic and growth is expected to continue or increase in vivo diagnostic products, although the number in the future (63). The 1982 market was val- of NBFs developing these products is less than the ued at $5 million to $6 million (77). Table 12 number developing in vitro MAb diagnostic prod- provides 1982 and 1990 estimates for the size ucts. ” In addition to MAb therapeutics to treat of various MAb markets in the United States. cancer, MAb therapeutic products are being developed to treat bacterial infections that are Oppenheimer & Co. expects the clinical immu- sometimes difficult to treat with antibiotics and nodiagnostics market to be the most important viral infections for which no antibiotics exist. As source of revenue to NBFs in 1983 (63). Many of will be discussed in the section below entitled the in vitro MAb diagnostic products now being “Collaborative Ventures Between NBFs and Estab- developed or sold are replacement products that lished U.S. Companies)” the regulatory environ- offer improved (more accurate) detection, shorter ment for pharmaceuticals imposes heavy long- test times, and lower production costs (63)—and term financial burdens, which many NBFs may as might be expected, competition for market be unable to bear alone. Since many of the new shares and scientific and financial resources is in- firms aspire toward short-term earnings and intense. Since 1980, more than 12 new U.S. com- dependent production and marketing, it is not panies (e.g., Xoma, Quidel, Techniclone, New Eng- surprising that in vitro MAb diagnostic products land Monoclinal Resources) have formed specif- are the area of application most widely chosen ically to exploit hybridoma technology, and most by NBFs. of them either already have MAb diagnostic kits on the market or are seeking FDA’s approval. In Many small markets exist for NBFs in animal agriculture, and for replacement as well as new products, the barriers to market entry are low. Furthermore, the costs of obtaining regulatory “Cetus Corp. (U.S.), for instance, is developing diagnostic products for detecting blood-borne pathogens such as hepatitis B virus approval for most animal health products are with funding from Green Cross of Japan and for detecting cyto- lower than those for human pharmaceuticals. megalovirus. Cetus is also developing readily marketable biotech- However, in order to market some animal health nology products for animal agriculture until its more profitable products, particularly anticancer drugs, are developed. Likewise products, including vaccines, a large and highly Hybritech (U. S.) and Genetic Systems (U.S.) are producing MAb diagnostic products to support other longer range R&D activities such ● An even smaller number are developing MAbs for use in separa- as MAb therapeutics. tion and purification. Ch. 4—Firms Commercializing Biotechnology ● 95

Table 12.—Estimates of U.S. Monoclinal Antibody Markets, 1982 and 1990 (1981 dollars in millions)

Application 1982 market size 1990 market size Diagnostics: In vitro diagnostic kits ...... $5 to $6 $300 to $500 ($40)”b Immunohistochemical kits (examination of biopsies, smears, etc.) . Nil $25 b d In vivo diagnostics (primarily imaging) ...... Nil Small to $lOO I Therapeutics (includes radiolabeled and toxin-labeled reagents) . . . Nil $500 to $l,ooob” Other Research ...... Small $10 Purification ...... Small $10 aHigh numbe r indicates market for total kit, number in parentheses indicates value of antibody alone for kit (includes patent licensing fees). %ariation depending on industry source, although the range has been corroborated by at least two sources. cThis number could ‘be much higher or lower depending on re9ulatow process ‘Based on current pricing (19S1 dollars) for diagnostic tests of the same type. SOURCE: Office of Technology Assessment. specialized sales force may be necessary. Some sess such advantages. Given their research advan- NBFs do not expect to hire their own marketing tages, and assuming good management and ade- force. Genentech, for example, does not expect quate financing, many NBFs may continue to com- to market its own animal vaccines. Some NBFs pete successfully with both larger companies and hope to use existing distribution networks for other NBFs as long as competition in biotechnol- animal health products instead of developing their ogy remains focused in research. Eventually, how- own specialized marketing force, ever, perhaps within 2 or 3 years, most NBFs will have to manufacture and market their own prod- NBFs pursuing plant agriculture applications of ucts in order to finance future growth and biotechnology seem to have found sponsors for achieve some level of commercial success. A longer term research in areas such as enhanced change from a research-oriented strategy to a protein content and nitrogen fixation, but a num- more production-oriented strategy will mark a ber of new firms are conducting proprietary renew stage in development for the average NBF, search in areas such as the regeneration of in- because in the past (and to some extent even now) bred crop lines from tissue culture. NBFs pursu- NBFs out of need for capital have sold their proc- ing plant biotechnology are already using cell cul- esses to established companies. ture technologies rather successfully to introduce new plants to the market. One firm, Ecogen, has NBFs that are wholly dependent on biotechnol- been formed to focus exclusively on microbial and ogy for revenues cannot spread the risk of prod- viral pesticides and other novel pest control meth- uct development over a broad range of products ods. As the more frontier techniques such as gene made by traditional methods (unlike the estab- transfer are developed, they can be incorporated lished companies that have several product lines into ongoing product lines (15). to generate revenues). Many NBFs will fail if markets for the biotechnology products now being FUTURE PROSPECTS OF NBFs commercialized do not develop. Furthermore, Almost 2 years ago, skeptics forecast a ‘(shake- many NBFs will fail if capital for production scale- out” among the NBFs (18,31,60,66). Even though up, clinical trials (if necessary), and marketing is the commercialization of biotechnology now may not available when markets develop. be more time-consuming, more expensive, and The commercialization of biotechnology in the less profitable than was initially hoped, such a United States and other countries at present is shake-out has not yet occurred. A shakeout will occur, however, when new markets develop and characterized by a large number of companies, many small, some medium, and many large, ap- present trends in financing, established firm in- plying biotechnology to a very narrow range of volvement, and technical capability change. products. * Most of the products are rDNA-pro- NBFs were formed to exploit research advan- “Examples of such products are interferon, interleukin-2, human tages in biotechnology, and many NBFs still pos- growth hormone, tissue plasminogen activator, and MAb-based diag- 96 ● Commercial Biotechnology: An International Analysis duced pharmaceuticals and MAb-based diagnostic these markets are currently very crowded, sur- products. Because of the large number of compa- vival may be difficult. nies and small range of biotechnology products, The specialty chemicals market appears rela- most of the initial product markets are likely to tively easy to enter, both because little competi- be very crowded, costly to enter, and highly com- tion exists at present and also because the regu- petitive. The sharp decline in the formation of latory environment does not impose high costs NBFs in 1983 might be explained in part by the on product development. Research is near term currently high levels of competition. How many for many of the products, 3 to 5 years, and an producers the initial biotechnology product mar- NBF would experience few production scale disad- kets might ultimately accommodate is uncertain. vantages in competition with larger companies. Thus, the factors likely to affect the future commercial success of the NBFs most immediately are The safety regulations applicable to animal the timing of market introduction, product per- health products are significantly less stringent formance, and product quality. Price, and hence than those applicable to pharmaceutical products production costs, will be of greater importance intended for internal human use, and many mar- later. ket niches exist for small firm entry. Additional- ly, relatively little competition from established The major determinant to the commercial fu- companies exists at present. However, the need ture of NBFs, assuming they are able to maintain for an extensive sales force to market some of the a research advantage, will be their ability to ob- products might pose a considerable barrier to tain financing and their ability to enter the newly developing product markets. NBFs must man- some NBFs wishing to enter animal health markets. ufacture and market their own products not only to generate sufficient revenues to fuel growth but The availability of venture capital and financ- also to be in control of the timing of their own ing for NBFs has been sufficient thus far to fuel product introduction. It remains unclear whether the growth of many NBFs. The public market, par- NBFs will have the financial resources and mar- ticularly for new issues, and R&D limited part- keting strength to enter some of the new mar- nerships continue to provide capital to NBFs for kets. Large established pharmaceutical compa- use in further research, pilot plant construction, nies, for example, normally employ some 500 peo- clinical trials, and product development. From ple just to market their drugs (24), while Genen- August 1982 to May 1983 alone, NBFs raised $200 tech, one of the largest NBFs, has a total of about million through R&D limited partnerships (6). One 500 employees. analyst estimates that R&D limited partnerships Some of the most difficult markets for NBFs to will raise a total of $500 million in 1983 (7). The enter will be those for human therapeutics, in public stock market has also been receptive to part because of the regulatory costs associated NBF issues. Between March and July 1983, 23 with product approval and in part because of the NBFs raised about $450 million (39). As long as market competition posed by established U.S. the public market and R&D limited partnerships pharmaceutical companies, which could control make financing available to NBFs, they can con- some of the early channels of distribution. Enter- tinue developing independent strategies, thereby ing the markets for in vitro diagnostic products, reducing their reliance on established companies. as mentioned earlier, is relatively easy and does Paralleling the emerging desire by some NBFs not require large capital investments, but because to become integrated producers and marketers is an apparent reduction from 1982 to 1983 in the number of research contracts sponsored by nostic products for detection of venereal diseases and pregnancy. Tables 18 and 23 in Chapter 5: Pharmaceuticals provide a list of established U.S. companies * and an increase in firms engaged in cloning projects for interferon and human tissue the amount of capital established U.S. companies plasminogen activator, respectively, and exhibit a rather high level of competition for the two products. Additionally, at least eight NBFs are cloning interleukin-2 (Chiron, Genex, Biogen, Cetus, Genetics ● It is impossible to quantify the number and value of all estab- Institute, Immunex, Interferon Sciences, and Quidel). lished company sponsored research contracts because not all of Ch. 4–Firms Commercializing Biotechnology 97 are devoting to in-house biotechnology programs. ROLE OF NBFS IN U.S. COMPETITIVENESS Although the pattern is beginning to change, re- IN BIOTECHNOLOGY search contracts sponsored by established com- The development of biotechnology is still at an panies still provide a large portion of the NBFs’ early stage, and competition at present is predom- revenues. * If the decline in number of research inantly in the areas of research and early product contracts sponsored by established companies development. This early stage of biotechnology continues, which is likely, NBFs must begin find- development is precisely where NBFs are playing ing other sources of revenue. Increases in the the largest role in competition. Later, however, amount of capital established U.S. companies are as the technology develops further and enters a devoting to in-house biotechnology programs por- large-scale, capital-intensive production stage, the tend greater competition in R&D from the larger science may become less important vis-a-vis pro- companies. Equipped with greater financial and duction expertise, and the dominant role NBFs marketing resources, more regulatory and, in currently play in the US. biotechnology effort some cases, production expertise, many U.S. es- may diminish. tablished companies will be formidable competi- The launching of embryonic high-technology in- tors in the long run as biotechnology product dustries by entrepreneurial firms is a phenome- markets develop. Not all NBFs will survive the non unique to the United States. Historically, small competition of the established companies; pro- new firms in the United States have had a major vided they have adequate financing, however, role in shaping the competitive position of the some NBFs will be able to commercialize their United States in emerging technologies. * As dis- early research advantages before the established cussed further below, NBFs have thus far as- companies commercialize theirs. sumed a similar role in biotechnology: As biotechnology continues to emerge, and fur- ● by contributing to the expansion of the U.S. ther technical advances are made, new genera- basic and applied research base for future tions of NBFs undoubtedly will evolve to develop biotechnology development, the technologies. Within the next several years, ● by transferring the technology to several in- a second generation of NBFs is likely to emerge dustries through joint agreements with other as the result of developments such as the fol- companies, lowing: ● by decreasing investment risk by advancing ● intensified competition that forces some learning curves for later entrants, such as firms out and creates new opportunities for established companies or other NBFs, more entrants, ● by developing markets, and a major technological advance in some area ● by increasing the level of domestic competi- of biotechnology such as computer-assisted tion in the United States and thereby accel- protein design, which encourages the entry erating the pace of technology advance. of more new companies, The formation in the United States of over 110 ● the diffusion of advances in bioprocessing, NBFs that have various links to the network of which enables small firms to assume respon- university biology, chemistry, and engineering sibility over their own production, and departments has extended the basic research base . the development of the technologies to the beyond the universities and has expanded the appoint where scientists from present complied research base beyond just a few companies. panies or young scientists from universities While the basic and applied research base is be- will start their own companies. ing broadened for future biotechnology development, joint agreements and licensing arrange- public. However, on the basis of those that have been reported, most observers would probably agree that the number of new outside ments between NBFs and large established U.S. research contracts sponsored by established companies in 1983 has dropped significantly fmm 1982 levels. *See Chapter 12: Financing and Tax Incentives for Firms for fur- ● See Appendix C: A Cbmparn”son of the U.S. Semiconductor Indus- ther discussion of the sources of NBF revenues. tty and BiotechnoIogv. 98 ● commercial Biotechnology: An International Analysis

companies are effectively diffusing biotechnology new technologies. The market uncertainty cre- across many industrial sectors. ated by the new firms and the perceived competition they represent to the established companies With the help of venture capitalists, NBFs is healthy in a competitive context, because it in- started much earlier to evaluate the commercial creases the aggregate level of industrial R&D in potential of biotechnology than did large estab- the United States. The perceived competitive lished US. or foreign companies. As early as 1976, threat that NBFs pose to established companies NBFs were willing to risk their very existence on could become even greater as NBFs such as Bio- the undemonstrated potential of biotechnology. gen, Genentech, and Genex begin to shift away A survey conducted by OTA indicated that most from developing products for large corporate established U.S. companies did not begin in-house clients and begin to turn toward independent pro- biotechnology R&D until 1981 or later. * This find- duction and marketing of their own products. ing suggests that the early burden of risk was carried by NBFs. Although many established U.S. Because of their technological expertise and companies have now made substantial commit- early role as contract research companies, the ments to biotechnology through investments in NBFs have helped established U.S. companies eval- plant and equipment for in-house biotechnology uate the feasibility and suitability of using the new R&D programs, others are still hesitant to make technologies in their existing lines of business. such investments and many NBFs continue to They have also helped the established companies function as a litmus test for the new technologies. evaluate new avenues for diversification, Fre- In Europe and Japan, most companies did not quently, the established U.S. companies maintain make major investments in biotechnology until multiple research contracts with the NBFs to eval- after 1981. Thus, it might be suggested that the uate several applications simultaneously or to early R&D activity of NBFs has given the United evaluate the same application from different per- States a competitive lead in the early stages of spectives. In this way, the established companies biotechnology’s commercialization. can “ride along” the NBF learning curves while minimizing expenses and risk. In a competitive The NBF initiative to commercialize biotechnol- context, this relationship between NBFs and es- ogy not only has spurred the development of new tablished U.S. companies is important because it product markets but also is expected to expand may help to position both types of U.S. firms in existing markets through the introduction of international product markets. products with increased effectiveness and decreased cost. For example, diagnostic kits using From the standpoint of U.S. competitiveness, MAbs and DNA probes are being developed to detect the innovative lead taken by NBFs in the United venereal diseases (e.g. chlamydia and herpes) that States might seem to be a handicap because of are difficult and time~onsuming to detect by ex- the potentially adverse consequences from the isting methods. Vaccines are being developed for transfer of technology from the United States to diseases that now have no reliable prevention foreign countries. But the United States, at first (e.g., hepatitis and herpes in humans and col- through the new firms and now with the com- ibacillosis in calves and pigs). bined effort of the established companies, has the ability to maintain its lead by continuing to inno- The NBFs’ entry into the traditional markets vate and develop at a pace equal to or faster than served by established companies, where NBFs its competitor countries. While competition re- have taken the risks of developing new products mains mostly in research, the ability of the United or potentially reducing the production costs of States to remain competitive and in the forefront existing ones, has prompted many established U.S. of biotechnology development rests heavily on companies to explore potential applications of the NBFs, As biotechnology reaches production stages, the bioprocessing, regulatory, and market- ● The survey questionnaire is reproduced in Appendix E: OTALWAS ing experience of the established companies will Survey of Personnel Needs of Firms in the United States. be crucial to a strong US. position. Ch. 4—Firms Commercializing Biotechnology ● 99

Established U.S. companies joint ventures are now increasing their commitment to biotechnology through internal The proliferation of many NBFs and the devel- expansion. opments in biotechnology that have been made thus far have prompted many established U.S. Since 1978, equity investments in NBFs, often companies to re-evaluate the competitive and accompanied by research contracts, have been technological environments in which they have a popular way for established U.S. companies to been operating. To some extent, U.S. corporate gain expertise in biotechnology. Table 13 lists investment in biotechnology has been both an ag- many established U.S. companies that have made gressive and defensive response to the potential equity investments in NBFs and the NBF in which market threat represented by NBFs such as Bio- they have taken the equity position. * Although gen, Genex, Cetus, and Genentech. Although a only individual corporate strategies can specifical- few pharmaceutical and chemical companies such ly explain why established U.S companies have as Monsanto, DuPont, and Eli Lilly have had bio- taken positions in NBFs, some of the investments technology research efforts underway since may have been viewed by the established com- about 1978, most of the established U.S. companies as: panies now commercializing biotechnology did ● a defensive strategy against market share not begin to do so until about 1981. * losses to unknown technologies, ● an avenue for diversification and greater INVESTMENTS IN BIOTECHNOLOGY BY ESTABLISHED U.A COMPANIES return on investment, and ● a means of gaining a ‘(window on the new The motivations underlying established U.S. technology.” companies’ decisions to invest in biotechnology and the forms that each investment takes vary Figure 12 provides the aggregate equity invest- from company to company. When biotechnology ment figures for 1977 to 1983 based on table 13. first began to receive commercial attention, many Review of table 13 and figure 12 shows that: established U.S. companies, particularly those ● equity investments in NBFs range from $0.5 without a major in-house biotechnology program, million to $20 million; elected to gain in-house expertise by obtaining ● some established companies have made technology through research contracts with NBFs multiple investments in the same NBF; or universities, * * R&D contracts with NBFs, * * * ● a number of established companies have or equity investments in NBFs. For some estab- made investments in more than one NBF; lished U.S. companies, contracts with or equity ● equity investments, in some cases, have led positions in NBFs are still a major route by which to the formation of another firm (e.g., Genen- to expand their knowledge of biotechnology.1 tech and Corning Glass formed Genencor, However, several of the established U.S. compa- and Diamond Shamrock and Salk Institute/ nies that initially entered the field through R&D Biotechnology Industrial Associates formed Animal Vaccine Research Corp.); and ● This statement is based on the responses to a survey conducted ● equity investments have tapered off since by OTA and the National Academy of Sciences. The survey questionnaire is reproduced in Appendix E: OTAIVAS Survey of Per- 1982. sonnel Needs of Firms in the United States. ● ● Major university contracts in biotechnology appear to have been The years 1978 and 1979 appear to have declining over time. University/industry relationships in biotech- marked the beginning of general US. corporate nology are discussed in Chapter 1 i’: University/industry Relationships, ● A much smaller number of foreign established companies have * ● ● For a more detailed discussion of R&D joint ventures, see the taken equity position in American NBFs. They are not included in section below entitled “Collaborative Ventures BetweenNBFs and table 13. The notable foreign investors are Sandoz (in Genetics In- Established U.S. Companies. ” stitute), Novo (in Zymos), a group of Japanese and Swedish investors tIn 1982, Monsanto, for example, committed approximately $40 (in Genentech), C. Itoh (in Integrated Genetics), and Bayer in million to outside contracts in biotechnology; however, the overall Molecular Diagnostics). number of newly formed research and licensing agreements is wan- ● ● The percentage of NBFs purchascxl by the established companies ing as more and more established companies commit large amounts listed in table 13 range from 1.6 to 100 percent, with 10 to 30 per- to in-house staff and facilities. cent being the most common. 100 Commercial Biotechnology: An International Analysis

Table 13.—Equity Investments in New Biotechnology Firms by Established U.S. Companies, 1977=83”

Equity Date U.S. established company New biotechnology firm (millions of dollars) 1980 Abbott Laboratories ...... Amgen $5 1981 Allied Corp...... Calgene 2.5 1983 Genetics Institute 10 1981 American Cyanamid...... Molecular Genetics, Inc.b 5.5 Cytogen 6.75 1981 ARCO ...... International Genetic Engineering, inc. (lNGENE) 0.75 1982 Baxter-Travenol ...... Genetics Institute 5 1982 Beatrice Foods ...... International Genetic Engineering, inc. (lNGENE) 3.0 1980 Bendix ...... Engenics 1.75 1982 Bendix/Genex ...... Proteins Association 16.5e 1983 BioRad ...... International Plant Research lnstitute(lPRl) 1 1981 Campbell Soup...... DNA Plant Technologies 10 1981 Continental Grain ...... Calgene 1 1981 Cooper LabslLiposome Tech. Corp...... Cooper-Lipotech 2.7 1982 CorninglGenentech ...... Genencor 20 1983 Cutter Laboratories ...... Genetic Systems 9.5 1982 DeKalb ...... Bethesda Research Laboratories 0.6 1980 Dennison Manufacturing Corp...... Biological Technology Corp. 2 1983 Diamond Shamrock/Salk Institute Biotechnology Industrial Associates. . . . Animal Vaccine Research Corp. N.A.* 1981 Dow ...... Collaborative Research 5 1981 Dow ...... International Genetic Engineering, Inc. (lngene) N.A.

1981 Ethyl ...... Biotech Research Labs 0.95 1981 Fluor ...... Genentech 9 1981 FMCICentocor...... Immunorex 4.9 1980 General Foods ...... Engenics 0.5 1982 Getty Scientific Corp...... Synergen 4 1982 Gillette ...... Repligen N.A. 1983 Hewlett-Packard Co./Genentech ...... HP Genenchem N.A, 1978 INCO, inc...... Biogen e 0.35 1979 INCO, Inc...... Biogen 1.25 1980 INCO, Inc...... Biogen 4.61 1981 INCO, Inc...... Biogen 2.5 1981 INCO, Inc...... Immunogen 1 1981 INCO, Inc...... Plant Genetics N.A. 1981 INCO, Inc...... Liposome Co. N.A. 1977 Innoven f .,...... Genex; Genentech 2 1981 Johnson & Johnson ...... Quadroma 0.7 1982 Johnson & Johnson ...... Enzo Biochem 14 1983 Johnson & Johnson ...... Immulokg 18 1982 Kellogg ...... Agrigenetics 10 1979 Koppers ...... Genex 3 1980 Koppers ...... Genex 12 1981 Koppers ...... Engenics 1.25 1981 Koppers ...... DNA Plant Technologies 1.7 1982 Eli Lfliy ...... International Plant Research Institute (IPRI) 5 1979 Lubrizol ...... Genentech 10 1980 Lubrizol ...... Genentech 15 1982 Lubrizol ...... Sungene 4 1980 McLaren Power &Paper Co...... Engenics 1.25 1982 Martin Marietta...... Molecular Genetics, Inc. 9.7 1982 Martin Marietta ...... NPI 5 1982 Martin Marietta...... Chiron 5 1983 Martin Marietta ...... Chiron 2 1980 MeadCo...... Engenics 1.25 1980 Monsanto ...... Biogen 20 1980 Monsanto ...... Collagen 5.5 Ch. 4–Firms Commercializing Biotechnology 101

Table 13.–Equity Investments in New Biotechnology Firms by Established U.S. Companies, 1977-83a (Continued)

Equity Date U.S. established company New biotechnology firm (millions of dollars) 1978 National Distillers ...... Cetus 5 1980 National Patent Development Corp...... Interferon Sciences 0.6 1980 Nuclear Medical Systems ...... Genetic Replication Technologies 0.95 1981 Phillips Petroleum ...... Salk Institute Biotechnologyllndustrial Associates 10 1981 Rohm & Haas ... , ...... Advanced Genetic Sciences 12 1979 Schering-Plough ., ...... Biogen 8 1980 Schering-Plough ...... Biogen 1982 Schering-Plough ...... DNAXQ 2: 1978 Standard Oil of California...... Cetus 12.9 1978 Standard Oil of Indiana ...... Cetus 14 1982 SyntexhlGenetic Systems ...... Oncogen 9.5 1982 SyntexlSyva ...... Genetic Systems 9.5 1980 Tosco ...... Amaen 3.5 aAs of May 1983. ~Amer}can Cynamid sold 375,000 shares of MGI to Moorman Manufacturing in 1983. ~lnvestment over a 6-year period. N.A. = Information not available. eBiogen j~ only ~ percent U.S.-owned. f Monsanto & Emerson Electric. ‘Acquisition. ‘Incorporated in Panama. SOURCE: Office of Technology Assessment.

interest in biotechnology, with equity investments made by a number of oil and mining companies in the NBFs Biogen, Cetus, Genex, and Genentech. By 1980, commercial applications of biotechnology were advancing in industrial areas where I 119.30 some established companies had no prior R&D 120 - commitment, and from 1979 to 1980, there was a dramatic increase in the number and size of equity investments. Equity investments in NBFs have been made by U.S. companies from a variety of industrial sectors: Monsanto (chemicals), for - - example, invested $20 million in Biogen and $5.5 k million in Collagen; Lubrizol (chemicals) made a .c- (/Y second equity investment in Genentech totaling E 60 - $15 million; Fluor (engineering) invested $9 mil- z lion; and Koppers (mining) expanded its equity z al > position in Genex by investing $12 million. .—c 40 - 32.25 In 1981, the amount of equity capital invested — 22.25 in NBFs barely exceeded the amount invested the 20 - ~ previous year, but in 1982, equity investments soared to a record high of $119 million, an in- 2 crease of 52 percent over 1981, and the highest 0 — — . — level of equity investments in biotechnology ever 1977 1978 1979 1980 1981 1982 1983 made. In 1983, the level of equity investments in Year NBFs dropped significantly. A growing commit- aAs of May 1983 ment among established U.S. companies to in- SOURCE: Off Ice of Technology Assessment. house R&D programs in conjunction with pre- 102 ● Commercial Biotechnology: An International Analysis viously made equity investments may have con- United States by diffusing applications throughout tributed to the sharp decline. many industrial sectors. In 1982, established U.S. companies not only in- Unlike the many NBFs that have taken a relative- creased their equity investments in NBFs but they ly short-term approach to biotechnology in order also dramatically increased their in-house in- to generate income for longer term research, vestments in biotechnology R&D programs. Cap- many established U.S. companies have several ital investments for in-house R&D programs gen- product lines and are taking a longer term ap- erally reflect the highest level of commitment to proach to biotechnology research; some estab- biotechnology, as new facilities and employees are lished companies are not expecting commercial often needed to start the new effort. Several U.S. development for 10 to 20 years (27). The long- pharmaceutical companies are spending large range research orientation of established U.S. amounts on new facilities: G.D. Searle, for exam- companies will be very important to the long-term ple, is building a $15 million pilot plant to make competitive position of the United States. proteins from rDNA organisms; DuPont is build- Established U.S. companies will play a major ing an $85 million life sciences complex; Eli Lilly role in the first biotechnology product markets. is building a $5o million Biomedical Research Because many NBFs have licensed technology to Center with emphasis on rDNA technology and established U.S. companies hoping to finance fu- immunology and a $9 million pilot plant and lab ture growth from the royalties received from the for rDNA products; Bristol Myers is building a future sale of the products, the established com- new $10 million in an alpha interferon produc- panies will be responsible for the production and tion plant in Ireland. * Companies from other sec- marketing of many early biotechnology products. tors have also made substantial investments in For example, two NBFs, Petroferm and Interferon biotechnology. See table 7 for a list of the 1982 Sciences, have already solicited the production ex- biotechnology R&D budgets for some of the es- pertise of Pfizer and Anheuser Busch, respective- tablished U.S. and foreign companies most actively, Pfizer’s chemical division is the foremost pro- ly supporting biotechnology. ducer of biopolymers and xanthan gums and will The product areas in which established U.S. produce Petroferm’s new bacterial oil emulsifier. companies have directed their biotechnology Anheuser Busch, through beer production, has R&D efforts are as diverse as the industrial sec- accumulated years of experience using yeast and tors they represent. Established companies, how- will produce interferon using Interferon Science’s ever, appear to be playing a dominant role in the genetically manipulated yeast. development of biotechnology in the areas of The most important element in competition for plants (25) and commodity chemicals–two rather pharmaceutical market acceptance and market long-term and costly research areas (see table 4). share might be the timing of product entry. Al- though some NBFs have recently begun funding ROLE OF ESTABLISHED COMPANIES IN their own clinical trials and product development, U.S. COMPETITIVENESS IN BIOTECHNOLOGY most NBFs still have rather limited financial Many established U.S. companies manufacture resources. Most NBFs also have limited produc- several product lines and are therefore concur- tion, marketing, and regulatory experience. Such rently evaluating different biotechnology applica- limitations may hinder the ability of NBFs to tion areas. DuPont, for example, is evaluating ap- become major participants in early pharmaceu- plications of biotechnology to food production, tical product markets. Although the U.S. com- health care, and renewable resources. Broad petitive position in pharmaceutical markets has strategies such as DuPont’s will have a positive been declining since the mid-1970’s, established effect on the development of biotechnology in the U.S. companies appear strategically positioned to ● S[;h~rin~-Plough is expected to spend more than $40 million on compete effectively in international biotechnology interferon R&.D alone in 1983. product markets as such markets develop. Ch. 4—Firms Commercializing Biotechnology 103

Established U.S. companies also have a compet- R&D for complex technological problems itive role to play in research, because continuous that might not otherwise be obtainable. technical advances will be necessary to maintain Considerable expenditures in time and money the present competitive strength of the United are required to research, develop, and market bio- States. As the established U.S. multinational com- technologically produced products. The NBFs, panies, along with the other later entrants, ex- started exclusively to exploit innovations in pand their in-house research and production fa- biotechnology, have initially concentrated their cilities they will undoubtedly make substantial activities on research. As a rule, therefore, NBFs contributions to the U.S. commercialization of bio- have limited financial resources with which to technology. fund production scale-up activities beyond the laboratory or pilot plant stage, not to mention the Collaborative ventures between NBFs financing required for regulatory approval and and established U.S. companies marketing should their research activities in biotechnology yield pharmaceuticals and to a lesser As suggested previously, the development of extent, animal drugs and biologics, food additives, biotechnology in the United States is unique from chemicals, or microorganisms for deliberate re- the standpoint of the dynamics of the interrela- lease into the environment. Established companies tionships between NBFs and the large established have an advantage over NBFs in that they have U.S. companies, NBFs and established U.S. com- relatively more financial strength, regulatory ex- panies not only compete with one another, but perience, and product distribution channels that they also, through joint ventures of many kinds, are already in place, although many established complement one another’s skills. In addition to companies are at a disadvantage compared to delaying a “shakeout” among NBFs, joint ventures NBFs with respect to the possession of technical between NBFs and established companies have expertise in biotechnology. R&D joint ventures allowed NBFs to concentrate on the research- and contracts between NBFs and established com- intensive stages of product development, the area panies, therefore, reflect a mutual search for com- in which they have an advantage in relation to plementary skills and resources, most established U.S. companies. Examples of the collaborative agreements that A joint venture is a form of association between are taking place between NBFs and established U.S. separate business entities that falls short of a for- and foreign companies are shown in table 14. * mal merger, but that unites certain agreed upon R&D contracts accompanied by product licensing resources of each entity for a limited purpose. * agreements form the basis for most joint ventures Joint ventures between NBFs and established between NBFs and established U.S. companies in companies are attractive for at least three reasons: the area of pharmaceuticals. Furthermore, equi- ● they assist NBFs and established companies ty investments in NBFs by established companies in overcoming resource limitations which are often accompanied by R&D contracts. Equi- may prevent them from developing or mar- ty joint ventures wherein equity capital is pro- keting a product themselves; vided by both partners (e.g., Genencor) for R&D ● they offer established companies and NBFs or marketing are less common. Since research less costly methods by which to develop ex- contracts and product licensing agreements char- pertise in areas in which they lack in-house acterize most joint ventures, three points should capability; and be kept in mind throughout this section: ● they provide established companies with an ● Licensing agreements and future royalties opportunity to achieve economies of scale in provide NBFs with financing to do their proprietary research. ● Chapter 18: Antitrust Latv explores some of the legal considerations surrounding R&D joint ventures, and Chapter 12: Financing “The large proportion of pharmaceutical joint agreements pre- and Tax incentives for Firms highlights joint ventures from a finan- sented in table 14 reflects the commercial emphasis by companies cial perspective on pharmaceutical development. 104 . Commercial Biotechnology: An International Analysis

Table 14.-Some Collaborative Ventures Between New Biotechnology Firms and Established U.S. and Foreign Companiesa New biotechnology fhn—Established company New biotechnology f!rm—Established company Biogen N.V. (Netherlands Anti//es)% Cetus: —Meiji Seika Kaisha, Ltd. (Japan) has license and —Roussel Uclaf (France) has a contract with Cetus under development agreement with Biogen N.V. for the scale- which Cetus produces vitamin B12. Cetus is receiving up of a still unnamed agricultural chemical which Meiji royalties. could bring to market by 1984-85. —TechAmerica has a contract with Cetus under which —International Minerals Corp. has exclusive marketing Cetus will develop a rDNA antigen to be used as a vac- rights to Biogen’s rDNA-produced swine and bovine cine against calf bovine diarrhea. TechAmerica will per- growth hormones. Biogen will receive royalties. form clinical research, manufacture, and market. —Shionogi & Co., Ltd. (Japan) will conduct clinical trials —Norden Labs, Inc. has a contract with Cetus under and pursue the commercial development in Japan of which Norden will produce and market rDNA col- Biogen’s gamma interferon for human therapeutic use. ibacillosis vaccine. Cetus receives royalties. —Merck is developing Biogen’s hepatitis B vaccine. —Cooper will market a MAb from Cetus Immune that is —Shionogi (Japan) has a license from Biogen to develop used in tissue typing for organ transplants. and market Biogen’s human serum albumin in Japan —Shell Oil Co. gave a research contract to Cetus under and Taiwan. which Cetus will develop human beta-1 (fibroblast) —Shionogi (Japan) has a license and development agree- interferon. ment with Biogen to develop interleukin-2. Shionogi Chiron: will conduct Japanese clinical trials. Merck possesses option for exclusive worldwide license —1/VCO has a contract with Biogen to do studies of the for the use, manufacture, and sale of Chiron’s hepatitis feasibility of bioextraction of nonferrous metals from B vaccine. low-grade ores and other sources of minerals. —Fujisawa Pharmaceutical Co. (Japan) has an agreement Collaborative Genetics: to develop and produce Biogen’s tissue plasminogen —Akzo N.V. (Netherlands) gave Collaborative Genetics a activator in Japan, Taiwan, and South Korea. research contract to develop genetically manipulated —Monsanto will fund Biogen’s developments of a tech- micro-organisms to produce bovine growth hormone. nique to produce and purify tissue plasminogen —Green Cross (Japan) has licensed from Collaborative activator. and Warner-Lambert the process by which urokinase is —KabiVitrum (Sweden) is collaborating with Biogen in microbially produced. the development of commercial products based on —Dow has given a research contract to Collaborative Factor Vlll. Biogen intends to market the products in under which Collaborative will produce rennin via the United States and Canada, and KabiVitrum will genetically manipulated micro-organisms. have the right to market such products in certain other Cytogem countries. —American Cyanamid has an agreement with Cytogen to —Green Cross (Japan) has a license from Biogen to develop a MAb that will deliver a chemotherapeutic manufacture hepatitis B vaccine. Green Cross has ex- agent to cancer cells. clusive license to market in Japan, Damon Biotech: —Suntory, Ltd. (Japan) has an agreement with Biogen —i+offmann-La Roche (Switz.) has contracted Damon to under which Biogen will develop rDNA micro- apply its microencapsulation system to the production organisms to produce tumor necrosis factor, to scale- of MAbs. Hoffmann-La Roche will retain the marketing up production, and to support clinical trials, and Sun- rights to the interferon produced by this process. tory will have exclusive marketing rights in Japan and Taiwan. Enzo Biochem: —Teijin, Ltd. (Japan) has a license to develop and market —Meiji Seika Kaisha (Japan) obtained worldwide Biogen’s Factor Vlll in Japan, South Korea, Taiwan, marketing rights to products based on Enzo’s Australia, and New Zealand. hybridoma technology, including a newly developed pregnancy test. Calgene: —Allied Chemical Corp. has a contract with Calgene Genentech: under which Calgene will do research in nutrient effi- —Monsanto is testing Genentech’s bovine and porcine ciency in plants. growth hormones. Commercialization and production will be joint effort. Cambr/dge Bioscience: —Genentech has a joint development contract with —Virbac, a French animal health care company, has a Hoffmann-La Roche for the production of leukocyte contract with Cambridge Bioscience under which Cam- and fibroblast interferon. Hoffmann-La Roche will con- bridge Bioscience will develop feline leukemia virus duct testing to determine its effectiveness. Genentech vaccine. will supply part of Roche’s requirements and receive Cenbcoc royalties on sales. —FMC Corp. has 50/50 joint venture to develop human- —KabiVitrum (Sweden) has worldwide (except in the derived monoclinal antibodies (MAbs). United States) marketing rights for Genentech’s human —Toray/Fujizoki (Japan) have signed an agreement to growth hormone. manufacture and market Centocor’s hepatitis —Fluor will develop commercial production operations diagnostic in Japan. for Genentech to scale-up new biotechnology products. Ch. 4–Firms Commercializing Biotechnology . 105

Table 14.—Some Collaborative Ventures Between New Biotechnology Firms and Established U.S. and Foreign Companiesa (Continued) New biotechnology firm—Established company New biotechnology firm—Established company —Eli Lilly has been granted exclusive worldwide rights to —A Japanese company (proprietary) has a contract with manufacture and market Genentech’s human insulin. Genex under which Genex will develop a genetically —Corning and Genentech have a joint venture (Genen- modified micro-organism to produce L-try ptophan. All cor) to manufacture and market rDNA-produced en- discoveries will be the sole property of the Japanese zymes for food processing and chemical industries. customer. Corning provides expertise in immobilization of —Vineland Laboratories and Genex have a joint develop- enzymes. ment project to produce a vaccine against coccidiosis. Genetics institute: —Koppers has a contract with Genex under which Genex —Sandoz (Switz.) is funding research by Genetics in- will develop genetically modified micro-organisms to stitute to clone monokines and lymphokines in do biocatalytic transformations of aromatic chemicals bacteria, i.e., interleukin-2. from coal distillate derivatives. All micro-organisms and research findings are the sole property of Koppers. Genetic Systems Corp.: Genex will receive royalties. —Cutter Labs and Genetic Systems have a $2.5 million —Schering AG (F. R. G.) has a contract with Genex under joint venture to develop human MAbs for the diagnosis which Genex will develop a microbe that will produce a and treatment of Pseudomonas infections. For other blood plasma protein. Schering AG will receive world- MAb products, Genetic Systems will do R&D and wide exclusive license. market the diagnostic products, and Cutter will market —Green Cross (Japan) has a contract with Genex under therapeutic products. which Genex will develop a microbial strain that pro- —Syva has a research, development, and marketing duces human serum albumin (HSA). Green Cross will agreement with Genetic Systems which will finance receive an exclusive license to sell, for at least 15 some of Genetic Systems’ R&D activities related to years, all microbially produced HSA under the contract diagnostic tests for sexually transmitted diseases such in Japan, Southeast Asia, India, China, Australia, New as herpes, gonorrhea, and chlamydia. Genetic Systems Zealand, North America, and South America. Genex re- receives 5 percent royalties on sales. ceives royalties. —Daiichi Pure Chemicals Co., Ltd. (Japan) (a subsidiary —KabiVitrum (Sweden) has a contract with Genex for of Daiichi Seiyaku Co.) entered into an agreement with HSA similar to that of Green Cross except Kabi’s Genetic Systems to collaborate on the R&D of a rights are limited to Africa, Europe, and the Middle diagnostic test kit for blood disorders in the human im- East. mune system. Daiichi will receive the exclusive manu- —Yoshitomi Pharmaceutical Industries (Japan) has a con- facturing and marketing rights in Japan, Taiwan, Main- tract with Genex under which Genex will develop land China, and Southeast Asia, for the products for genetically modified micro-organisms to produce treating blood disorders. Genetic Systems will receive interleukin-2. royalties. —Mitsui Toatsu Chemicals Inc. (Japan) contracted Genex —A separate marketing agreement with Daiichi grants to develop a microbial strain that produces human the exclusive right to purchase and sell, for research urokinase. Genex will retain the patent and Mitsui Toat- products only, in Japan and other Asian countries, cer- su will receive an exclusive license with the right to tain MAbs developed by Genetic Systems. make, use, and sell the product for the royalty period, —A joint venture between Syva Co. (a subsidiary of about 15 years. Syntex Corp.) and Genetic Systems to develop MAbs —Mitsubishi Chemical Industries, Ltd. (Japan) will for the diagnosis and treatment of human cancer. develop and market Genex’s HSA. –New England Nuclear (E. 1. du Pent de Nemours & Co,) —Pharmacia has a contract with Genex under which has the rights to market Genetic Systems’ MAbs for Genex will develop a nonpathogenic strain of bacteria the identification of different types of human blood that would produce a protein with potential therapeutic cells to the research market throughout the world, with applications. the exception of Japan, Taiwan, People’s Republic of China, and Southeast Asia, which are covered by Hana Biologics, inc.: Daiichi Pure Chemicals Co., Ltd. —Recordati S.p.A. (Italy) has an agreement with Hana under which Hana will develop and distribute Genex: biomedical research and MAb diagnostic products. —Yamanouchi Pharmaceutical Co. (Japan) will manufac- —Fujizoki Pharmaceutical Co. (Japan) has a joint venture ture and sell a biological product developed by Genex with Hana under which Hana will develop new im- which dissolves fibrin. Yamanouchi will market the munodiagnostic tests. Also, Fujizoki has a distribution product for 15 years, paying Genex a licensing fee of 8 agreement with Hana under which Fujizoki will market percent of sales for development and scale-up. Genex Hana products in Japan. will retain the patent rights. —BristoLMyers Co. has a contract with Genex under Hybritech: which Genex will develop genetically modified micro- —Teijin, Ltd. (Japan) has an agreement with Hybritech organisms that will produce leukocyte (alpha) and under which Hybritech will develop human MAbs for fibroblast (beta) interferon. Bristol-Myers owns all treatment of lung, breast, colorectal, prostate, and cer- rights. Genex receives royalties. tain Ieukemia-lymphoma type cancers. The goal of the

25-561 0 - 84 - 8 — -—..

106 ● commercial Biotechnology: An International Analysis

Table 14.—Some Collaborative Ventures Between New Biotechnology Firms and Established U.S. and Foreign Companiesa (Continued) New biotechnology firm-Establishect company New blotechnobgy firm-Established company joint venture is to combine Hybritech’s MAb manufac- —American Cyanamid sponsored an R&D contract and turing technique and Teijin’s unique technique of bind- formed a licensing agreement with Molecular Genetics ing a cytotoxic substance to an antibody for cancer under which American Cyanamid will conduct human therapy. testing, secure regulato~ approvals, and manufacture —Travenol Laboratories, Inc. will provide $1 million for and market any products developed from Molecular’s research and $1.9 million for stepwise benchmark pay- human herpes simplex vaccine research. Ledede has ments to Hybritech to develop MAbs for treating major begun preclinical testing. bacterial infections. Hybritech will receive royalties on —Philips-Roxane (subsidiary of Boehringer-lngleheim Travenol’s worldwide sales. (F. R.G.)) sponsored research and has exclusive license Immunex: to manufacture and market bovine papilloma virus vac- —Diamond Shamrock has a license to commercialize lm- cine developed by Molecular Genetics. Philips-Roxane munex’s lymphokines for use in animals. is responsible for obtaining government approval. Integrated Genetics, Inc.: Monoclinal Antibodies: –Connaught Laboratories, Ltd. (Canada) has an R&D —Ortho Pharmaceuticals has an agreement with agreement with Integrated Genetics to produce Monoclinal Antibodies under which Monoclinal An- hepatitis B surface antigen in yeast or mammalian tibodies will develop and manufacture an innovate cells. diagnostic product that will be marketed by Ortho. Interferon Sciences: Petrogen, Inc.: —Bristol-hfyers has a licensing and supply agreement —Magna Corp. has a 10-year joint venture with Petrogen with Interferon Sciences under which Bristol-Myers will under which Magna will field test micro-organisms commercially develop interferon for the treatment of developed by Petrogen for use in shallow, low-pressure herpes zoster. stripper wells. –Green Cross (Japan) has a $2.5 million R&D and supply ARCO Plant Cell Research Institute: agreement with Interferon Sciences under which in- —H. J. Heinz and ARCO Plant Cell Research institute terferon Sciences will supply Green Cross with gamma have a joint venture to develop a tomato with high and alpha interferon. solids content. —Collaborative Research is synthesizing interferon in Schering-Plough: yeast. Collaborative provides Interferon Sciences with —Yamanouchi (Japan) will manufacture alpha interferon the alpha-interferon producing clones. Interferon using Schering-Plough’s technology. Sciences is involved in the product end and plans to optimize the bioprocess. Unlvers/ty Genetics: —Kureha Chemical Industry (Japan) has a license to Interferon Sciences, lncJCo/laborative Genetics: develop bovine interferon based on University —Both companies have a license agreement under which Genetics’ technology. Green Cross shares results of a study evaluating application of rDNA technology to the production of in- Worne B/otechno/ogy: terferon by yeast or other micro-organisms. —Ornni Biotech (Canada) and Worne are in a joint project to extract usable petroleum from Canadian oil sands Molecular Genetics, Inc.: using micro-organisms. —American Cyanamid has an R&D contract and licensing agreement with Molecular Genetics under which Mo- Zymos, Inc.: lecular Genetics will develop bovine growth hormone. —Cooper Laboratories funded research and has the Cyanamid is conducting scale-up and testing. rights to alpha-1 antitrypsin developed by Zymos for —American Cyanamid has sponsored an R&D contract possible treatment in emphysema. and formed a licensing agreement with Molecular Ge- netics to select herbicide-resistant corn in tissue cult ure.

aMajor Public contracts, agreements, and ventures. bBiogen is only about so-percent U.S. owned SOURCE: Office of Technology Assessment.

● NBFs in many cases are still reliant on es- Typically, an NBF will enter into an R&D con- tablished companies for working capital, tract, joint venture, or licensing agreement with whether it be through research contract an established U.S. company to secure funds for revenue or equity investments. proprietary R&D, or, in the case of some pharma- ● Licensing agreements diffuse technology to ceutical products, to obtain a partner to do clinical different industrial sectors and promote the evaluations, obtain regulatory approvals, and development of biotechnology in the United undertake marketing. Furthermore, the revenues States. , make the new firm attractive to investors if and Ch. 4–Firms Commercializing Biotechnology 107 when the firm wants to use the public market ogy-in essence, portfolio diversification. Addi- as a source of financing. Typically, the research tionally, the research effort can be either short objective of the NBF in many R&D joint ventures or long term depending on the desire of the con- is to develop a micro-organism and the related tracting firm. By minimizing the front end costs bioprocessing, extraction, and purification proc- and the risk, contracts serve as a kind of feasibility esses needed to produce the desired product in study (49), Successful contracts with NBFs or uni- quantities sufficient to proceed with testing. The versities can lend credibility to the commercial established company then organizes and imple- potential of the new technology and can help ob- ments clinical trials (if necessary) and takes tain the corporate support necessary to fund fu- responsibility for the production and marketing ture projects in the same field. of the product. Joint venture partners are usual- Established companies suffer no disadvantages ly sought by NBFs to share the risk in new tech- in joint ventures with NBFs except a loss of risk nological areas that appear to have significant capital should the research be unsuccessful. In commercial applications but that require large in- fact, as the only buyers of the technology and the vestments and have long development times. Joint major group with the financial resources to com- venture partners are usually sought by estab- mercialize it, established companies exert a great lished companies because they can provide a deal of control over the rate at which biotechnol- “window on the new technology” in addition to ogy is being developed in the United States. oftentimes providing products. Corporate equity investments in NBFs, in addition to providing NBFs do suffer disadvantages as a consequence “windows on the new technologies,” can also proof their own resource deficiencies, which neces- vide the corporate investor with the possibility sitate their reliance on established companies. of a large return on its investment when (and if) These financial reliances of NBFs on established the NBF goes public, or, if the NBF is aIready companies will play a crucial role in the future publicly held, with potential profit if the stock in- viability of the entire NBF sector for three reasons: creases in value. ● The low profit margins from licensing tech- NBFs in general retain the rights to any patents nology do not generally provide IVBFS with resulting from the contract research performed, adequate financing for growth and expan- and should the product be marketed, the NBF ob- sion. tains income through the royalties, which over ● Contract relationships, and thus revenues, a range of products may enhance the NBF’s finan- are very likely to be transitory. There is a cial position so as to enable it to later enter future strong economic incentive for established markets independently. The established company companies to exercise a high degree of “con- often obtains an exclusive license to the tech- trol” over their own product development ef- nology developed through the contract and also forts and to bring their own work in-house. gains access to that specific product market. If ● The commercial success of many NBF prod- the contract has been preceded by an equity in- ucts is reliant on the amount and timing of vestment, the established company might serve resources that licensees and partners (estab- as a marketing partner to the NBF in diverse prod- lished companies) devote to clinical testing uct areas. (when necessary), obtaining regulatory approval, and marketing. R&D contracts also enable the established com- ● Some of the contracts with established company to minimize the risks and costs associated panies are tightly written, making it difficult with biotechnology R&D. Should the research not for some NBFs to pursue interesting research produce desirable results, the contract can be can- findings which might occur in the course of celed and someone else has paid for the infra- the contracted work. structure. By sponsoring several companies at one time, as Schering-Plough, Koppers, and Martin NBFs with a heavy reliance on contract revenue Marietta have done, the sponsor can spread the could face uncertain futures unless their own pro- risk of not finding the most relevant technol- prietary research yields marketable products in 108 ● Commercial Biotechnology: An International Analysis

the near term. Most NBFs are not assured that ket acceptance and market share competition may operating revenues from established companies be the timing of market introduction of competi- will be sufficient to fund projected product de- tive therapeutic and diagnostic products, the cor- velopment. The reliance on established firms for rect choice of partners could be crucial to the U.S. manufacturing and royalty incomes could also competitive strength. jeoprdize the future earning power of many small firms. Those NBFs that have licensed to established companies the right to manufacture and Collaborative ventures between NBFs market their products do not control the timing and established foreign companies of market entry for these products. If royalties are expected to be the major source of an NBF’s The observations made concerning NBFs’ reli- operating revenue, then the NBF’s correct choice ance on established U.S. companies apply equal- of a marketing partner is crucial for financial suc- ly to R&D arrangements between NBFs and es- cess. It might not be wise, for example, for an NBF tablished foreign firms. But the same situation has to choose a marketing partner whose own prod- greater implications for U.S. competitiveness ucts stand to be displaced by the new product. when viewed in the context of international technology transfer. * The NBF Genentech, for example, licensed Eli Lilly to produce the new human insulin product Joint ventures between NBFs and established Humulin” On the one hand, because Lilly controls foreign companies are motivated in part by a for- the insulin market in the United States, an effec- eign need for American technology and in part tive distribution network is already in place and by NBFs’ desire to retain U.S. marketing rights– Humulin@ sales could be substantial. On the other rights often ceded in joint ventures with estab- hand, Humulin” is a competitor of Eli Lilly’s lished U.S. companies. Most observers would animal-derived insulins, and Eli Lilly holds about agree that the United States is currently the leader 85 percent of the U.S. insulin market. In other in developing commercial applications of biotech- words, the pace of market development for nology. Reflecting the strong technological posi- Humulin @ is controlled by the very company tion of some U.S. companies is the increasing whose monopoly position Humulin@ sales other- number of established foreign companies that wise might challenge. For example, Eli Lilly could are seeking R&D contracts with NBFs. Between be threatened by the introduction of the new 1981 and 1982, for example, the NBF Biogen ex- product, and delay the marketing of Humulin@, perienced a 948-percent increase ($520)000 to or if the costs of producing Humulin@ are not $5.5 million) in R&D fees from Japanese com- competitive with Eli Lilly’s existing insulin prod- panies (3), while Genentech experienced a 504- uct, then Eli Lilly could also delay the market in- percent increase ($2.6 million to $15.7 million) troduction of Humul.in@. Other arrangements of (33). NBFs often seek joint marketing agreements this kind between NBFs and established compa- with established foreign companies for access to nies could slow the market entry of new products foreign markets. on the basis of publicly available and reduce the flow of royalties to NBFs. * R&D joint venture agreements, it appears that the United States is a net exporter of technology. An obvious disadvantage common to all NBFs is the sale of technology to ensure survival. By Foreign companies’ joint ventures with NBFs transferring technology to established companies, generally take the form of licensing agreements some NBFs could be canceling the comparative for R&D, and few foreign companies seem to be advantage they currently possess in domestic taking equity positions in the NBFs. From the markets. If the competitive pressures arising from NBFs’ point of view, the same advantages (e.g., the the technology transfer to established companies grow too strong, many NBFs will not survive. Ad- ditionally, since the most important factor in mar- *There are enormous difficulties in assessing the degree of technology inflow and outflow because of the many ways technology *See Chapter 5: Pharmaceuticals and Appendix C: A Comparison can be transferred; however, most observers would probably agree of the U.S. Semiconductor Industry and Biotechnology for a more that the current net flow of biotechnology is outward from the general discussion of the Eli Lilly -Genentech joint agreement. United States. Ch. 4—Firms Commercializing Biotechnology 109 revenues) and disadvantages (e.g., reliance on roy- countries. It is common for licensers to barter, alty income instead of product sales and a loss so that they can obtain privileges to market in of technological advantage) are associated with their territories some products developed by the licensing agreements with foreign companies as licensee. The established U.S. companies apply- are associated with licensing agreements with U.S. ing biotechnology are in a position to be able to companies. From the standpoint of the U.S. com- barter without a loss to their competitive posi- petitive position in biotechnology, however, the tion. The’ NBFs, if in need of financing or in pur- advantages and disadvantages of such agreements suit of foreign markets, are not in such an advan- are not at all the same. In the case of domestic- tageous position. The only bargaining chip they domestic licensing agreements, technology is dif- have is their proprietary research. fused within the United States and U.S. biotech- NBFs that because of their initial inability to nology development is promoted. In the case of finance development and clinicaI trials license domestic-foreign agreements, technology is trans- some of their proprietary research to foreign ferred out of the United States and thus contrib- companies may be ceding an indirect advantage utes to the foreign development of technology. to foreign companies. However, the licensing Agreements in the pharmaceutical industry be- strategy and future royalty income may also pro- tween established U.S. and foreign companies are vide some NBFs with the needed working capital more difficult to evaluate than agreements be- to commercialize other research advantages. At tween NBFs and established foreign firms. Licens- this time, it remains unclear both how technology ing in the pharmaceutical industry is standard export will affect the commercial success of the practice to overcome the complexities of clinical NBFs and how it is likely to influence the U.S. com- testing, registration, and marketing in foreign petitive position in biotechnology.

Findings

U.S. efforts to commercialize biotechnology are United States a comparative advantage in the con- currently the strongest in the world in part text of product introduction remains unclear. because of the unique dynamism and complemen- Since the established U.S. companies, through tarily that exists between NBFs and established production and marketing agreements with NBFs, U.S. companies in developing biotechnology for control the later stages of commercialization for wider commercial application and in part because many new products being developed, they will of a strong U.S. support sector that supplies re- have considerable control over the pace at which agents, instrumentation, and software to the com- these new products reach the market. Some es- panies applying biotechnology. At present, most tablished companies may have disincentives to NBFs are still specializing in research-oriented market the new products that might compete phases of product and process development, pre- with products they are already producing, cisely the commercial stage where they excel. The Biotechnology is still in an early stage of com- established companies, on the other hand, have mercial development, and competition remains assumed a major share of the responsibility for largely in research and early product develop- producing and marketing, and, when necessary, ment. In the current research-intensive phase of obtaining regulatory approval for, many of the development, the new entrepreneurial firms earliest biotechnology products, the commercial founded specifically to exploit innovations and stages where their resources are strongest. research advantages are providing the United Whether the dynamism arising from the compe- States with a competitive edge in the commercial tition and complementarily between NBFs and development of biotechnology. Through their established companies will continue giving the R&D efforts, NBFs are contributing to biotech- 110 ● Commercial Biotechnology: An International Analysis nology’s commercial development in the United their in-house investments in biotechnology re- States through innovation, technology diffusion, search and production facilities, so the role of es- product market development, and encourage- tablished U.S. companies in the U.S. biotechnolo~ ment of technical advances because of the in- commercialization effort is expanding. creased domestic competition they generate. US. competitive strength in biotechnology will The financial constraints faced by the NBFs in be tested when large+cale production begins and the United States have led NBFs into R&D joint bioprocessing problems are addressed. The Japa- ventures and licensing agreements that are dif- nese have extensive experience in bioprocess fusing NBF-generated innovations to established technology, and dozens of strong “old biotech- U.S. and foreign companies. The collaborative nology” companies from a variety of industrial ventures between NBFs and established U.S. com- sectors in Japan are hoping to use new biotech- panies, by broadening the U.S. technology base nology as alever to enter profitable and expand- for future biotechnology development, in the ing pharmaceutical markets. Japanese companies, short run have promoted competitive vigor which already dominate biologically produced among U.S. companies commercializing biotech- amino acid markets, are also major competitors nology. Increasing domestic competition arising in new antibiotic markets; in the future, they from established company R&D, however, stands could dominate other specialty chemical and to threaten the survival of many NBFs and, con- pharmaceutical markets as well. sequently, the source of much of the current in- Pharmaceutical markets will be the first prov- novation in biotechnology. Since the established ing ground for U.S. competitive strength. Interna- U.S. companies now have some control over the tional competition will be intense, and the Ameri- later aspects of product development, they can can drug and chemical companies, as well as some control the rate at which some of the early prod- NBFs, will be competing against not only the Jap- ucts are introduced to the marketplace. It is not anese companies but also the major pharmaceu- clear what this situation may do to the U.S. com- tical and chemical companies of Western Europe, petitive position. all of whom expect to recover their biotechnology Although NBFs have assumed much of the risk investments through extensive international mar- associated with biotechnology’s early develop- ket penetration. Although there seem to be fewer ment, established U.S. companies are making sub- European companies than Japanese companies stantial contributions to the U.S. commercializa- commercializing biotechnology, the potential of tion effort. Through equity investments and li- European pharmaceutical companies such as censing and contract agreements with NBFs, es- Hoechst (F.R.G,), Rhone Poulenc and Elf Aquitaine tablished U.S. companies are providing many (France), ICI, Wellcome, and Glaxo (U.K.), and NBFs with the necessary financial resources to Hoffmann-La Roche (Switzerland) is impressive. remain solvent. Through joint development agree- Thus, to remain competitive internationally and ments with NBFs, many established companies to compete effectively in the future, it is crucial will also provide the necessary production and for U.S. companies to rely on rapid innovation marketing resources to bring many NBF products made possible by NBFs, rapid product develop- to world markets. These resources, in turn, are ment made possible by established companies, helping to sustain the rapid pace of technical ad- and the accumulated and combined experience vance spurred by NBFs. Recently, more and more of both groups of firms. established U.S. companies have been increasing Ch. 4—Firms Commercializing Biotechnology . 111

Chapter 4 references

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7. 27.

28, 9.

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, 112 ● Commercial Biotechnology: An International Analysis

38.

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No. 83-276, New York, Mar. 21, 1983. 64 Organisation for Economic Co-Operation and De- velopment, Directorate for Science, Technology, 46. and Industry, “Impact of Multinational Enterprises on National Scientific and Technical Capacities, ” Paris, 1977. 65. Organisation for Economic Co-Operation and De-

49. Ch. 4—Firms Commercializing Biotechnology ● 113

the U.S. Pharmaceutical Industry, Washington, 81. Ward, G., Vega Biochemicals, Tucson, Ariz., per D.C., 1983. sonal communication, February 1983. 75. Scrip 686, "U.S. Potential for Japanese Drug Firms," 82. Waldholz, M., "Ballyhoo Has Faded But Interferon Apr. 21, 1982, p. 9. Still Has Boosters at High Levels," Wall Street Jour 76. Stinson, S. C., "Analytical Instrument Sales Set To nal, Sept. 30, 1983, p. 1.

Bounce Back After Recession," Chern. & Eng. News 83. Wardell j W. j and Sheck, L., "Is Pharmaceutical In Feb. 7, 1983, p. 16. novation Declining?: Interpreting Measures of 77. Taylor, R., Hybritech Inc., San Diego, Calif., per Pharmaceutical Innovation and Regulatory Impact

sonal communication, September 1983. in the USA j 1950-1980," Center for the Study of 78. Tilton, J., International Diffusion of Technology: Drug Development, Department of Pharmacology, The Case of Semiconductors (Washington, D.C.: University of Rochester Medical Center, Rochester, The Brookings Institution, 1971). N.Y., presented at the Arne Ryde Symposium on 79. Tomizuka, N., "Industrial Aspects and Government Pharmaceutical Economics, Helsingborg, Sweden, Policy Concerning Genetic Engineering in Japan," Sept. 27-28, 1982.

Genetic Engineering: Commercial Opportunities in 84. Zimmerj S. J., liThe Impacts of Applied Genetics Australia, Proceedings of a symposium held in in Animal Agriculture," contract report prepared Sydney, Nov. 18-20, 1981. for the Office of Technology Assessment, U.S. Con 80. U.S. Department of Commerce, International gress, August 1982. Trade Administration, "An Assessment of U.S. Competitiveness in High Technology Industries," Washington, D.C., February 1983. PART III Applications of Biotechnology in Specific Industrial Sectors Chapter 5 Pharmaceuticals Contents

Page Introduction ...... 119 Regulatory Proteins...... 120 Human Insulin ...... 120 Interferon ...... 122 Human Growth Hormone ...... 127 Neuroactive Peptides ...... 128 Lymphokines...... 130 Other Regulatory Proteins ...... 131 Blood Products ...... 131 Human Serum Albumin ...... 132 Antihemophilic Factor ...... 133 Thrombolytic and Fibrinolytic Etnzymes ...... 134 Vaccines ...... 136 Viral Disease Vaccines ...... 136 Bacterial Disease Vaccines...... 139 Parasitic Disease Vaccines ...... 140 Antibiotics, ...... 143 Monoclinal Antibodies ...... 143 Diagnostic Products ...... 144 Preventive and Therapeutic Products ...... 147 DNA Hybridization Probes ...... 148 Commercial Aspects of Biotechnology in the Pharmaceutical Industry ...... 150 Priorities For Future Research ...... 151 Chapter 5 References ...... 152 Tables Table No. Page 15.U.S. and European Markets for Insulin: Eli Lilly’s Estimated Sales ...... 121 16. Some Ongoing Clinical Trials Using Alpha or Beta Interferon To Treat Human Viral Diseases...... 124 17. Some Ongoing Clinical Trials of the Use of Interferons To Treat Cancer ...... 126 18.Some U.S. and Foreign Companies Involved in Interferon Gene Cloning Projects . . . 128 19. Some Proteins With Possible Pharmaceutical Applications Being Developed With Recombinant DNA Technology ...... 129 20. Some Protein “Growth Factors’’With Potential Pharmaceutical Applications ...... 131 21. Human Serum Albumin Production and Consumption in the United States ...... 132 22. Antihemophilic Factor Production and Consumption in the World ...... 133 23.Thrombolytic and Fibrinolytic Enzymes: Companies Involved in Development and Marketing ...... 13s 24. Some Current Viral Vaccine Biotechnology Projects ...... 137 25. Estimated Worldwide Populations Affectedly Parasitic Diseasesin 1971 ...... 140 26. In Vitro Monoclinal Antibody Diagnostic Products Approved in the United States. . 145

Figures FigureNo. Page 13. Methods Used to Prepare Subunit Vaccines for Viral Diseases: Recombinant DNA Technology. Chemical Synthesis ...... 138 14.The Lifecycle of Plasmodum,the Malarial Organism: Possibilities for Development of Vaccines for Malaria ...... 141 15.DNA Probe Filter Assay ...... 149 Chapter 5 pharmaceuticals

Introduction

In the United States, many industrial biotech- govern the selection of projects for development. nology developments rest on the broad base of In considering the use of biotechnology to pro- knowledge generated by university research in duce substances by new means, manufacturers the biological sciences. Such research has been must make multifaceted decisions that include the funded largely by the National Institutes of Health following considerations: (NIH) and other public health-oriented sponsors. ● As a consequence, the first areas of application the possibility of making products superior of new biotechnology in the United States have to those already marketed for a given pur- been in the pharmaceutical field. As research pose (i.e., more effective, convenient, safe, or using the new genetic techniques has progressed, economical); ● the pharmaceutical industry has been the leader the technical feasibility of applying new in industrial applications. methods (e.g., in rDNA applications, the feasibility of cloning DNA that directs synthesis Perhaps the most important application of bio- of desired substances); technology is to facilitate further biomedical re- ● the cost of the conventional method (e.g., search. Among the most intriguing areas of re- chemical synthesis, tissue extraction, or tradi- search using biotechnology are those pertaining tional bioprocessing) and the potential to re- to the nervous system, the immune system, the duce costs with rDNA technology or other endocrine system, and cancer. As research in new methods; these areas yields insight into mechanisms of ● the nature of the market (i.e., whether it is disease and healthy body function, basic questions of high enough value or volume to justify the about the organization and function of the brain, substantial start up costs of new production the nature of behavior, and the regulation of body methodology and regulatory approval); functions may be answered. The illumination of ● the possible l0SS of production of other these phenomena, in turn, may generate new pos- substances with the change in methods (e.g., sibilities for pharmaceutical products. substances that were coproduced in the old Pharmaceutical production may be improved method), as well as the potential for develop- with biotechnology in many ways. In some in- ing new, useful byproducts; and ● stances, production of pharmaceutical products the possibility that the new methods em- by chemical synthesis or tissue extraction meth- ployed will serve as useful models for prepar- ods may be replaced by production from cloned ing other compounds (whereby the new tech- genes. In other instances, applications of recom- nology may justify high startup costs and the binant DNA (rDNA) technology may supplant tra- loss of formerly coproduced products). ditional bioprocess methods for the production Although biosynthesis may eventually reduce proof antibiotics and other pharmaceutical com- duction costs of widely used compounds by sev- pounds. Perhaps most importantly, new biotech- eral orders of magnitude (from millions of dollars nology provides a means of producing for the first per kilogram for chemical synthesis to several time large amounts of compounds that are other- thousand dollars per kilogram for biosynthesis), wise scarce. Thus, biotechnology may give rise chemical synthesis often suffices for production to the development of entirely new pharmaceu- of low molecular weight compounds for testing, tical products. In many cases, substantial research and develop- Whatever the intended impact of a new phar- ment (R&D) costs and high product attrition rate maceutical product, profit expectations usually in pharmaceutical development may not justify

119 120 Commercial Biotechnology: An International Analysis

initial exploration of some compounds with bio- erations that have shaped the use of biotechnol- technology. . ogy in the pharmaceutical industry are noted in this chapter. * This chapter introduces the scientific and commercial bases of a number of pharmaceutical A second point is that in assessing the poten- developments that exemplify biotechnology’s tial for biotechnology’s use throughout the phar- promise in the pharmaceutical industry. Some ex- maceutical industry, it is important to examine amples include human insulin (hI), the first rDNA- the receptivity of established companies to the manufactured product of biotechnology to reach adoption of new production methods. Traditional- the marketplace, interferon (Ifn), human growth ly, funding for most of the applied research and hormone (hGH), and human serum albumin (I-ISA) development of new pharmaceutical products in rDNA projects. Other examples discussed are the United States has been provided by large monoclinal antibodies (MAbs) and DNA hybridi- pharmaceutical manufacturers. Since these manu- zation probes, which are already being marketed facturers generally command the markets for for in vitro diagnostic use. Discussions include products made by conventional means, they may market profiles for each of these compounds, have vested interests in established products that many of which will compete with products made will impede the development and marketing of by other methods. new products. This situation might perpetuate the problem of decreasing innovation in the pharma- Several important points are raised in this ceutical industry and contribute to the underde - chapter that are discussed throughout this report. velopment of biotechnology applications to The first is that government regulation and licens- pharmaceuticals. ing of pharmaceuticals play a major part in the development of these new products. With the rapid progress taking place in biotechnology, tech- ● For a further discussion of regulatory factors that affect the use nical barriers may in some instances become sec- of biotechnology in the pharmaceutical and other industrial secondary to regulatory barriers. Regulatory consid- tors, see Chapter 15: Health, Safety, and Environmental Regulation.

Regulatory proteins

The use of biotechnology to manufacture phar- Human insulin maceutical products can be viewed in several ways. First, biotechnology may be used as a The first therapeutic agent produced by means substitute for conventional methods of produc- of rDNA technology to achieve regulatory ap- tion, which include chemical synthesis and extrac- proval and market introduction is hI, marketed under the name Humulin ”. * Although Humu - tion from tissue. The successful cloning projects a and microbial production of the proteins hl, Ifns, lin may be the debutant of rDNA produced and hGH in rDNA systems, outlined below, are drugs, the extent to which rDNA-produced hI will valuable as paradigms for biotechnology’s role in be substituted in the marketplace for animal in- developing competitive pharmaceutical substi- sulin is uncertain. Insulin derived from animals tutes, Second, biotechnology may be used to pro- has long been the largest volume peptide hor- duce unprecedented amounts of scarce biologi- mone used in medicine. Human insulin differs cal compounds, of which certain regulatory pro- only slightly from that of pigs and cows, and its teins provide the leading examples. Finally, the incremental benefits have yet to be demonstrated use of biotechnological methods yields basic (82). knowledge on which future research can be *Humulin@ has been approved in both the United States and the based. United Kingdom. Ch. 5—Pharmaceuticals . 121

A profile of insulin markets and sales by Eli Lilly facturing, marketing, and obtaining regula- & Co. (U.S. )-the dominant producer and market- tory approval for the hI product that resulted er of insulin, and licensee from Genentech Corp. from Genentech’s work. This arrangement (U. S.) of the new rDNA product–in the United capitalized on Lilly’s decades of experience States and Europe is shown in table 15. By 1985, in large-scale bioprocessing and the purifica- as indicated in that table, both U.S. and European tion of insulin. Most significantly, Lilly was markets for insulin are expected to double. Eli Lil- thoroughly familiar with insulin and the pro- ly is expected to retain a sizable portion of the cedures of regulatory agencies, marketing, U.S. market, but its greatest potential lies in and distribution. Lilly was able to satisfy the penetrating foreign markets with Humulin”. Food and Drug Administration’s (FDA’s) requirements for approval of Humulin@ in The development and commercialization of Hu- record time-4 years after the first bacterial mulin ”establishes several important precedents preparation of hI. Under their arrangement, of general significance to the introduction of bio- Genentech receives royalties from Lilly on technology to industry: @ the sale of Humulin . Lilly, in turn, has ac- ● Liaison between industry and academic sci- cess to improvement inventions by Genen- entists. The original bacterial production of tech. Proinsulin, for example, produced from polypeptide chains of insulin at the new bio- genes cloned by Genentech (disclosed in technology firm (NBF)* Genentech made use March 1980), may provide a more efficient of nucleic acid sequences synthesized by col- route for the production of hI or may have laborators at City of Hope Medical Center, an clinical value of its own (see below). This pat- academic laboratory that had capabilities not tern of collaboration between NBFs and es- otherwise available to Genentech at the time tablished pharmaceutical firms is common. * (31). ● International joint ventures. Though Eli Lilly ● Collaboration between NBFs and established has had little competition in the U.S. insulin companies. Early in the development of market until now, the company has been only Humulin@, Genentech entered a collaborative a minor factor in insulin markets outside of arrangement with Eli Lilly. Under the agree- the United States. Recently, however, Lilly ment, Genentech performed the rDNA work has licensed Swedish and Japanese firms to and received financial support for the work facilitate penetration of overseas markets from Lilly. Lilly, in addition to providing this (121). The leading insulin supplier abroad is financial support, was responsible for manu- the Danish firm Novo Industri A/S (142). Novo countered Lilly’s rDNA hI effort by commer- *NBFs, as defined in Chapter 4: Firms Commercializing Bio?echnologv, are firms that have been started up specifically to cializing an enzymatic process devised in the capitalize on new biotechnology. Most NBFs are U.S. firms. early 1970’s to transform insulin from swine into a form identical to hI, * * Novo’s symisyn- thetic hI product was approved for market- Table 15.-U.S. and European Markets for Insulin: Eli Lilly’s Estimated Sales (millions of dollars) ing in the United Kingdom shortly before Lil- ly’s Humulin” attained approval there. To 1981 1985 estimate compete with Lilly in the United States for U.S. market: insulin markets, Novo formed a joint venture Lilly’s sales...... $133 $205’ Total market ...... $170 $345 with an established American pharmaceutical company, E. R. Squibb (116). Novo also con-

● For a further discussion of collaboration between NBFs and established firms, see Chapter 4: Firms Commercializing Biotech- nology. ● ● Hoechst @. R. G.) and Nordisk (Denmark) have subsequently introduced semisynthetic M products, and Shionogi (Japan) has developed a significant process improvement involving an immobilized bacterial enzyme (94).

25-561 0 - 84 - 9 122 Commercial Biotechnology: An International Analysis

tracted with Biogen S.A, (Switzerland)* to sometimes occur in patients taking hI for the develop an alternative rDNA process for the first time (79). These problems probably arise production of hI (11). because insulin is administered by subcutane- ● Refinement of process technology. The race ous injection. Thus, improvements in the to supply international insulin markets has mode of delivering insulin to patients maybe spawned further biotechnological innovation at least as important to commercial imple- in the pharmaceutical industry. The A and mentation as technical advances in rDNA pro- B protein chains of insulin can join in several duction of hI. (See Box B.—Recent Work on ways, only one of which is correct. Combin- Drug Delivery Systems.) ing the two chains by nonbiological chemistry Some diabetic complications may not be is generally regarded as the ‘(hard way” to caused simply by insulin deficiency. Human make insulin. In the body, a connecting pep- proinsulin, for example, may have therapeu- tide in proinsulin (the precursor of insulin) tic value. Animal proinsulin, which differs sig- positions the chains appropriately for join- nificantly from its human counterpart, is con- ing to make the biologically active form of sidered a contaminant in preparations of ani- ‘ insulin. The connecting peptide is deleted mal insulin. However, some scientists hypoth- when proinsulin is converted to insulin with- esize that administration of human proinsulin in pancreatic cells. Work to design bioproc- may be beneficial to diabetic patients. Human esses using immobilized enzymes** to trans- proinsulin’s availability through rDNA tech- form rDNA-produced proinsulin into insulin nology is allowing Eli Lilly to evaluate this and to separate the products is currently hypothesis (27). underway. Lilly has reported the production of human proinsulin in bacteria through Interferon rDNA technology and the efficient conversion of proinsulin to hI (27). The NBF Cetus Ifns, a class of immune regulators or lympho- (U. S.) also has an improved proinsulin proc- kines, are proteins that regulate the response of ess, and Hoechst (l?. R. G.) is reported to be cells to viral infections and cancer proliferation. developing one (10). These extraordinarily potent substances are the ● Clarification of related problems. The injec- subject of the most widely publicized, well-funded tion of insulin has saved the lives of many applications of rDNA technology to date, but diabetics, but the delivery of insulin by in- details of their functions remain unknown. Until jection is thought to cause complications.*** recently, the study of Ifns was limited by the ex- Initial hopes for rDNA-produced hI centered tremely small amounts of Ifn that could be ob- on avoiding allergic reactions to impurities tained from cultured cells. Now, however, rDNA in insulin preparations, but these hopes have technology allows production of large quantities not been realized. Although results with pa- of Ifn-like proteins for testing as pharmaceutical tients switching from animal insulin to h.1 are products. Despite certain structural differences encouraging, substantial allergic responses from native Ifns, * rDNA-produced Ifns appear to have identical effects on cultured cells. “Biogen N. V., the parent company of the Biogen group, is registered in the Netherlands Antilles. Biogen S. A., one of Biogen N.V.’S The cloning and production of Ifns illustrate four principal operating subsidiaries, is a Swiss corporation that several aspects of the commercialization of conducts R&D under contract with Biogen N.V. ● ● Immobilized enzymes are enzymes bound to solid supports so biotechnology: that they can exert their catalytic effects on dissolved substances without becoming inextricably mixed up with the reactants and ● the use of rDNA technology to produce a products. For further discussion, see Chapter 3: The Technologies. scarce product in quantities sufficient for re- ● ● ● In spite of daily injection of insulin, long-term complications search on the product’s effects; continue to plague many diabetics. After 20 to 30 years of disease patients often develop blindness, need for leg amputations, kidney . a massive, competitive scale-up campaign by failure, stroke, heart disease, and/or nerve damage. About 10 percent of all hospital days (21 million per year) are consequences of ● Ifns produced by rDNA in bacteria lack carbohydrate (sugar) diabetes, and the disease accounts for 19 million physician visits groups found on native Ifns. It is not known to what extent the per year (49). absence of these groups affects protein function. Ch. 5—Pharmaceuticals ● 123

pharmaceutical manufacturers in advance of ety (ACS), and other organizations, to SUppofi demonstrated uses of the product; testing of Ifns toward a national goal (cure the attempt to produce economically a func- of cancer). * tional glycoprotein (protein with attached Ifns are being considered for various pharma- sugar molecules) in an rDNA system; ceutical applications, but are not yet approved as a pattern of international R&D investment that reflects the differing needs and medical *In general, Ifn projects in the United States have received massive practices of various nations; and public funding. Studies in Sweden, and to a limited extent in the the establishment of a U.S. national effort, United States, stimulated appropriations of $5.4 million by the non- via research grants and procurement con- profit ACS for extended clinical trials in the early 1980’s. This was by far the greatest single commitment ever made by ACS, and it tracts administered through the National was followed by a boost in NIH funding for Ifn research from $7.7 Cancer Institute, the American Cancer Soci- million to $19.9 million for fiscal year 1980. 124 ● Commercial Biotechnology: An International Analysis pharmaceutical products. There is some evidence ever, Ifns may prove useful in treatment of viral that Ifns are effective in preventing certain viral diseases (50,81,130,157). Extensive clinical trials infections, but more clinical trials are necessary to determine Ifns’ effectiveness in the treatment to demonstrate their preventive abilities (81). * of herpes and other viral infections are under- Most evidence that Ifns cure viral infections is way, some which are listed in table 16. The avail- anecdotal. In combination with other drugs, how- ability of Ifns made with rDNA technology has allowed many of these clinical trials to be under- *Assuming the safety criterion can be satisfied for the use ofIfn taken. in a prophylactic mode, the immediate market may be for persons whose natural defenses are weakened by illness or medication, such Several clinical trials to evaluate Ifns’ effective- as those undergoing cancer therapy with drugs or radiation. Other early markets could be for patients entering elective surgery or per. ness in the treatment of cancer have taken place, sons at high risk of viral exposure, such as teachers and ce~in but, at present, only limited conclusions can be medical peraomel. Since Ifns apparently will be available from many drawn from the data. In some cases, Ifns inhibit sources, the dosage forms or delivery systems may be crucial for widespread acceptance and efficacy. tumor cell growth and may stimulate immune

Table 16.—Some Ongoing Clinical Trials Using Alpha or Beta Interferon To Treat Human Viral Diseases

Herpes genitalis

Herpes Iabialis

Herpes infections

Multiple sclerosis

apJIAID- Nation# Institute of Allergy and Infectious Diseases. %cherlng-Plough’s Ifn produced for clinical trials outside of the United States is synthesized microbially from genes cloned by Blogen S.A. cEnzo Biochem obtained natural alpha-lfn from New York Blood Center and Sponsors trials at Sloan Kettmhrg. dlnter.y~a LS an Israeli firm conducting clinical trials primarily in Israel, Europa, Md Canda. eGenentech (u.s.) cloned and produces the Ifns being evaluated by Hoffmann-La Roche (Switzerland). f phase H! studies at !jtanford with Ifn obtalnad from K. Cantell, Finnish Red CrOSs, completed In 1~. %egrowth of these wart-like growths, apparently caused by virus, has been Inhibited by Ifns in Danish studies. hNIAID.5ponsored tria15 indicate that Ifn atone la ineff~tlve for the carrier state in males, but combinations with other drugs show prOITliSe. i viral Or{g{n suspected but not PrOv@ SOURCE: Office of Technology Assessment. Ch. 5—Pharmaceuticals 125 cells to destroy cancerous cells; their effects on from yeast, including secretion of the Ifn polypep- inhibiting tumor metastasis are better established tide into the culture medium from which it can than their ability to cause regression of primary more easily be purified (45). Academic workers tumors (8). With some exceptions, the tumors that funded by the British firm Celltech, Ltd., have re- respond to Ifn treatment (certain Iymphomas, ported yields of alpha-Ifn as high as 15 milligrams benign human esophageal papillomavirus tumors, (3 billion units*) per liter of yeast culture (139). and leukemia, in particular) are also the most re- Numerous genetic techniques are being devised sponsive to established chemotherapeutic agents. to increase production: 1) amplification of the Some subtypes of interferon (e.g., alpha-Ifn) oc- number of Ifn genes, 2) enhancement of gene ex- casionally induce tumor regression in patients pression by placing it under control of regulatory who are resistant to radiation and multiple drug elements which can be varied without hamper- therapy (95). ing cell growth, 3) limitation of product degradation, 4) inducement of product secretion, and 5) Several problems have been noted in initial clin- stabilization of microbial strains. Additionally, the ical trials designed to test Ifns’ effectiveness in the Swiss company Hoffmann-La Roche has reported treatment of cancer. For example, side effects a MAb system for alpha-Ifn purification that gives (fever, fatigue, and influenza-like symptoms) in excess of 1)OOO-fold purification with 95 per- caused by injections of Ifn made in cell cultures cent recovery of biological activity (133). were thought to be toxic reactions to impurities of the culture medium, but pure rDNA-produced Many U.S. and foreign companies using biotech- 1fns show similar side effects (95). Thus, despite nology are working toward large-scale Ifn pro- extensive research, numerous questions remain duction. Some of the companies with Ifn gene concerning Ifns’ anticancer potential. Some ongo- cloning projects are listed in table 18. The large ing clinical trials for Ifns’ anticancer properties number of companies involved in Ifn production are listed in table 17. reflects the large market potential so widely publicized in the late 1970’s. Since clinical trials Perhaps the most enlightening results stemming have not supported many of the claims made for from Ifn research will concern cellular function Ifns, companies are beginning to draw back from during immune responses. Such results may Ifn R&D. prove extremely valuble in medicine. Better understanding of immune mechanisms, for exam- The international pattern of interest and invest- ple, may provide insight into the etiology of the ment in the use of rDNA technology to produce recently problematic acquired immunedeficiency Ifn reflects to some extent international differ- syndrome (AIDS). Substantial supplies of Ifns to ences in medicine and, possibly, movements to conduct such research can now be produced with reduce national dependence on pharmaceutical rDNA technology. imports. Japan, for instance, has long been the largest market in the world for cancer drugs, to- Though most rDNA-made 1fns currently under day exceeding $375 million in annual sales (com- evaluation are produced in the bacterium E. ccdi, pared to $210 million in the United States) (127), yeast are being increasingly employed as produc- and is actively investigating the production of anti- tion organisms. Yeast require less stringent cul- cancer pharmaceutical products using new bio- ture conditions than do most bacteria, have long technology. * * records of reliability and safety in large-scale bioprocessing, and are more adaptable to continuous *A single dose of Ifn ranges from 1 million to 100 million units. culture production than are many bacteria. Fur- * *protein agents are especially popular for cancer treatment in thermore, because yeast more closely resembles Japan. 1mmunotherapeutic concepts which are regarded as ex- higher organisms than bacteria, yeast can add perimental hypotheses in the West provide the rationale for administration in Japan of hundreds of mdhons of dollars worth of agents, sugar molecules to protein when necessary. Thus, such as Krestin” (an orally administered fungal glycoprotein that modified products made in yeast are more likely accounted for Japanese sales in 1981 of $230 million) and urokinase to be pharmaceutically useful than unmodified (which is used in Japan for indications not even suggested in the United States). Sales of over $117 million were recorded in 1981 products made in bacteria. Several groups have for a streptococcial “vaccine,” czdlwl Picibanil@, which Japanese physi- recently reported progress with Ifn production cians regard as an immunostimulant (118). 126 . Commercial Biotechnology: An International Analysis

Table 17.—Some Ongoing Clinical Trials of the Use of Interferon To Treat Cancer

Interferon supplier Sponsor Cancer Phase Institution N.tur.1 Iymphobl•• told (produced lrom culluted cell.; cont.ln. mlxtute ol'n"""ron type.): National Cancer Institute NCI Broad range of advanced cancers , University of Wisconsin (NCI) NCI NCt Melanoma II Georgetown University Well come Foundation NCt Ovary II Gynecological Oncology Group East Coast Oncology Group Well come Foundation NCt Lymphoma, non-Hodgkin's II Southeast Oncology Group NCI NCt Breast, metastatic II UCLA NCI NCI Breast, recurrent II Duke University Well come Foundation NCI Breast, recurrent II National Surgical Adjuvant Breast Project NCI NCI Multiple myeloma II UCLA Duke University Memorial Sloan Kettering Cancer Center NCI NCI Kidney (renal cell) II Duke University Well come Foundation NCI Kidney (renal cell) II Southwest Oncology Group ~ __ • ,,___ • n ___ l __ ... ~._ •• _ C:C:CH \.AJCI~l VII\,;VIVYY UIVUJI Wellcome Foundation NCI Leukemia, childhood acute I-II Children's Cancer Study Group lymphocytic NCI NCI Kaposi's sarcoma II NCI-Clinical Oncology Program NCI NCI Colorectal II Memorial Sloan Kettering Cancer Center rONA-produced .'ph.·lnterferon: NCI NCI Broad range of advanced cancers I NCI-Frederick Cancer Research Facility NCI NCI Lymphoma, non-Hodgkin's II NCI-Frederick Cancer Research Facility NCt NCI Lymphoma, Burkitt's II NCI-Frederick Cancer Research Facility NCI NCI Leukemia, chronic (CLL) NCI·Frederick Cancer Research Facility NCI NCI Mycosis fungoldes NCI·Frederick Cancer Research Facility NCI NCI Leukemia, acute 1·11 University of Maryland Schering-Plough (S-P) NCI Multiple myeloma II Wake Forest University SoP NCt Bladder cancer I-II Northern California Oncology Group Sop Sop Melanoma II Yale University University of Wisconsin University of Rochester M. S. Hershey Medical Center University of Missouri s-P S·P Lymphoma, non-Hodgkin's II Roswell Park University of Maryland Harper Grace Hospital Yale University University of Chicago s-P Sop Lymphoma, Hodgkin's II Yale University University of Chicago Wilford Hall Medical Center s-P Sop Breast cancer Bowman-Gray Hospital Harper Grace Hospital USC Cancer Center s-P Sop Multiple myeloma II University of Texas (Galveston) Roswell Park Bowm an-G ray Dartmouth-H itchock Sop Sop Leukemia, acute II UCLA Sop Sop Kaposi's sarcoma II San Francisco General Hospital UCLA S·P S·P Lung, small cell USC Cancer Center " Bowman-G ray Sop Sop Head and neck cancer II University of Texas (Galveston) Sop Sop Colorectal II Lombardi Cancer Center Hoffmann-La Roche (HLR) HLR Broad range of advanced cancers II Unlversitv of Arizona HLR HLR Melanoma II University of Arizona Mayo Clinic Ch. 5—Pharmaceuticals ● 127

Table 17.–Some Ongoing Clinical Trials of the Use of Interferon To Treat Cancer (Continued)

Interferon supplier Sponsor Cancer Phase Institution II II

Osteogenic sarcoma II Breast cancer II

Antibodies)” memorandum, May 4, 1983.

Human growth hormone are sufficient, * hGH was one of the first targets for the applications of rDNA technology. Workers As suggested by the preceding discussion, rDNA at both Genentech and the University of Califor- technology is increasingly being used to produce nia, San Francisco (UCSF) reported cloning and large amounts of otherwise scarce biological com- expression of hGH in 1979 (39). Genentech’s work pounds. In addition to supplying compounds for was supported by the Swedish firm KabiGen AB, basic research, rDNA technology is likely to con- while partial funding for the UCSF work was pro- tribute to the discovery of many new pharmaceu- vided by Eli Lilly, which is believed to be the tical products. Some of the promising protein licensee for the product (39). Genentech has such compounds actively being developed with rDNA high aspirations of proving sufficient utility for technology-human growth regulators, neuro- hGH in medical applications beyond those cur- active peptides, and lymphokines, for instance— rently treated with cadaver hGH that it has an- are listed in table 19. nounced its intent to make the development of The development of hGH with rDNA methods hGH from rDNA one of the cornerstones of its is another model for biotechnology’s use in the integrated pharmaceutical enterprise (9). To this pharmaceutical industry. Human growth hor- end, Genentech is raising capital through an R&D mone is one of a family of at least three, closely limited partnership specifically to support clinical related, large peptide hormones secreted by the testing of hGH and is investigating a variety of pituitary gland. These peptide hormones are possible new clinical indications for hGH use, The about four times larger than insulin (191 to 198 NIH National Pituitary Agency has been enthusi- amino acids in length). All three hormones possess astic about these investigations, which were not a wider variety of biological actions than do most practical when the supply of hGH was limited by other hormones. The primary function of hGH the availability of human cadaver pituitaries (104). is apparently the control of postnatal growth in humans. Whereas insulin derived from slaught- ● Most pharmaceutical hGH ia obtained from human pituitaries removed at autopsy. In the United States, isolation and distribution ered animals can be used for treating diabetics, of hGH has been managed primarily by the National Pituitary Agency only growth hormone derived from humans is (under the auspices of NIH and with the cooperation of the College satisfactory for reversing the deficiencies of of Pathologists). Under pmgrama of the National Institute of Arthritis, Diabetes, and Digestive and Kidney Diseases, hGH is provided, hypopituitarism in children (65). without charge, for approximately 1,600 children per year for treatment of hypopituitariam. Another several hundred patients are Although the established market for hGH is treated with commercial hGH imported from abroad, which is also small and current supplies from tissue extracts obtained from tissue extracts (39). 128 ● Commercial Biotechnology: An International Analysis

Table 18.—Some U.S. and Foreign Companies in the world, except in the United States and invoived in interferon Gene Cioning Projects Canada, where Genentech has sole rights (31). KabiGen researchers are among the long-term leaders in the study of other growth-promoting hormones, especially the polypeptides known as somatomedins (30,100). Although it is premature to judge the likelihood of success, hGH is being evaluated for: 1) treating constitutionally delayed short stature; 2) improving healing of burns, wounds, and bone fractures; and 3) treating the deficiency of nitrogen assimila- tion known as cachexia (9). Approximately 3 percent of all children are thought to have constitutionally delayed short stature, and Genentech ad- visors speculate that as many as one-third of these might benefit from hGH treatment (136). *

Neuroactive peptides

Several important biosynthetic discoveries in recent years have involved identification of polypeptides in the body that act at the same cellular receptors that are affected by drugs. Some of the body’s neuroactive peptides, for example, bind to the same receptors affected by opiate drugs and produce analgesic effects in the nervous system similar to those produced by these drugs. Two of the body’s own “opiates,” enkephalins and en- dorphins, appear to be structurally related to many other polypeptides that play various roles in the nervous and endocrine (hormonal) systems ‘%his alpha4fn lacks carbohydrate groups, but lack of glycosylatlon does not (41). Another neuroactive peptide that may affect appear to influence activity. bAttemptlng production In yeast. neurological processes, including attention span, Cclinical trials began early ‘n ‘m” is melanocyte stimulating hormone (MSH). Some %oray is seating-up to acapmity of 3- 101* units par month and expects approval from Japan’s Ministry of Health and Welfare soon for beta-lfn as an anticancer evidence suggests that MSH enhances the ability e&unge~{2~\ retdnti ~1 mmufwtuhng rights and only licensed Its Japanew col- of test animals to pay attention to their environ- Iaborators to sell in Japan and, parhaps, other Asian markets (32). f ment, and MSH treatment has improved the Revlon’s subsidiary, Meloy Laboratories was the first firm to supply both alpha- Ifn and gamma-lfn to the National Cancer Institute. health of some mentally retarded patients as well %slng Genentech’s published gamma.lfn gene sequence (450 bases long), Suntory, a Japanese beverage company, took only 3 months to synthesize and (53). Initial hopes raised by the treatment of clone the gamma-lfn gene (1 19). Suntory has also succeeded in producing gamma-lfn in yeast. schizophrenic patients with beta+ndorphin have SOURCE: Office of Technology Assessment; and S. Panem, The Interferon Cru- not withstood more rigorous testing. Results of sade: Public Policy and Biomedical Dreams, Brooklngs Institution, Washington, D.C., {n press. testing some other peptides as antidepressants, after encouraging earlier studies, are also disappointing (53). KabiVitrum AB, a firm owned by the Swedish Government, is the world’s largest producer of hGH from frozen human pituitaries (113). Kabi- ● Vitrum owns 50 percent of KabiGen AB, which Genentech, Lilly, Amgen, Monsanto, and other firms are also interested in applications of rDNA-produced GHs for food produc- has the sole rights to manufacture and market tion purposes, and those investigations may prove complementary hGH made by the Genentech process anywhere to the medically oriented studies (see Chapfer 6: Agriculture). Ch. 5—Pharmaceuticals ● 129

Table 19.—Some Proteins With Possible Pharmaceutical Applications Being Developed With Recombinant DNA Technology

Size (number of amino Class/substance acids) Function R&D status Project sponsors Applications Hum.n I/rowth "I/ulltor,: Growth hormone (GH) . 191-198 Promotes growth Cloned, expressed, Genentech (U.S.)/ Growth promotion; heal- 1979 Kabigen AB (Sweden) ing burns, fractures; UCSF/Eli Lilly (U.S.) cachexia Somatostatin 14 Inhibits GH secretion Cloned, expressed, UCSF /Genentech Adjunct to Insulin 1977 Somotomedins .. 44-59 Mediates action of GH Cloned, expressed, Chiron (U.S.) Growth promotion, 1982 regulation Growth hormone releasing factor (GRF) . 44 Increases pituitary GH release Isolated, sequenced, Salk Institute (U .S.) Growth promotion synthesized, 1982 C,'c'um "I/ulltor,: Calmodulin .. 148 Mediated calcium's effects Determined to be None Numerous applications in unprofltablea basic research; hypertension Calcitonin . 32 Inhibits bone resorption rONA production Genentech, Amgen (U.S.) Bone disease therapy Parathyroid hormone (PTH) 84 Mobilizes calcium; prevents calCitonin Cloned, but no Massachusetts General Osteoporosis therapy; excretion production Hospital calcium metabolism Reproductive hormonlS: Luteinizing hormone (LH) .. Beta Females: induces ovulation Cloning in progress Integrated Genetics Antifertility chain; (glycoprotein) (U.S.)/Serono Labs 115b (Italy) Males: stimulates androgen secretion Follicle-stimulating hormone (FSH) Beta Induces ovarian growth Cloning in progress Integrated Genetics/ Reproductive services chain; (glycoprotein) Serono Labs 115 Human chorionic gonadotrophin (HCG) Beta Like LH; more potent Cloning in progress Integrated Genetics/ Pregnancy testing chain; (glycoprotein) Serono Labs 147 Relaxin. 52 Dilation of birth canal; relaxation of uterus Cloning in progress Genentech Soften bone connective (non-glycoprotein) tissue of reproductive tract; antiarthritic (?) N,urD6CtllI' fIIPtJdll: €-Endorphin ...... 31 Analgesia Cloned, expressed Amgen, others Analgesia nkephalins ...... 5 Analgesia Cloning in progress Amgen, others Analgesia Pancreatic endorphin. N.A.c Undetermined Cloning in progress Endorphin, Inc. Analgesia, particularly in childbirth LympholclnlS Ind ImmunDlCtlv. fIIptldll (oth" thIn Interferon,): Interleukin-2 133 Promotes T-cell growth, activity Cloned, expressed Ajinomoto Co. (Japan) Maintain T-cell cultures; Japanese Cancer immunotherapy Institute Immunex (U.S.) Cetus (U.S.) Chiron Genex (U.S.) Biogen (U.S.) Genetics Institute (U. S.) Interferon Sciences (U.S.) Ouidel (U.S.) Thvmosin (fraction 5) .. 10-150 Promotes maturation of bone marrow Purified, seQuenced George Washington Immunodeficiency cells, T-cell differentiation University diseases Thymosin (alpha 1) . 28 Promotes T-helper and T-amplifier Purified, sequenced Hoffmann-La Roche SystemiC lupus functions cloned, 1979 (Switz.) erythmatosis; other Genentech immune disorders Thymic hormone factor THF) 9 Promotes T-helper and T-amplifier N.A. N.A. Antiviral protection in functions immunosuppressed patients Thymic factor (TFX) 40 Restores delayed-type hypersensitivity N.A. N.A. Cancer treatment Thymopoietins .. 49 Inhibits B-cell differentiation N.A. Ortho Pharms. (U.S.) Reversing immunodeficiencies 130 . Commercial Biotechnology: An International Analysis

Despite the setbacks noted above, many inves- the neuroactive peptide betaadorphin (126), and tigators are confident that neuroactive peptides Endorphin, Inc. (U.S.), which is primarily con- are among the most promising potential advances cerned with compounds active in both the nerv- in medicine; thus, a great deal of research is be- ous and digestive systems. ing done on synthetic analogs of neuroactive peptides (e.g., 26,41) to identify structures that may Lymphokines have research or pharmaceutical applications. Lil- ly and Burroughs-Wellcome (U.K.) are investigat- Lymphokines are proteins produced by lym- ing the use of enkephalin analogs in clinical trials phocytes (cells of the immune system) that con- in the United States. Foreign companies with ma- vey information among lymphocytes. With the ex- jor research programs concerning neuroactive ception of Ifn, lymphokines are only beginning peptides include Abello @. R.G.), Hoechst (F.R.G.), to be characterized, but these proteins appear to Hoffmann-La Roche (Switzerland), Organon (Neth- be crucial to immune reactions. Some lympho- erlands), Reckitt & Colman (U.K.), Roussel Uclaf cytes, for example, produce lymphokines that (France), Sandoz (Switzerland), and Takeda engage other lymphocytes to boost the immune (Japan). In addition to screening neuroactive pep- response to a foreign substance (antigen) and tides compounds for analgesic and anesthetic ac- repel foreign invasion or disease. Other lympho- tivity, researcher~ are attempting to recognize cytes produce lymphokines that act in tandem those compounds that might suppress coughing with the antigen to stimulate the secretion of an- or diarrhea or might counteract asthenia, cerebral tibodies. Lymphokines may also help to ensure vascular disorders, failing memory, mental de- that only the antigen is attacked during an impression, Pmkinson’s disease, and forms of de- mune response, not the body’s own tissues. mentia, including senility. The importance of lymphokines in preventing Much basic research remains to be done before disease and understanding cellular function (in- substantial use is made of neuroactive peptides cluding aberrant cell function such as cancer as pharmaceutical compounds in medicine (53). growth) is fostering widespread research on these Studies of these substances and their chemical compounds (for review, see 47). Investigations of analogs are expected to result in the development the complex interactions among lymphocytes of new drugs, some of which may be produced have been hampered in the past by impure lym- with biotechnology, Companies vigorously pur- phokine preparations, which have led to ambig- suing the production of neuroactive peptides with uous findings. Recent progress, including the biotechnology include Amgen (U.S.), which has establishment of lymphocyte cell lines that pro- cloned and obtained expression of the genes for duce various classes of lymphokines (e.g., 37) and Ch. 5—Pharmnaceuticals ● 131 cloning of lymphokine-producing genes into rDNA Table 20.-Some Protein “Growth Factors” With systems for production in bacteria (24,137), has Potential Pharmaceutical Applications been made possible with the use of biotechnology. Factor Function The availability of pure lymphokine samples from CSF (colony stimulating such systems may enable researchers to answer factor) ...... Stimulate granulocyte more questions concerning cell biology and im- differentiation ECGS (endothelial cell mune function. Lymphokines may also be useful growth supplement) . . . . Required by vascular lining in the culture of certain cell lines. Eventually, cells these efforts may lead to the use of lymphokines EDGF (endothelial-derived growth factor)...... Stimulates cell division in in medicine to stimulate the patient’s own immune blood vessels system to combat disease. EGF (epidermal growth factor) ...... Stimulates growth of Leading commercial efforts to produce lympho- epidermal cells and kines with biotechnology are centered in Japan, many tumors FGF (fibroblast growth Switzerland, and the United States. In Tokyo, Dr. factor) ...... Stimulates fibroblast cell Tadatsugi Taniguchi of the Japanese Cancer In- growth stitute is collaborating with Ajinomoto Company FN (fibronectin) ...... Stimulates adhesion and proliferation of fibroblast to produce the lymphocyte growth factor, inter- cells leukin-2 (13). IN Switzerland and the United States, MDGF (macrophage- numerous firms using biotechnology are engaged derived growth factor). . . Stimulates cell division near inflammation in lymphokine research, especially in the produc- NGF (nerve growth factor) . Stimulates nerve growth tion of interleukin-2, but their efforts are largely and repair proprietary at this time (24). PDGF (platelet-derived growth factor)...... Stimulates division of fibroblast-like cells Other regulatory proteins SGF (skeletal growth factor) ...... Stimulates bone cell In addition to hormones and other regulatory growth WAF (wound angiogenesis proteins, a number of protein “growth factors” factor) ...... Stimulates wound healing for a variety of somatic (body) cells have been TAF (tumor angiogenesis isolated and are currently being characterized factor) ...... Stimulates blood vessel proliferation in tumors with the possibility that they may soon be can- SOURCE: Office of Technology Assessment, 19S3. didates for production by rDNA technology as well (see table 20). Perhaps the most important use of growth factors will be in preparing culture media for growing higher eukaryotic cells, thereby facilitating further research with more complex cells.

Blood products

Products derived from the fractionation of hu - three main plasma commodities are human serum man blood represent the greatest volume of bio- albumin (HSA), gamma globulin (GG), and anti- logical pharmaceutical products sold today and hemophilia factor (AHF), which accounted for 41 comprise a world market of $1 billion yearly. The percent, 25 percent, and 13 percent, respective- 132 Commercial Biotechnology: An International Analysis ly, of the global plasma component market in in medicine. HSA is used primarily during surgery 1978. North America and Japan each consume 25 and to treat shock, burns, and other physical percent of the world’s blood products (106). trauma. In 1979, worldwide HSA consumption exceeded 90,000 kg, with U.S. consumption account- The United States now enjoys a favorable trade ing for 80 percent (72,500 kg) of this amount. Al- balance with respect to blood products. Because though the United States consumed large amounts blood donation is more widely practiced in the of HSA relative to most other countries in the past, United States than elsewhere, the United States foreign HSA consumption is rising, as shown in supplies blood components to many other coun- table 21. Worldwide HSA consumption is ex- tries. Japan obtains 50 percent of its HSA and 60 pected to exceed 250,000 kg by 1984 (64,106,143) percent of its GG* from the United States. The with the largest increases of HSA consumption plasma production of Europe is about 60 percent taking place in foreign countries. The United of that of the United States (105). States has experienced an overcapacity of HSA The blood products industry is characterized production from blood fractionation since 1975 by large markets and strong incentives for bio- (143) and is currently the world’s leading exporter technological innovation on a nationwide basis. of HSA. Currently, the industry is troubled by the disease HSA’S tremendous markets make it an attrac- AIDS. Although the etiology of AIDS is not yet tive target for production with biotechnology. understood, the strong possibility that it can be However, HSA’S substantial molecular size (585 transmitted in blood products lowers the market- amino acids) and its relatively low cost of conven- ability of such products. Thus, the industry is tional production present formidable challenges seeking new methods for the production of blood to biotechnology. In November 1981, Genentech products. * * amounced successful HSA production in bacteria and yeast through rDNA manipulation (63). This Human serum albumin achievement is a landmark in several respects: HSA, a single polypeptide chain of 585 amino ● HSA is the largest protein (585 amino acids) acids, is the protein used in the largest quantities yet produced by rDNA technology. ● Planners and technologists aim to manufac- ● GG is a fraction of serum that contains antibodies. Soosting a ture tons rather than grams of injectable patient’s antibody level generally is thought to help prevent infectious disease. This treatment is used especiaUy for hepatitis preven- products using rDNA systems. tion. The ability to produce specific antibodies (MAbs) may make ● Competitive product costs are more than an GG a less desirable therapy and increase the effectiveness of an- order of magnitude lower per unit weight of tibody prophylaxis. * “These efforts are to be discussed in a forthcoming OTA report, product than those for previously considered Blood Banking Policy and Technology.. rDNA pharmaceuticals (e.g., less than $1/

Table 21 .—Human Serum Albumin Production and Consumption in the United States

Forecast 1971 1976 1979 1984 Plasma processed in the United States (thousands of liters) ...... 1,950 2,910 3,950 6,920 HSA production in the United States (millions of grams) ...... 39 67 91 159 HSA consumption: Domestic (millions of units) ...... 2.9 4.6 5.8 8.5 Foreign (millions of units) ...... 0.3 0.7 1.5 4.2 Total (millions of units) ...... 3.2 5.3 7.3 12.7 Domestic...... 940/0 870/o 800/0 670/o Foreign ...... 60/0 13’?/0 200!0 330!0 HSA revenues: Domestic (millions of dollars) ...... $58 $133.4 $168.2 $300 Foreign (millions of dollars) ...... 20.3 43.5 148 Total (millions of dollars) ...... :2 153.7 211.7 448 SOURCE: Office of Technology Assessment, based on data and estimates in M. M. LeConey, “Who Needs Plasma?” Plasrrra C?uar?edy 2:66-93, Septembr 1960. Ch. 5—Pharmaceuticals ● 133

gram, compared to somewhat less then $50/ duced HSA developed under the contract in the gram for insulin). Far East, South America, and North America. ● The companies that successfully produce Genex made a similar agreement with the Swed- HSA with rDNA technology will amass knowl- ish firm KabiVitrum, with licensing pertaining to edge of certain related processes, including Europe, Africa, and the Middle East. Biogen S.A. purification of large amounts of product. This negotiated a similar agreement in late 1981 to knowledge might allow them to dominate the cooperate with Shionogi (Japan) in the develop- production of other proteins made by similar ment of rDNA techniques for HSA production. processes. Only one major American drug company, Up- Since cloning the HSA gene, Genentech has en- john Pharmaceuticals, shows evidence of develop- tered into an agreement with Mitsubishi Chemical ing a fully in-house large-scale biosynthetic HSA Industries, Ltd. (Japan) to cooperate in continued process. Upjohn is making HSA in both E. coli and R&D for manufacturing and commercialization. yeast. The partnership hopes to produce 10 metric tons (tonnes) of HSA per year by 1985 (121). Mitsubishi will probably ask Green Cross, which is the largest Antihemophilic factor Japanese blood products company, to distribute the rDNA-produced product, thus avoiding dis- AHF, a class of proteins contained in the frac- crimination against the present distributor of tion of blood used to treat hemophilia (a set of HSA. In 1981, HSA sales in Japan were $60 million hereditary disorders that prevent blood clotting),

(*14.2 billion) (118), compared to about $200 is used by approximately 14)000 hemophiliacs in million in the United States (64). The corporate the United States on a routine basis (143). Type arrangements between Genentech, Mitsubishi, A hemophilia, which affects about 5 people in and Green Cross may lead to the reduction of every 100,000, is caused by a deficiency of fac- Japanese imports, the establishment of a blood tor VIII, and type B hemophilia (which is much product industry in Japan, and advances in Jap- rarer but equally severe) by a lack of factor IX. anese technology for producing and purifying AHF is separated during the fractionation of proteins. whole blood to obtain HSA, As shown in table 22, Genex (U. S.) and Biogen S.A, (Switzerland) also U.S. AHF production has multiplied faster than have established arrangements with Japanese consumption in recent years, and AHF comprises firms to conduct R&D on rDNA production of sizable exports for U.S. firms and nonprofit HSA (115). Genex made a contract in 1981 with organizations. With AHF selling for over $1 mil- Green Cross. In exchange for research funding, lion per gram and AHF use growing at a rate of Genex agreed to grant Green Cross exclusive 14 percent per year, AHF is the blood fractiona- licenses to make, use, and sell all microbially pro- tion industry’s most profitable product (64).

Table 22.—Antlhemophilic Factor Production and Consumption in the World

Forecast 1971 1976 1979 1984 Plasma processed globally for AHF (thousands of liters) ...... 365 1,600 2,750 5,320 AHF units processed (millions)...... 80 400 688 1,330 Domestic consumption: Millions of units ...... 72 300 412 648 Average price (cents/unit) ...... 15 10 10 14 Sales (millions of dollars) ...... 10.8 30 41.2 91 Foreign consumption: Millions of units ...... 8 100 275 682 Average price (cents/unit) ...... 40 30 30 27 Sales (millions of dollars) ...... 3.2 30 82.5 184 Total AHF sales (million of dollars) ...... 14 60 123.9 275 SOURCE: Office of Technology Assessment, based on data and estimates in M. M. Le Coney, “Who Needs Plasma?” Plasma Ouarterfy 2:68-93, September 19S0. 134 ● Commercial Biotechnology: An International Analysis

Efforts to produce AHF with biotechnology are ● Baxter Travenol Laboratories (LJ.S.)/Genetics underway. The gene for factor IX has recently Institute (U.S.), been cloned and expressed in E. coli (18,61). The ● Biogen S.A. (Switzerland)fleijin (Japan), availability of factor IX produced by rDNA tech- ● Speywood Laboratories (U.K.)/Katherine Dor- nology facilitates studies concerning the genetic mandy Hemophilia Centre and the Royal Free basis of type B hemophilia (e.g., 35). However, Hospital of London (U.K. )/Genentech (U.S.), quantities of factor IX necessary to treat the rela- and tively uncommon type B hemophilia are adequate- ● Connaught Laboratories (Canada)/Canadian ly provided by whole blood fractionation, and the Government. rDNA product is not now a competing alternative. Significantly stronger medical and commercial Thrombolytic and fibrinolytic reasons motivate efforts to clone factor VIII genes, enzymes since the majority of hemophiliacs are type A. At Thrombosis, the blockage of blood vessels, is present, difficult problems surround factor VIII the leading cause of death in industrialized na- gene cloning. Not only is factor VIII present in tions. Blood clots in the vessels that supply the low concentrations in plasma, making its isolation heart (coronary heart disease), brain (stroke), or and purification difficult, but this molecule is an lungs (pulmonary embolism) account for more extremely large and labile glycoprotein (over than half of all deaths in the Western Hemisphere. 300,000 molecular weight, about 20 times the size of Ifn). Recent progress in factor VIII research in- The search for substances that dissolve blood cludes development of MAbs to aid in AHF isola- clots is a major undertaking of the pharmaceutical tion (86,132) and localization of AHF-producing industry. At present, the most popular com- cells in the liver (134). pounds are thrombolytic and fibrinolytic enzymes. These substances initiate the dissolution The rDNA production of factor VIII is an elusive process by converting plasminogen, a plasma pro- goal, but the implications of success are substan- tein, into plasmin, which then attacks fibrin, the tial. Apart from providing more economic treat- protein that comprises most of the blood clot. ment for hemophiliacs, results of factor VIII cloning may lead to a better understanding of the The two most widely used thrombolytic en- most common type of hemophilia and prove use- zymes are streptokinase and urokinase. Strep- ful for prenatal screening for the disease. tokinase is manufactured from colonies of Strep- tomyces bacteria, while urokinase is obtained Biosynthetic AHF may lower costs of treatment either from cultured human kidney tissue or from for the expanding population of hemophiliacs human urine. Recent improvements in large~cale throughout the world. Furthermore, if the pro- cell culture techniques and purification methods duction of HSA from rDNA technology proves (including the use of MAbs for the purification competitive with fractionation, the need to proof protein) now yield good quantities of throm- duce AHF with rDNA may be paramount, since bolytic enzymes (57). Despite the great usefulness AHF is copurified with HSA from plasma. * of these enzymes, however, several problems Research laboratories working towards AHF mi- diminish their clinical value. In prolonged therapy crobial biosynthesis include the following (12,128): with streptokinase, chances of allergic reactions arise. In addition, streptokinase and urokinase ap- ● Armour Pharmaceutical (U. S.)/Scripps Clinic pear to act nonspecifically throughout the body, and Research Foundation (U.S.), thus raising risks of internal hemorrhaging in patients. To circumvent this risk, carefully placed ● The price of factor VIII controls the price of serum albumin (64). catheters must be used to deliver the enzyme to The worldwide growth rate for AHF, about 14 percent per year its target. Finally, high costs of manufacturing and (64), is twice the growth rate of HSA. Thus, any major shift of HSA therapy also restrain more widespread use (strep- production to rDNA technolo~ with a concomitant loss of AHF production may drive the price of AHF (produced from fractionation) tokinase treatment costs $275, while urokinase to higher levels. costs about $3,000 per patient) (57). Because of Ch. 5—Pharmaceuticals 135 these problems, alternative thrombolytic enzymes of sugar residues found on native tPA remain to and more economic production methods are be- be answered. ing sought. At present, the extent to which thrombolytic A group of fibrinolytic enzymes called tissue enzymes are used by different countries varies plasminogen activators (tPAs) may solve some of substantially. German and Japanese physicians the problems associated with streptokinase and prescribe streptokinase and urokinase extensive- urokinase. Although tPAs are generally not well ly, often in conjunction with cancer chemother- characterized and are only available in limited apy (on the premise that fibrin shields tumors quantities at present, they appear to work specif- from drugs and the body’s immune defenses and ically at blood clots over a prolonged time (59), hence must be removed). American medical prac- reducing both the risks of hemorrhage and the tices, on the other hand, discourage the use of doses necessary for thrornboiysis, thus lowering streptokinase and urokinase because of the prob- costs of treatment. lems mentioned earlier. Thus, the annual market for thrombolytic enzymes in the United States Advances in culturing tPA-secreting cells and represents a modest $8 million, whereas the an- isolating tPA using MAbs indicate that manufac- nual market for urokinase in Japan, where it is turing costs may be reduced in the future. More- the seventh largest selling drug, represents $150 over, Genentech, in collaboration with investiga- million (57). tors at the University of Lueven (Belgium), recent- The widespread sponsorship of tPA projects by ly succeeded in cloning the gene that produces Japanese companies, as shown in table 23, reflects tPA (108), and a number of other companies are these national differences in thrombolytic enzyme working to produce tPA from rDNA systems (see use. In addition to underwriting clinical testing table 23). Cloned genes in bacteria or yeast may and marketing costs of enzymes produced from provide a means for economically producing large cultured cells, Japanese companies such as Green quantities of tPA. The biochemical effectiveness Cross are active in sponsoring tPA production and commercial viability of rDNA-produced tPAs using rDNA techniques. remain to be demonstrated. In particular, questions concerning the stability of the cloned genes The development of tPA illustrates biotechnolo- in bacterial strains, scale-up costs, and importance gy’s role in providing new pharmaceutical agents.

Table 23.-Thrombolytic and Fibrinolytic Enzymes: Companies Involved in Development and Marketing

Protein Company Project description Streptokinase ...... Hoechst-Roussel (F. R. G.) Production from bacteria KabiVitrum (Sweden) Production from bacteria Urokinase ...... Abbott Laboratories (U. S.) Extraction from cultured kidney cells Genex (U. S.)lMitsui Toatsu Chemicals, Inc. Production from rDNA (Japan) Genentech (U. S.)/Grunenthal (F. R.G.) Production from rDNA Human tissue plasminogen activator ...... GenentechlUniversity of Leuven (Belgium)l Production from rDNA Mitsubishi Chemical Industries, Inc. (Japan)lKyowa Hakko Kogyo (Japan) Biogen S.A. (Switz.)lFujtsawa (Japan) Production from rDNA Integrated Genetics (U.S,)I Production from rDNA Toyobo Pharmaceutical (Japan) Chiron (U. S.) Production from rDNA Collaborative Resarch (U.S.)/ Extraction from cultured kidney cells Green Cross (Japan) Anticoagulant and fibrinolytic agents ., . . . . . Genentech/Yamanouchi Ltd. (Japan) Development of microbial strains that Genex/Yamanouchi Ltd. produce a fibrinolytic agent

SOURCE: Office of Technology Assessment. 136 . Commercial Biotechnology: An International Analysis

Through the use of improved bioprocess systems, Given successful economic development of tPA purification methods, and rDNA technology, large (i.e., at one-half the cost of urokinase production) quantities of scarce materials are becoming avail- and improved mode of action, industry experts able for study, possibly leading to substantial estimate that U.S. markets for tPA could climb changes in medical practices in the United States. swiftly to $125 million per year (57).

Vaccines

The combined techniques of biotechnology find tenuated vaccines contain the complete genetic perhaps no greater promise for medicine than in material of the pathogen, If the pathogen is not the preparation of vaccines and other pharmaceu- killed or attenuated completely, the vaccine itself tical products to combat infectious diseases. There may be capable of causing the disease it is in- are several approaches to disease control using tended to prevent. Another problem with conven- biotechnology, including the use of rDNA and tional vaccines is that, in many instances, they do MAb technology, artificial vaccine synthesis, and not immunize the recipient against all of the var- protoplasm fusion to prepare novel antibiotics. ious strains of the pathogen. Finally, many conventional vaccines are not stable enough for use Most vaccines used at present consist of the or- where they may be most needed, as in areas with- ganisms that cause the particular disease that the out refrigeration. vaccine is intended to prevent. These organisms (pathogens) are killed or otherwise treated (’(at- Subunit vaccines—vaccines that contain only tenuated”) in an effort to make them nonvirulent, portions of the pathogens-may solve some of the and the killed or attenuated mixture is then in- problems associated with killed and attenuated jected into the person to be vaccinated. Ideally, vaccines. Subunit vaccines do not contain the the recipient’s immune system responds to the pathogen’s genetic material, and, thus, they can- introduction of the vaccine by producing anti- not themselves cause infection. Furthermore, sub- bodies that bind to particular molecules (antigens) unit vaccines may be more stable for storage and on the surface of the vaccine organism and iden- of greater purity than most conventional vaccines, tifying it for destruction by other components of although these qualities remain to be demon- the immune system. The antibodies produced by strated in most cases. Two new methods are be- the recipient remain in circulation for a period ing developed to prepare subunit vaccines: rDNA of months to years, protecting the recipient technology to produce all or part of a surface pro- against the live pathogen should it be encountered tein molecule of the pathogen and chemical syn- later. Thus, the recipient becomes “immune” to thesis of short polypeptides that represent sur- the disease. Immunity thus induced, since it uses face proteins. Both of these new approaches have the recipient’s immune system for constant sur- the added advantage that subunit vaccine manu- veillance and defense against the disease, is facture does not require large-scale culture of the known as “active immunity.” The administration infectious organism. of foreign antibodies or immune products that themselves protect the recipient from the disease, on the other hand, provides what is known as Viral disease vaccines “passive immunity.” Passive immunization usually Because of the relatively simple, well-under- confers only short-term protection against a dis- stood structure of viruses, the most preeminent ease. biotechnology efforts for the development of new Killed and attenuated vaccines represent one vaccines are focused on viral diseases (51,135). of the highest achievements in medicine. Never- As shown in table 24, biotechnology is being used theless, several problems with these vaccines per- to develop vaccines for influenza types A and B, sist. one substantial problem is that killed and at- herpes, polio, hepatitis A and B, and a number Ch. 5—Pharmaceuticals . 137

Table 24.—Some Current Viral Vaccine Biotechnology Projects

Viral disease Company Project description Influenza virus...... Numerous investigators Improved attenuated strains Numerous investigators Modifications of viral genome through rDNA manipulations Scripps (U. S.) Synthesis of short peptides corresponding to fragments of influenza virus surface proteins Scripps Attachment of viral subunit to larger carrier to evoke broader immune response Polio virus ...... Numerous investigators Modifications of viral genome through rDNA manipulations Hepatitis B virus. . . . Merck (U. S.) Purification of viral particles from blood lnstitut Pasteur Production (France) Chiron Corp (U. S.)lMerck/University of Production of viral surface proteins from Washington, UCSF rDNA in yeast Takeda/Osaka and Hiroshima Universities (Japan) Amgen (US.) Biogen/Green Cross (Japan)Wniversity of Edinburgh Integrated Genetics (U. S.)lConnaught (Canada) Herpes viruses . . . . . Merck Purification of surface glycoprotein from herpes simplex viruses Molecular Genetics (U. S.)lLederle Labs (U. S.) Production of viral proteins in bacteria Institut Merieux (France)Wniversity of Chicago Production of nonpathogenic viruses by the deletion of specific genes SOURCE: Office of Technology Assessment. of other human viral diseases. The two main vaccines made by traditional methods is not yet methods used to prepare subunit vaccines for known, but the need for an effective and inexpen- viral diseases are summarized in figure 13. sive hepatitis B vaccine is great. * Hepatitis B subunit vaccines, in particular, il- Using chemical synthesis, other researchers lustrate the use of biotechnology in vaccine im- have prepared synthetic polypeptides which may provement. Using the rDNA approach, a number be useful as subunit vaccines. These synthetic of groups have cloned genes that encode portions peptides are based on known amino acid se- of the hepatitis B surface antigen (HBsAg) and quences of virus surface proteins. The amino acid have shown that isolated surface antigens behave sequences and their molecular shapes are ana- similarly to the whole virus when used as a vac- lyzed by computer, and peptide sequences that cine (25,74,131,146). Merck (U.S.), which supports are likely to elicit immune responses are defined work done at UCSF and Chiron Corp. (U. S.) and (for review, see 68)). Researchers have synthe- has built an in-house molecular genetics group of nearly 50 scientists since 1978, expects to mar- ● In the United States, there are 80,000 to 100,000 cases of hepatitis ket a hepatitis B vaccine made from rDNA in yeast B and about 1,000 deaths each year. The incidence in some other parts of the world runs 10 times as high. Between 3 and 15 per- by 1987 (44). Biogen S.A. (Switzerland) has suc- cent of healthy blood donors in Western Europe and the United cessfully immunized chimpanzees against hepa- States show serological evidence of past infection, and 0.1 percent titis B using its yeast-grown vaccine, and a license are chronic carriers of the type B virus. In many African and Asian countries the majority of the adult population have been infected, to Biogen’s work with hepatitis vaccines has been and 5 to 10 percent of the population are clinically ill with hepatitis. acquired by Green Cross (Japan). It has been es- A very strong association has recently been demonstrated between timated that Biogen’s hepatitis B vaccine will sell the carrier state of hepatitis and liver cancer. In areas of the world where hepatitis B is endemic, primary liver tumors account for 20 for only $10 to $30 per dose as compared with percent of cancer, in contrast to the 1 percent level of liver tumor $100 per dose for Merck’s vaccine made from incidence in the United States (150). A costly hepatitis B vaccine was virus particles extracted from blood of hepatitis brought to market by Merck in 1982 in the United States. Although not made with new biotechnolo~v, this vaccine consists of natural B carriers (14,71). How well these rDNA-produced subunits—particles of the virus coat protein which are isolated and hepatitis B subunit vaccines will compete with purified from the blood of relatively rare suitable donors (34,44).

25-561 0 - 84 - 10 138 ● Commercial Biotechnology: An International Analysis

Figure 13.—Methods Used to Prepare Subunit Vaccines for Viral Diseases: Recombinant DNA Technology v. Chemical Synthesis

Chemical Synthesis Method

synthesize the /surface protein gene

Extract protein vaccine

IIn the chemlcal synthesis method, proteins that comprise the viral surface are Isolated, often with the use of monoclinal antibodies. The protein sequence is then determined. Based on the sequencing information, large amounts of the Protein or Portions of the Protein are made chemically for use as the vaccine; alternatively, the sequencing information may allow chemical synthesis of the gene that encodes the protein (or a small portion of the protein). This synthetic gene is cloned wa rDNA techniques. In the recombinant DNA method, the gene that encodes the viral surface Protein is Isolated and cloned into an appropriate vector (such as Plasmid), transformed into a host (such as a bacterium or yeast), and the host is grown in large quantities. Formation of the protein by the rDNA and isolation of the protein results in the subunit vaccine.

SOURCE: Office of Technology Assessment. Ch. 5—Pharmaceuticals ● 139 sized both linear and cyclic peptides that stimulate is currently being tested in chimpanzees. The in- immunity similar to the complete virus for hepa- vestigators are doing further work on the use of titis B and influenza (23)46,66) cf, 68). Preliminary this live virus vector system for other vaccines. evidence indicates that a synthetic influenza sub- Such live vaccines may prove useful after a single, unit vaccine adequately protects animals against easily administered dose of the vaccine where several strains of the live virus, but more tests subunit vaccines fall short in achieving a suffi- must be done before synthetic subunit vaccines cient immune response. are ready for clinical evaluation. If synthetic vaccines prove effective, they may Bacterial disease vaccines be produced in rDNA systems by cloning the DNA Unlike viruses, whose surfaces are relatively corresponding to the synthetic polypeptide and simple and offer protein targets to which vaccines producing the vaccine using microbial bioproc- can be directed, bacteria and other microbial esses. Fairly small amounts of protein may be re- pathogens have complex, dynamic surfaces which quired, with a few kilograms sufficing for millions in many cases defy vaccine development. Most of vaccine doses. However, it remains to be seen bacterial surfaces are composed mainly of lipids whether economics favor development of micro- and polysaccharides, which are molecules derived bial bioprocesses over chemical synthesis. On the from complex biosynthetic pathways determined other hand, multivalent vaccines (vaccines that by many genes. Hence, bacteria are not as ame- protect against several diseases) may be created nable as viruses to genetic manipulation tech- by combining a number of peptide sequences to niques used in subunit vaccine technology. elicit responses to several different antigens and thus broaden the range of synthetic subunit vac- Biotechnology is being used in several ways to cines. Such multivalent vaccines may be more eco- create novel vaccines against bacterial infections, nomically produced using biotechnology. but the results with bacterial vaccines at present are not as extensive as those with viral vaccines. In order for both synthetic and rDNA-produced It is necessary first to identify targets that might subunit vaccines to be more effective, better im- be suitable for vaccine development. On the sur- munizing systems must be devised to promote ac- face of some bacteria, such as Gonococci and tive immunity. Live (attenuated) vaccines prolif- several pathogenic E. coli strains, for example, erate within the body, thus sustaining immune there are certain proteins which perform func- responses that are necessary for long-term pro- tions essential to the disease mechanisms. Though tection. On the other hand, subunit vaccines are subunit vaccine technology has not been widely destroyed rapidly. Delivery systems are being for- explored in bacteria, these proteins may provide mulated by coupling the subunit proteins with targets for subunit vaccines comparable to those larger carrier proteins that evoke better immune being made against viruses. responses (e.g., 2), and by encapsulating subunit vaccines in lipid packages that allow the vaccine The genes responsible for a bacterium’s viru- to diffuse slowly throughout the body and pro- lence can be genetically manipulated to create long exposure (92). viable, harmless mutants. These mutant bacteria, which outwardly resemble the pathogenic form, A potential live virus vector system is being can be introduced into the body, where they elicit investigated using vaccinia virus, a virus not the production of antibodies against both mutant pathogenic to humans (131). DNA encoding HBsAg and pathogenic bacteria. * Such mutant bacteria is joined to DNA sequences (“vaccinia virus pro- might be used to colonize body spaces prone to moters”) which control transcription of the HBsAg infection and to provide long-lasting immunity DNA. This rDNA construct is inserted into vac- (51). cinia virus, and a “living” vaccine that synthesizes and secretes the HBsAg is produced. Rabbits re- ● As discussed in Chapter 6: Agriculture, such bacterial vaccines are currently being introduced to the animal agriculture industry ceiving injections of this live vaccine rapidly pro- to treat colibacillosis, a common bacterial infection in newborn farm duce antibodies against HBsAg, and the vaccine animals. 140 ● Commercial Biotechnology: An International Analysis

A similar method involves using mutation/selec- hibit even more extraordinary degrees of com- tion procedures on pathogenic bacteria to select plexity than bacteria, however, and lack of basic bacteria that die after a short period of time in knowledge restrains new vaccine development in the body. For instance, a mutant of the typhoid- virtually all cases (51). As basic knowledge ac- causing bacterium, Sahnonella typhi”, type Ty-21a, crues, immunization against diseases caused by accumulates toxic amounts of galactose during parasites may eventually be the greatest break- growth and causes its own death. This mutant through in health care provided by biotech- can proliferate within the body for a short time, nology. * and its presence elicits an immune response that Progress in developing malaria vaccines ex- protects against the disease. The Swiss Serum and emplify efforts to realize biotechnology’s poten- Vaccine Institute, in association with the French tial in combating parasitic diseases. Because of the Institut Pasteur, has developed an oral typhoid lack of a vaccine, combined with parasitic resist- vaccine of this type. ance to the drugs used in malaria control (e.g., Other workers have taken this typhoid vaccine chloroquine), malaria remains the most prevalent strain and incorporated a plasmid with a gene en- infectious disease in the world.** Historically, the coding a protein normally produced by Shige]la search for malaria vaccines has been hampered sonnei, one of the bacteria which cause dysen- by difficulties in growing the malarial parasite tery. In mice, this “hybrid” strain elicits immune Plasnmdium (which is transmitted by female responses that protect against both the dysentery Anopheles mosquitoes) in the laboratory. Other and typhoid organisms. Thus, it may be possible difficulties stem from Plasmodium's complex life- to construct a multipurpose oral, attenuated ty - cycle and the apparent ability of the parasite to phoiddysentery vaccine organism that will pro- evade the body’s immune system. In addition, vac- duce “protective” antigens for both dysentery and cines based on killed, injected whole Plasmocfia typhoid (51). presently require the use of powerful adjuvants (additional components of vaccines that boost im- Parasitic disease vaccines mune responses) in test animals which are too strong for human use. Diseases caused by parasites, including protozoa, pose major barriers to acceptable health The complexity of Plasmodium's lifecycle hints standards for millions of people throughout the at the difficulties in developing a vaccine that pro- world (see table 25). Many of these organisms ex- tects against all forms of malaria. As shown in figure 14, the sporozoites, injected into the blood

● The U.S. National Academy of Sciences and the Agency for In- Table 25.—Estimated Worldwide Populations ternational Development convened meetings in July and December Affected by Parasitic Diseases in 1971 1982 on the applications of biotechnolo~ most significant for the developing world. Recommendations were made with respect to Diseased population research priorities on the basis of applicability of the new technol- Type of Parasite (in millions) ogies and other considerations (88,145). The only human parasitic diseases that ranked among the top priorities for development at Intestinal parasites: this time were leishmaniasis and malaria. Leishmaniasis is a family Ascariasis ...... 650 of diseases, caused by sandfly-transmitted protozoa, which is con- Ancyclostomiasis...... 450 sidered to have grossly underestimated public health importance Amoebiasis ...... 350 in South America, Africa, and the Middle East. It was identified for Trichuriasis ...... 350 special attention because there is evidence that immunity can be Periocular parasites: developed by people in sandfly-infested areas over a period of time. Trachoma...... Greater than 400 An understanding of this immunity may provide ways to prevent Systemic parasites: leishmaniasis. Filariasis ...... 250 ● ● There are now an estimated 300 million malaria cases per year Schistosomiasis...... 180 and a very high mortality rate for children (I million deatha in Africa Malaria...... 100 N.A.a alone per year) (158). About 850 million people live in areas where Leishmaniasis...... malaria continues to be transmitted despite activities to control it. Try~anosomiasis ...... 7 An additional 345 million people reside in areas with little or no aN,A. = Information not available. active malaria control efforts. Over half of the health budget of In- SOURCE: Office of Technology Assessment, based on data from World Health dia is spent on malaria control. Resistance to both drugs and insec- Organization, Repori for the Special Programme for Research and Trahr- ticides and the number of new malaria cases are all increasing at ing In Troplcai Diseases, Geneva, 1976. alarming rates (155). No vaccine is currently available. Ch. 5—Pharmaceuticals . 141

:igure 14.-The Lifecycle of PlasmodIum, the Malarial organism: Possibilities for Development of Vaccines for Malaria The malarial infection begins when a person is bitten by an Anopheles mosquito that bears Plasmodia. Sporoloites (1) are injected into the bloodstream, where they may remain for only 30 minutes before they infect liver cells. Within the liver cells, each sporozoite divides into six to twenty-four merololtes, the next Palsmodlum life-stage. MerOloltes burst trom the infected liver cell (2) destroying It, and enter the blood stream, where they infect red blood cells and prOliferate. In subsequent waves of Infection, meroloites burst from the red blood cells and spread to other red blood cells. Red blood cells infected with merozoites may produce new cell surface molecules which allow them to bind to blood vessel walls (3). Some of the merozoites go on to become gametophytes, the next life-stage (4}. These gametophytes are picked up by another Anopheles mosquito in another bite; they reproduce within the mosquito and form sporozoites, which may be injected into another person to begin the cycle anew.

Vaccine possibilities: 1. Anti-Sporozoite-Vaccines against the sporozoite, whether antibodies that react with the sporozoite or peptides that mimic the sporozoite surface would probably be ineffective since they must kill every sporozoite to prevent infection. 2. Anti-Merozoite-Both passive (antibody) and active (subunit) vaccines against the merozoite might be effective in preventing malaria since the merozoite is often exposed to circulation and because the merozoite is most directly responsible for ongoing malaria infection. 3. Anti-Maiafia·ififecfed fed blood cell-Because red blood celts infected with maiozoites may be differentiated by ne\AJ surface molecu!es, vaccines (particularly antibodieS) against these surface molecules may help in reducing the spread of merozoites to other cells. 4. Anti-Gamefocyte-Vaccines against the gametocyte would reduce the transmission of malaria since they would lower the number of gametocytes carried by mosquitoes, but such vaccines would not reduce the severity of the disease in its earlier stages.

SOURCE: Office of Technology Assessment. —

142 ● Commercial Biotechnology: An International Analysis

stream during the mosquito bite, infect liver cells technology are underway (54). These rDNA-pro- to initiate infection. Large numbers of merozoites, duced surface antigens may serve as protective the next life-stage, proliferate within the liver cells malarial vaccines. and, bursting into the blood stream, successive- NYU’s “antisporozoite vaccine” has been the ly infect large numbers of red blood cells. Some subject of a widely publicized dispute between of the merozoites remain blood-borne; other NYU; Gmentech (U.S.) (the proposed manufactur- merozoites develop into gametocytes, which are er of the vaccine); and the World Health Organiza- picked up by mosquitoes, reproduce to form new tion (WHO) (which, with the U.S. Agency for In- sporozoites, and begin the cycle anew. Additional- ternational Development, sponsored NYU’s basic ly, Plasmodium has the ability to evade the im- research with the standard provision that all mune system over time. WHO-funded work must be “publicly accessi- Since the pathology of malaria is caused large- ble’’). * When it became clear that Genentech ly by Plasmodia in the merozoite stage, the would not obtain an exclusive license to commer- merozoite appears to be the best target for vac- cialize the vaccine, the company bowed out of ne- cines. Even one sporozoite reaching a liver cell gotiations. At present, no other arrangements to is capable of causing malaria, so vaccines against pursue large-scale rDNA production of the spor- this stage must kill every sporozoite to be effec- ozoite antigen have been made. tive. The gametocyte itself is not pathogenic; an As mentioned earlier, a vaccine effective against antigametocyte vaccine, therefore, would serve only the sporozoite stage of a single Plasmodium only to reduce the transmission of the disease. species may not prove to be fully protective Many investigators (particularly in the United against malaria. Ultimately, malaria vaccines may States, the United Kingdom, and Switzerland) are include a variety of stage-specific antigens that developing MAbs that may be useful in malaria result in combined sporozoite and merozoite neu- research (153). Antisporozoite and antimerozoite tralization, accelerated removal of infected red MAbs that inhibit the in vitro multiplication of blood cells, and prevention of gametocyte trans- Wasmodia and antigametocyte MAbs that inac- mission to the mosquito (158). The delay of fur- tivate male gametes have been developed (153). ther development of NYU’s potential milestone Also, MAbs that destroy merozoite-infected red sporozoite vaccine imposed by the turmoil over blood cells have been developed. Such MAbs may commercialization, however, has raised concern prove useful as vaccines that confer passive im- that, in the future, profit motivations may delay munity (19,87,160). the development of urgently needed pharmaceutical products made possible by biotechnology The most promising use of such MAbs is in the (7’5,90). Despite their promise, the development isolation of surface antigens which might be used of effective malarml“ vaccines appears to be several for the development of subunit malarial vaccines. years away. Though quantities of surface antigens obtained by MAb precipitation are too small for use as vac- For a variety of reasons, biotechnology holds cines, these purified antigens provide a starting less promise for vaccine solutions for other par- point for developing other MAbs with an even asitic diseases than for malaria. For most of the greater affinity for Plasmodium for use as passive parasites, there are formidable problems related vaccines. They may also provide a starting point to culture of the pathogenic organisms and es- for using rDNA technology to isolate large tablishment of meaningful models of the human amounts of antigen. Workers at New York Univer- disease in animals. For example, the parasite that sity (NYU) recently reported the successful clon- causes schistosomiasis, a disease that ranks sec- ing and expression in E. COLZ” of a surface antigen ond only to malaria as a cause of morbidity and from the sporozoite stage of one species of Plas- modium using rDNA technology (28), and similar “A similar situation aroae with regard to the cloning of several more malarial surface antigena at Walter and Eliza Hall Institute efforts to obtain quantities of antigen from other of Medical Research in Australia. This research was also partially Plasmodium species and life stages using rDNA funded by WHO (110). Ch. 5—Pharmaceuticals . 143 mortality from parasitic organisms, is difficult to Much basic research on parasites is needed in culture in the laboratory. The ability of this para- order to develop effective antiparasite vaccines site to alter its susceptibility to host immunological using rDNA technology. The techniques of bio- responses and the difficulty in obtaining sufficient technology have accelerated the study of parasitic quantities of an antigen have hampered efforts diseases, but urgently needed pharmaceutical ap- to develop a vaccine for schistosomiasis. placations in this area are still in early stages.

Antibiotics

For the past three decades, antimicrobial agents ● Recombinant DNA technology. Gene coding for the treatment of infectious diseases caused for enzymes and other metabolic proteins by bacteria have consistently led worldwide sales can be cloned into antibiotic-producing of prescription pharmaceuticals. Novel antibiotics, microorganisms to add steps to existing produced mainly by traditional microbial bioproc- biosynthetic pathways that improve products esses, continue to be developed and introduced or manufacturing processes. Ongoing re- each year (especially in Japan in recent years). search includes: 1) the rDNA-mediated trans- Methods of biotechnology such as the following fer of acyltransferase genes among species offer strong innovative possibilities for produc- of bacteria to obtain solvent+xtractable ing new antibiotics: cephalosporins (149); 2) the combination of genes via rDNA technology and transforma- ● “Sexual’ ’recombination. A technique known tion to obtain direct, efficient synthesis of the as protoplasm fusion, whereby the contents antibiotic amikacin (149); and 3) Eli Lilly’s of two micro-organisms are fused to give one utilization of rDNA technology to improve the cell, enables researchers to induce rapid im- production of the antibiotic tylosin (4). provements in bacterial germplasms. Proto- plasm fusion allows the rejuvenation of strains The combination of new and traditional tech- of industrial microbes that have lost vigor as nology in the pharmaceutical industry holds tre- a result of mutation and selection procedures mendous potential for improvement of micro- that have been performed to increase their organisms used in antibiotic production and the antibiotic productivity. The fusion of micro- isolation of new antibiotic products. Japanese organisms is beginning to yield new (hybrid) pharmaceutical companies, with their extensive antibiotics (22). * bioprocessing resources, are placing great emphasis on new antibiotic research (114). This emphasis ● Through protoplasm fusion and selection, researchers at Bristol- Myers (U. S.) developed an improved method of producing purer may be due to the fact that antibiotics comprise penicillins that has accounted for 8 percent per year improvement 25 percent of (1981) ethical drug sales in Japan in penicillin productivity over the past 4 years. Other genetic ap- (compared to about 8 percent in the united States) proaches produced 60 to 70 percent improvements in yields of cephalosporina (a class of antibiotics) in the same period. Genetic and that at least 28 percent of the antibiotic sales research by Pfizer, Inc., at laboratories in the United Kingdom and in Japan now arise from antibiotics produced in United States, have gradually lowered costs of producing oxytetra- the United States (120,125). cycline, a long eatabliahed antibiotic, to coats similar to bulk chemical production, to give prices of several dollars per kilogram (73).

Monoclinal antibodies

MAb technology currently leads other forms of largely due to MAb in vitro diagnostic products. biotechnology in commercial use, as measured by In vitro diagnostic products do not have to under- numbers of products on the market. Its lead is go the same rigorous safety testing required of 144 Commercial Biotechnology: An International Analysis pharmaceuticals used within the body (in vivo). * chlamydia has been produced by Genetic Sys- The increasing number of MAb-based products tems Corp. (U.S.), in collaboration with Syva also stems from advances in knowledge about hy - Co. (U. S.) and the University of Washington bridoma technology and antibody functions. Fur- (93), and MAb-based diagnostic kits for all ther refinements of MAb technology will allow three types of infections maybe used in the MAbs to be used in numerous applications in the clinic in the near future (38,93 ).* pharmaceutical industry, including in vivo diag- ● Diagnosis of hepatitis B and other viral infec- nosis, prophylaxis, and therapy. tions. MAb-based diagnosis of hepatitis B infection is reportedly 100 times more sensitive Hybridomas (MAb-secreting cell lines) derived than conventional diagnosis based on poly - from human (rather than rodent) cells have only clonal antibodies (6,151). The MAb diagnostic recently become available for use in the pharma- product, developed by Centocor (U. S.) with ceutical industry. The use of human-cell-derived Massachusetts General Hospital, may benefit MAbs in in vivo pharmaceutical applications the blood banking industry, where unambig- should give fewer adverse immune reactions than uous screening for hepatitis is crucial. MAbs the use of mouse-derived MAbs. Though the prepare also proving satisfactory for diagnosing aration of human hybridomas is in its technical rotavirus and cytomegalovirus infections and infancy, as described in Chapter 3: The Technol- for distinguishing between strains of influen- ogies, advances in producing MAbs from human za viruses that have until now been indistin- cell lines will encourage MAb-based applications guishable by conventional methods (80). for new and replacement medicines. ● Diagnosis of bacterial infections. The recu- peration of hospitalized patients is often jeop- Diagnostic products ardized by infections with bacteria such as Pseudomonas aerouginosa, and diagnosis IN VITRO DIAGNOSTIC PRODUCTS may take several days before treatment is be- The roster of MAb-based in vitro diagnostic gun. Also, group B streptococcal infections products is growing rapidly. Table 26 provides are the most common serious infections of a list of the products approved for use in the newborn infants in the United States. Prior United States as of June 1983.** MAb technology to availability of MAbs, there was little ap- is being used to make both novel diagnostic prod- plication of immunoassay to the diagnosis ucts and products to replace conventional, poly - of bacterial infections. Genetic Systems, in a clonal diagnostic products. Although the compet- joint venture with Cutter Laboratories (U. S.) itive advantages of MAb products must ultimate- and its parent company Bayer (F. R.G.), is de- ly be demonstrated in the marketplace, such prod- veloping diagnostic and therapeutic MAb ucts may prove superior to traditional methods products for Pseudomonas infections (124). used to identify infectious diseases, hormonal Researchers at the University of Pennsylvania changes, or the presence of cancer. report that diagnosis times for streptococcal Recently developed applications of MAbs for in vitro diagnosis include the following: *New infections of gonorrhea, chlamydia, and herpes simplex virus type 2 (HSV2) are estimated to exceed 15 million per year in ● Diagnosis of human venereal diseases. Con- the United States. Approximately 1 million new cases of gonorrhea are reported annually to the U.S. Centers for Disease Control. It ventional diagnosis of several common vene- is estimated that the true prevalence of gonorrhea in the United real diseases—gonorrhea, chlamydia, and States is 3 million cases annually. Chlamydia infections are not re- herpes simplex virus—is hampered by time- ported and their prevalence can only be estimated. Clinically, the infection rate is estimated to be three to four times that of gonor- consuming cell culture requirements. A rhea (approximately 10 million cases annually in the United States). speedy, sensitive MAb-based diagnostic kit for Separately or in combination, chlamydia and gonorrhea are responsible for an estimated 200,000 to 300,000 cases of pelvic inflamma- ● The regulation of pharmaceutical products in the United States tory disease per year resulting in infertility in 50,000 to 100,000 and other countries is discussed in Chapter IS: Health, Safety, and women. HSV2 infections are becoming increasingly common, with Environmental Regulation. approximately 200,000 to 300,000 new cases occurring each year. ● “A longer list of approved MAb products for research and diag- These new cases accrue on an estimated base of 10 million individ- nostic use appears in Monodonal Antibodies in Cliru”cal Mml”cine (77). uals who are already infected (38). Ch. 5—Pharrnaceuticals ● 145

Table 26.—In Vitro Monocionai Antibody Diagnostic Products Approved in the United States’

Manufacturer Analyte Date approved Hybritech, Inc...... lgE 5/29/81 Hybritech, Inc...... PAP 9/1/81 Hybritech, Inc...... HCG 10I13I81 Hybritech, Inc...... T Cell 7126J81 Hybritech, Inc...... Ferritin 10I19I81 Abbott ...... PAP 1}19182 Abbott ...... CEA 313182 Abbott ...... CEA 3/29/82 Ortholil ...... OKT-11 416/82 Centocor ...... Anti-Rabies 4116182 Hybritech, Inc...... HCG 4/23/82 Hybritech, Inc...... HGH 618182 Mallinckrodt, inc...... Total Ti 6/9/82 Hybritech, Inc...... Prolactin 6I1OI82 Clinical Assays...... ’’sl-lgE 6118/82 Biogenex Laboratories ...... @-HCG 7/13/82 Hybritech, Inc...... HCG (EIA) 7122182 New Horizons ...... Gonogen 8/4/82 Monoclinal Antibodies, Inc. ....UCG 9/24/82 Hybritech, inc...... TSH 10/8/82 Afiergenefics (Div.of Axonics). ..lgFast@t@ (Specific lgE) 11/10/82 Becton Dickinson&Co...... T4 1217182 Syva Co...... Chlamydia 12I1OI82 Miles Laboratories . . . .., ...... Gentamicin 12/14/82 Allergenetics (Div.of Axonics). ..TotallgFASTST 1113/83 Carter-Wallace, inc...... @HCG 1/20/83 Hybritech, Inc...... Tandem-E@ Ferritin 2/24183 Ortho ...... Rubefia 3/15/83 PCL-RIA ...... HCG 4/5/83 Quidel Home...... HCGb 4/14/83 Ventrex Labs, Inc...... Enzyme TSH 4126/83 Quidel Home...... HCGb 4/26183 Diagnon ...... Ferritin 4/28/83 BTC Diagnostics ...... HCG 4/28/83 Immunlok...... Chlamydia 4129183 Monoclinal Antibodies ...... HCG 5125/83

Ventrex LabsV inc...... ,...... lgE (total) 5125183 Organon Inc...... HCG 5/26/83 BioGenex Laboratories ...... RIAGen~-HCGRIA Kit 5/26/83 Micromedia System, Inc...... Micromedia @-HCG RIA 6/1/83 Organon Inc...... Neo-Presmosticon Duoclon Tube Kit 6/3/83 aAsof61141S3. %heeekitesreforhorneuae. SOURCE: U.S. Department of Health and Human Services, Food and Drug Administration, National Center for Devices and Radiological Health, 1983.

infections maybe reduced to 2hours using ● Pregnancy testing. Products composed of MAb-based products, Additionally, Becton polyclonalantibodies have long beenusedto Dickinson (U.S.) has introduced a MAb kit detect high levels of human chorionic gonad- that detects the bacteria responsible for men- otropin (hCG) in the blood as an indicator of ingitis infection. The bacterial strains can be pregnancy. Large amounts of antisera are re- detected in 10 minutes, and the company’s quired to circumvent the need for radioac- price for each test is $2 (17). tive isotope labels, which often accompany 146 ● Commercial Biotechnology: An International Analysis

immunoassay. MAb technology is an eco- cases (e.g., prostatic acid prosphatase and nomic means of producing the high quantities CEA), MAbs are used used to detect blood- of antibody required in pregnancy testing. * borne antigens shed by the tumor; in others, Cancer detection. The detection and quanti- the MAb reagents are used to identify tumor tation of indicators related to malignant tu- cells by staining tissue specimens. mors is potentially one of the most important IN VIVO DIAGNOSTIC PRODUCTS applications of immunoassay and MAbs. A great deal of work on tumor markers is Diagnosis of some diseases requires identifica- underway, and a few MAb-based products tion and localization of the disease within the have been approved for marketing. In some body. Antibodies with detectable markers (e.g., radioactive chemicals) provide highly specific means for accomplishing these ends. Antibodies injected into the body, although used in diagnostic applications, are considered drugs; thus, they require extensive testing prior to approval for marketing. MAb technology provides quantities of antibodies for testing, and MAbs are being evaluated in an increasing number of in vivo diagnostic appli- Ch. 5—Pharmaceuticals ● 147 cations. one application involves radioisotope- ing to MAbs that neutralize the virus and are labeled MAbs that bind to cardiac myosin (a ma- effective as a passive vaccine. Infants born to jor heart muscle protein) to locate and character- women with hepatitis B apparently benefit from ize myocardial infarcts (the most common type treatment with human serum that contains anti- of “heart attack”) (55,56). Another application in- bodies against hepatitis B (78), and such serum volves the use of radioisotope-labeled MAbs that is used prophylactically in many parts of the bind to antigens on cancer cells, but results to date world. MAb technology provides a means for have not been encouraging, As yet, no antigen producing large quantities of antibodies against that occurs on cancer cells exclusively has been hepatitis B. found. A few clinical trials of in vivo diagnosis Scientists at Genetic Systems have produced hu- using MAbs have been undertaken, but experts man MAbs against Pseudomonas, Klebsiella, and agree that clinically useful products will require E. coli, all gram negative bacteria which account 5 or more years of further development (48). Suc- for serious problems in patients with depressed cess in this work could provide useful informa- immune system function (83). Clinical trials of tion prior to and following surgery. these MAbs as passive vaccines are underway. In certain types of malignancies, such as plas- Trials of MAbdirected cytotoxic agents against macytomas whose surface immunoglobulins are tumor cells indicate that while cytotoxic agents homogeneous and particular to the tumor, MAbs such as cobra venom factor can be made to direct can be made against these proteins and then used their activity in a very specific fashion against as diagnostic or therapeutic agents. The therapeu- their targets, problems with finding cancer-spe- tic approach has been used in clinical trials for cific antigens noted earlier restrain such applica- some types of cancer with encouraging results tions of MAbs (36,60,147,148,161). other prob- (20,109). lems associated with the use of MAbs in either chemotoxic or direct anticancer therapy include Preventive and therapeutic products the following: Applications of MAbs to prevent or treat dis- ● toxicity problems associated with rapid ad- eases are being pursued on two fronts: 1) administration of antibodies, ministration of MAbs as passive vaccines to pro- ● cancer defense mechanisms that apparently tect against specific diseases, and 2) coupling involve shielding of target antigens by tumor cytotoxic agents (e.g., diptheria toxin, ricin, or cells (109), cobra venom) to MAbs that direct the agents to ● the difficulty of getting the cytotoxic agents diseased cells (7). inside the tumor cells, and ● Much of the technology being developed that the difficulty of getting the agent to the ma- uses MAbs as diagnostic reagents may lead to de- jority of cells of a solid tumor. velopment of MAb-based (passive) vaccines. This MAbs will undoubtedly play a major role in the is especially true in the case of the viral diseases pharmaceutical industry in the future, both as hepatitis B, herpes, and cytomegalovirus. Until products and reagents for pharmaceutical re- recently, no cell culture system for hepatitis B has search. R&D in the use of MAbsas pharmaceuti- been available; however, a human liver tumor has cals is proceeding rapidly in the United States, been adapted to cell culture, and these tumor cells where several MAb-based biotechnology compa- secrete the HBsAg (23). The availability of this nies have emerged, in the United Kingdom, where HBsAg may make MAb preparation possible, lead- MAb technology was invented, and in Japan. 148 . Commercial Biotechnology: An International Analysis

DNA hybridization probes

DNA ‘(hybridization” occurs when two single potential to be more sensitive than radioactive strands of DNA join to reform the double helix probes (70). 3: The Technologies). (see Chapter The DNA Nonradioactively labeled DNA is stable and safe strands must have exact, corresponding se- to handle, so these probes can be prepared in quences of nucleotide bases for hybridization to large (manufacturer’s level) quantities and stored occur; thus, a given strand can hybridize only for long periods of time. Almost any given short with its complementary strand. DNA fragment can now be chemically synthesized DNA hybridization is a powerful tool in molec- for use as a probe rather than isolating the frag- ular biology. Radioactive phosphorus is commonly ment from a natural source. Another method of incorporated into one of the DNA strands, the preparing DNA for use as probes is the isolation “probe,” so that the hybridization process can be of DNA fragments made by restriction enzymes. followed using the radioactive label. DNA hybridi- Several companies (e.g., Applied Biosystems (U.S.), zation is used to identify and isolate for further University Genetics (U.S.)) are working toward study particular DNA sequences (and cells that producing a large repertoire of DNA fragments bear this DNA). DNA hybridization is also used for use as probes. to determine where certain DNA sequences are The ready availability of DNA probes and the located on chromosomes. In addition, DNA probes convenience of nonradioactive labeling is likely are being tested as reagents in clinical medicine. to encourage widespread use of DNA hybridiza- Probe DNA obtained from a pathogenic organism tion probes in the near future. While many uses such as a virus, for example, can be used to iden- for DNA probes exist in basic research, developers tify the presence of that virus within human cells, such as Enzo Biochemical (U. S.) and Cetus Corp. thus allowing specific diagnosis based on whether (U. S.) are striving to produce probes for clinical or not the radioactive DNA probe hybridizes with use, where much larger markets exist. Some DNA in the cells. promising clinical applications of DNA probes in- Radioactive labeling of DNA hybridization clude the following: probes raises problems of safety, handling, and ● Diagnosis of infectious diseases. DNA probes disposal that in many cases limit the use of such that identify and differentiate among species probes to the research laboratory. Furthermore, of bacteria that cause diarrheal diseases have since radioactive phosphorus loses its radioactive been made. other DNA probes may prove strength rapidly, only small batches of probes useful in diagnosing human sexually trans- may be practically labeled with radioactivity at mitted diseases. DNA probes to detect infec- any given time. tions of rotavirus, cytomegalovirus, hepatitis, Several methods to label DNA probes with non- herpes, and other viruses are being devel- radioactive substances are emerging. The most oped (29), In some clinical situations, DNA predominant new method, developed and pat- probes may be more useful than MAbs for ented by Dr. David C. Ward and his colleagues diagnosis. at Yale University’s School of Medicine, is to cou- ● Prenatal diagnosis of congenital abnormalities ple chemically the molecule biotin to DNA. Biotin- such as sickle cell anemia (97), beta-thalasse- labeled DNA probes hybridize with the target mia (101), and duchenne muscular dystro- DNA and the hybrids are identified using com- phy. pounds that recognize biotin (62) (see fig. 15). ● Diagnosis of disease susceptibility. Research- With such detection systems, only a few hours ers in several laboratories are developing are required to identify DNA sequences using DNA probes that recognize DNA abnormali- biotin-labeled probes, whereas 1 or more days are ties leading to such conditions as atheroscle- required when radioactive phosphorus labels are rosis, the leading cause of death in the United used. Additionally, biotin-labeled probes have the States (5). Ch. 5—Pharmaceuticals ● 149

Figure 15.—DNA Probe Filter Assay

Sample Deposit organisms Break open organisms Treat the DNA with chemicals on a matrix and isolate the DNA to separate the strands and bind them to the matrix

2 < - - ‘ -

Add labeled DNA probes DNA probes hybridize Wash away extra probes to complementary and add signal molecules DNA in the sample to identify

SOURCE: A. Klausner and T. Wilson, “Gene Detection Technology Opena Doors for Many Industries,” Wotechnology, Auguat 1983; Ron Carboni, N. Y., N. Y., artist.

The success of DNA probes for clinical use prob- ics (in collaboration with the University of Califor- ably depends most on convenience and safe label- nia, San Diego). ing of the DNA. Enzo Biochem (U.S.), capitalizing The development of DNA hybridization probes on Ward’s biotin labeling technique, markets kits represents a challenge to MAb technology for for labeling any given DNA sequence with biotin clinical diagnostic applications. MAb kits for for use as a probe. Enzo has granted Ortho Diag- diagnosing human venereal diseases are now on nostics, a subsidiary of Johnson &Johnson (U.S.), the market, but proponents of DNA hybridization exclusive worldwide marketing rights for its probes claim that DNA hybridization offers an human diagnostic products. Cetus (US,), the ex- even more specific method of diagnosing infec- clusive licensee of a patent that involves diagnos- tions (58). DNA hybridization can be performed tic applications of DNA probes stemming from with a minimum of tissue handling and may be work at the University of Washington, is also em- used on some fixed tissues that are not amenable phasizing diagnostic applications of probes (91). to MAb use. Ultimately, the relative strengths of Other NBFs that have amounced their intentions DNA hybridization probes and other diagnostic to develop commercial diagnostic products based products must be assessed on an individual basis. on DNA probe technology are Amgen (with back- ing by Abbott Laboratories) and Integrated Genet- 150 . commercial Biotechnology: An International Analysis

Commercial aspects of biotechnology in the pharmaceutical industry

The path leading from the concept for a drug in the pharmaceutical industry. In addition to al- to a marketable product is arduous, costly, and lowing improvements in pharmaceuticals them- extremely speculative. Discovery and develop- selves, the adoption of biotechnology may pro- ment costs alone in the United States are esti- vide ways for companies to streamline R&D costs mated to range from $54 million to over $70 mil- for such things as biological screening, pharma- lion per drug (43). Despite the generally low re- cological testing, and clinical evaluation of new turns on the majority of potential drugs, however, products. To a large degree, pharmaceutical de- high investments in pharmaceutical R&D con- velopment involves the correlation of function tinue. With an average of 11.5 percent of annual and molecular structure, and biotechnology may sales invested in R&D (99), the U.S. pharmaceu- aid in making such correlations. Prior knowledge tical industry ranks only below the information about the structure of drug receptor molecules, processing and semiconductor industries in terms as gained partially from gene cloning and DNA of R&D as a percentage of annual sales (16). sequencing research, for example, could supply investigators with information about which struc- During the past 40 years, the pharmaceutical tures of new drugs might be effective in reacting industry has given increasing attention to R&D, with these receptors. This predictive ability may and extensive government regulation of pharma- be increased by the use of computers to select ceutical products has evolved. Despite the increas- appropriate drugs for development, as has been ing R&D commitments, however, recent trends done in the development of synthetic subunit vac- indicate that the rate of innovative return to phar- cines (67,68). maceutical companies throughout the world has declined (89). In short, fewer new drug introduc- The costs of applying biotechnology to the de- tions are emanating from larger research com- velopment of new pharmaceutical entities cannot mitments by the public and industry (40). be readily determined at this time. In most instances, however, biotechnological methods of Reasons most often cited for this decline in the production are probably not yet cost-competitive United States center on the burdens imposed by with conventional methods. With biotechnology, Government legislation, including high costs of as with other new technologies, there are costs obtaining FDA approval, brevity and insufficien- associated with learning the technology that will cy of patent protection for new drugs, sponsor- diminish as facilities and skills are acquired. ship of competition and product undercutting by Achieving the limited goal of supplying MAbs suc- State substitution laws and maximum allowable cessfully to manufacturers of in vitro diagnostic cost programs, and other regulatory factors that products, it has been estimated, will require a act as disincentives for renewed industrial R&D cumulative 3-year investment of $3.5 million to for new drugs. other popular hypotheses for $4 million, and final immunodiagnostic product lower pharmaceutical innovation are decentraliza- development may require 5 to 10 times this tion of R&D resources by pharmaceutical compa- amount (138). The costs of commercial rDNA nies to other industries such as specialty chemi- work are considerably higher. Although expend- cals, cosmetics, and agricultural products, and in- itures are rarely disclosed, indications of the cost creased displacement of R&D in industrial coun- of production for rDNA produced products can tries by R&Din less developed countries, empha- be gleaned from Schering-Plough’s (U.S.) $6 mil- sizing substitution rather than innovation. lion investment in a pilot-scale bioprocessing and purification facility (52), Genentech’s drive to raise Although biotechnology should not be viewed $32 million to sponsor clinical testing and develop- as a panacea for the problem of diminishing in- ment of its rDNA produced tPA (32), and Eli Lilly’s novation in the pharmaceutical industry, it does $60 million investment in facilities to produce hI offer promise in augmenting existing technologies (129). Ch. 5—Pharmaceuticals . 151

The international pharmaceutical market rep- developing new methods such as biotechnology resents a major source of trade between nations, more acceptable in certain nations. In Japan, and foreign sales are comprising increasing per- where blood products are imported because of centages of total sales in the developed countries. cultural barriers to domestic collection, the From 1975 to 1981, for example, U.S. companies’ Government may choose to subsidize the costs control of their domestic market fell to 73 per- for domestic production of HSA by rDNA tech- cent from 85 percent, and Japanese companies’ nology (which is likely to exceed the current price share of their domestic market fell to 69 percent of HSA on the world market) rather than perpet- from 87 percent (120). Foreign sales account for uate the import trade. Such an action might 43 percent of total sales by U.S. ethical drug enable firms involved with HSA biotechnology in manufacturers. West German and Swiss compa- Japan to move more rapidly along the manufac- nies are even more oriented toward foreign mar- turing learning curve with generally applicable kets than their U.S. counterparts (40). technology. Ultimately, this could reverse Japan’s substantial pharmaceutical trade debt with the Many companies conducting biotechnology United States. R&D are considering markets on a global scale, and for that reason, international market dif- Biotechnology is likely to augment the interna- ferences are likely to have strong effects on the tional stature of the pharmaceutical industry pattern of biotechnology’s introduction to the through international corporate arrangements pharmaceutical industry. These differences are that combine research, production, and licensing suggested by the fact that the most widely used in ways that best satisfy market needs in various pharmaceuticals in the U.S. market are neuroac- countries. Because biotechnology offers possibil- tive drugs, while those most widely used in for- ities of creating novel pharmaceutical compounds eign markets are anti-infective compounds. Thus, in large quantities and at reduced costs (e.g., Ifns, national preferences lead to differences in the growth hormones, vaccines, and other biological choice of R&D ventures among leading compa- response modifiers) and because many small new nies, as exemplified by Japanese companies’ in- companies are involved in pharmaceutical R&D, terest in thrombolytic compounds. The potential the demands of “less glamorous” markets for of these new agents is more readily appreciated products such as parasitic vaccines may have by Japanese drug firms than their U.S. counter- greater chances of being met than they have in parts, and thrombolytic agent R&D efforts by U.S. previous years. Thus, biotechnology provides the NBFs are underwritten largeIy by Japanese com- pharmaceutical industry with a variety of new panies. sources of R&D possibilities. International differences of pharmaceutical use may also make the high costs associated with priorities for future research

Funding from NIH has been and will continue research that would benefit pharmaceutical inno- to be instrumental in developing biotechnology vation in biotechnology including the following: for pharmaceutical use. The new biological tech- ● clarification of the functions and mechanisms niques have dramatically increased the under- of action of immune regulators such as Ifn standing of many disease mechanisms. Areas of and interleukin-2, 152 Commercial Biotechnology: An International Analysis

● investigation into the clinical use of neuroac- ● development of the ability to culture and an tive peptides and thrombolytic and fibrino- increased understanding of the lifecycle of lytic peptides, the world’s more debilitating protozoan ● development of improved drug delivery sys- parasites, and tems, ● acquisition of a better understanding of the ● clarification of the mechanisms of acquired physiology and genetics of cancer. immunity leading to better vaccine development procedures,

Chapter 5 references Ch. 5—Pharmaceuticals ● 153

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N., and Elander, R. P., "Genetic on Proteins," Science 219:660-6, 1983. Manipulation of Antibiotic Producing Microorga· 136. Swift, R., Director of Clinical Affairs, Genentech nisms/, Science 219:703.709, 1983. Corp., South San Francisco, Calif., personal com· 150. Vyas, G. N., Cohen, S. N., and Schmid, R., Viral munication to W. P. O'Neill, Apr. 5, 1983. Hepatitis: A Contemporary Assessment of Etiol 137. Taniguchi, T., "Use of Recombinant DNA Tech· ogy, Epidemiology, Pathogenesis and Prevention nology for the Study of Lymphokines," Taisha (Philadelphia: Franklin Institute Press, 1978). 19:1695-704, 1982. 151. Wands, J. R., Carlson, R. I., Schoemaker, H., et 138. Treble, M. J., "Scale·Up of Hybridoma Business al., "Immunodiagnosis of Hepatitis B With High Ventures: Investment Requirements and Perspec· Affinity IgM Monoclonal Antibodies," Proc. IVatJ. tives," Genetic Engineering News, July/August Acad. Sci. (U.S.A.) 78:1214-1218, 1981. 1982, p. 5. 152. Wardell, W. 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tylthy-Myosin Alpha 1 in Escherichia coli Through 159 Yamasaki, Y., Shiehiri, M., Kawamori, E., et al., Expression of a Chemically Synthesized Gene," "The Effect of Rectal Administration of Insulin on Biochemistry 19:6096-104, 1980. the Short-Term Treatment of Alloxan-Diabetic 155. World Bank, Poverty and Human Development Dogs," Can. Physiol. Pharmacol. 59:1-6, 1981. (New York: Oxford University Press, 1980). 160 Yoshida, N., Nussenzweig, R. S., Potocnjak, P., et 156. World Health Organization, Report for the Special al., "Hybridoma Produces Protective Antibodies Programme for Research and-Training in Tropi Directed Against the Sporozoite Stage of Malaria

cal Diseases, Geneva, 1976. Parasite, II Science 207:71-73, 1980. 157. World Health Organization, "Interferon Thera 161 Youle, R. J., and Neville, D. M., "Anti-Phy 1.2 py," WHO Technical Report 676, Geneva, 1982. Monoclonal Antibody Linked to Ricin is a Potent 158. Wyler, D. J., "Malaria-Resurgence, Resistance, Cell-Type-Specific Toxin," Proc. Natl. Acad. Sci. and Research/' N. Eng. 1. Med. 308:934-940, 1983. (U.S.A.) 77:5483, 1980. Chapter 6 Agriculture —-

Contents

Page Introduction ...... 161 Animal Agriculture ...... 162 Diagnosis, Prevention, and Control of Animal Diseases ...... 162 Animal Nutrition and Growth Promotion ...... 167 Genetic Improvement of Animal Breeds ...... 168 Commercial Aspects of Biotechnology in Animal Agriculture ...... 169 Conclusion ...... $ ...... 171 Plant Agriculture ...... 172 Improvement of Specific Plant Characteristics...... 174 Uses of Microorganisms for Crop Improvement ...... 181 Conclusion ...... 184 Commercial Aspects of Biotechnology in Plant Agriculture ...... 185 Priorities for Future Research ...... 186 Animal Agriculture...... 186 Plant Agriculture ...... 186 Chapter preferences ...... 188 Tables Table No. Page 27. Viral Animal Diseases and Potential Vaccine Production ...... 164 28. World and U.S. Sales of Growth Promotants ...... 167 29.Global Animal Health Product Markets ...... 170 30.U.S.Producers of Animal Health Productsts ...... $...... , ...... 170 31. Sales of Major U.S. Animal Vaccine Products, 1981 ...... 171 32. Major Producers of Animal Vaccines Sold in the United States ...... 171 33. Plant Resistances of Economic Value ...... 177 34.U.S. Soils With Environmental Limitations...... 177 35. Distribution of Insurance Indemnities From Crop Losses in the United States From 1939 to 1978 ...... 177 36. Examples of Secondary Plant Products of Economic Value .....,...... 179 37.Importance of Basic Research (Model Systems) on Nitrogen Fixation...... 183

Figure Figure No. Page 16.Steps To Create a New Variety of Plant by Using Biotechnology...... 174 Chapter 6 Agriculture —.— —. —

●

161 .—

162 ● Commercial Biotechnology: An International Analysis

Animal agriculture

The commercial use of biotechnology in animal Diagnosis, prevention, and control agriculture is affected by several often-contra- of animal diseases dictory forces. Favorable forces include the extensive use of animals as test models in basic research Losses due to animal diseases exceed hundreds and, as is discussed in Chapter 15: Health, Safe- of millions of dollars yearly in the United States, * ty, and Environmental Regulation, less stringent giving strong impetus to efforts to improve animal regulatory approval processes for animal health health. A combination of the techniques of bio- products than for pharmaceutical products in- technology is being used to better understand tended for human use. Because animals are used viral, bacterial, protozoan, and parasitic infections during the development of pharmaceutical and that affect animal productivity throughout the biologic products for humans, veterinary medi- world, MAbs, for example, are being used as re- cine stands to benefit from biotechnology research tools to gain a better understanding of the search and development (R&D) such as that de- molecular biology of animal diseases. MAbs may scribed in Chapter 5: Pharmaceuticals. Biotech- also be used for diagnosis of diseases, for monitor- nologically made products for use in animal ag- ing the efficacy of drugs, and for providing short- riculture, such as MAb diagnostic products, term passive immunity against animal diseases. growth hormones (GHs), and vaccines, are becom- In addition, recombinant DNA technology and ing available on a limited basis. polypeptide synthesis maybe used to develop vac- ● cines for long-term immunization against certain Among the factors that inhibit commercial ap- animal diseases. plications of biotechnology in animal agriculture is the fact that the low value-added nature of indi- MONOCLINAL ANTIBODY DIAGNOSTIC PRODUCTS vidual farm animals limits veterinary costs per The diagnosis of animal diseases can be accom- animal, veterinary medicine sales, and funding for plished by the identification in the laboratory of veterinary R&D. In addition, some biotechnolog- specific antigens displayed by the infectious agent. ically made products do not suit current animal As discussed in Chapter 3: The Technologies, husbandry practices. Commercialization of at MAbs that recognize specific antigens can be pre- least one rDNA-made vaccine, the vaccine for foot- pared readily. MAbs for several animal diseases and-mouth disease (FMD), for example, awaits are now being made, and in vitro MAb diagnostic successful applied research results to achieve pro- products for a number of animal diseases may tection against several strains of the disease, few- be used in the near future. MAb-based diagnostic er dosage requirements, lower costs, and other tests are currently being developed for blue- improvements that make the vaccine amenable tongue, equine infectious anemia, and bovine leu - to animal husbandry practices in the developing kosis virus. Furthermore, diagnostic MAbs are be- nations where FMD exists (20).

Biotechnological developments in the areas ● “Animal losses” are described by a number of parameters, in- of animal disease control, animal nutrition and cluding dollar value of animals lost, losses in productivity due to morbidity, and value of potential progeny lost due to sickness or health, and genetic improvement of animal breeds death of breeders. In this report, the dollar value of animals actu- are discussed further below. Distinctions between ally lost to disease (as a primary cause of death) is used for the sake the use of biotechnology to expand fundamental of comparison in describing animal diseases. These estimates are based on data collected for U.S. Department of Agriculture’s Ani- knowledge and to develop specific products for mal and Plant Health Inspection Service, Veterinary Services, Hyatts- commercial use are noted. ville, Md., and by Deane Agricultural Services, Inc., St. Louis, Mo. Ch. 6—Agriculture ● 163

ing sought for canine parvovirus, canine rotavirus the infection they are supposed to prevent. Sub- (a potentially fatal viral diarrhea in puppies), feline unit vaccines do not contain the pathogen’s ge- leukemia virus, and canine heartworm disease. netic material and therefore cannot cause infec- For MAb diagnostic products to be effective diag- tion. Subunit vaccines may also be more stable, nostic tools and hence commercially viable, they more easily stored, and of greater purity than con- must recognize the large variety of disease strains ventional vaccines, but these qualities remain to likely to be encountered (20). be demonstrated. Despite their potential advantages, subunit vaccines raise new technical prob- The acceptance of iMAbs for field use by veter- lems, as mentioned above, and these must be inarians and animal owners remains to be dem- overcome if the vaccines are to prove useful in onstrated. Whether MAb products will have a the field (20). large role in the diagnosis of specific animal diseases is unclear. Since livestock producers and Viral Animal Diseases. —The development poultry growers attempt to spend as little money of improved vaccines may allow the prevention as possible per animal raised, the markets for of several problematic animal diseases caused by individual MAb diagnostic tests initially may be viruses (34). Most subunit vaccine research for limited. Applications of MAb diagnostic as well animals to date has been focused on viral diseases, as therapeutic products initially may be restricted particularly FMD and rabies, but some of the find- to high-profit animals, animal products for export, ings can be generalized to other viral diseases, and companion animals such as dogs, cats, and Table 27 shows some viral diseases in animals horses. Although individual diagnostic kits are not against which subunit vaccines may prove effec- costly, the farmer’s narrow margin of return on tive and economic. other animals may prevent the routine use of The development of subunit vaccines for FMD diagnostic products. is currently receiving much attention from re- In the future, diagnostic MAbs could substan- searchers (2). Although the disease is nonexistent tially assist large-scale disease control programs in the United States, FMD affects livestock pro- in both developed and less developed countries ductivity and exportability throughout South (16). Such reagents might be used to detect disease America, Africa, and the Far East. The world mar- in order to select an appropriate vaccine and mon- ket for FMD vaccine is larger than that of any itor the level of disease during the course of a other vaccine, either animal or human. In 1981, control program. 800 million doses of inactivated FMD virus vaccine worth $250 million were used (36). Vaccines Apart from potentially being used as diagnostic for all types of FMD commonly encountered ex- reagents by animal producers, MAbs can be used ist at present, but these vaccines vary in effec- as purification tools to isolate compounds (anti- tiveness against different FMD field strains. Evolu- gens) that may prove to be effective animal vac- tion of new field strains is a continuing problem, cines. They can also be used to provide “passive because a vaccine may lose its effectiveness immunity” to certain animal diseases. The applica- against such strains. The impetus for developing tions of biotechnology to the development of ani - a subunit vaccine for FMD is the hope that such mal vaccines is described further below. a vaccine will offer enhanced protection with ANIMAL VACCINES greater safety than conventional vaccines. The degree of protection offered, however, will only Prevention of a number of animal diseases is become clear over the next few years as research being sought with rDNA subunit vaccines in ef - and field evaluations progress (9). forts similar to human vaccine programs described in Chapter 5: Pharmaceuticals. Subunit Three research groups have cloned the gene vaccines may solve some of the problems associ- that codes for the major FMD viral surface pro- ated with conventional vaccines. One problem, tein (5,14,15). The new biotechnology firm (NBF)* for example, is that “attenuated” and killed whole “NBF”s, as defined in Chapter 4: Firms Commercializing Biotech- vaccines contain the genetic material of the path- nology, are firms that have been started up specifically to capitalize ogen and therefore have the potential to cause on new’ biotechnolo~v. 164 Commercial Biotechnology: An International Analysis

Table 27.—Viral Animal Diseases and Potential Vaccine Production

Potential Current for new vaccine Potential for Disease biotechnology Company status new vaccine Viral diseases: Foot-and-mouth disease . . . . . + Genentech (U. S. MJSDA (U. S.) Medium Replacement Pirbright (U.’K.) Biotech Gen (Israel) MGI (U.S.)a Rabies...... + Wistar Transgene (France) Variable Replacement Genentech (U. S.) Inst. Pasteur (France) Parvovirus: Swine ...... + MGI Poor Replacement Canine ...... + TechAmerica (U. S.) Medium Replacement Bovine Ieukosis virus ...... + MGI N.A.b Replacement Bovine papilloma virus ...... + MGI N.A. Export animals Rift Valley fever ...... + MG1/U.S. Department of Good Replacement Defense Marek’s disease (fowl) ...... + BRL (U.S.)C Medium Replacement Infectious bovine rhinotracheitis ...... + MGI Medium Replacement Pseudorabies...... + MGI Medium Replacement African swine fever ...... + Spanish Government None New product Rota viruses...... — Vido Institute None New product University of Saskatchewan Bluetongue ...... + Bio-Tech Gen. (Israel) Poor to medium Export animals USDA Hog cholera...... — N.A. Good Replacement Newcastle disease ...... + USDA Poor in some areas Replacement Bacterial diseases: Tuberculosis ...... N.A. N.A. None New product Neonatal diarrhea ...... + Cetus (U. S.)/Norden (U. S.) Poor Replacement InterVet (Netherlands/ Akza (U. S.) MGI Bacterial respiratory disease . N.A. N.A, Poor Replacement Anaplasmosis N.A. N.A. None New Product Parasitic diseases: Babesiosis ...... + IMC (U.S.)d None Replacement Trypanosomiasis ...... + American Cyanamid (U. S.) None New product Genex (U. S.) Hoffmann-La Roche (Switz.) Coccidiosis ., ...... + Eli Lilly (U. S.) Good Replacement Helminithic diseases ...... + Merck W. S.) Fair Replacement a MGl = Molecular Genetics, Inc b N.A = Information not ava!lable c ~RL = Bethesda Research Laboratories d IMC = International Minerals & Chemicals Corp SOURCE Board of Science and Technology for International Development, et al , “Prlorltles In Biotechnology Research for International Development—Proceedings of a Workshop” (Washington, D C National Academy Press), and the Off Ice of Technology Assessment

Genentech Corp. (U.S.), in collaboration with the trial was not extensive), but it was less effective U.S. Department of Agriculture (USDA), cloned than the whole inactivated vaccine. The two other the DNA that encodes the protein of one strain of research groups working on a subunit FMD virus FXID into bacteria, made the protein product in vaccine are a Swiss-West German team (Univer- large enough quantities for field trials, and tested sity of Heidelberg, Federal Research Institute for it at USDA’s Plum Island Animal Disease Facility Animal Virus Diseases at Tubingen, Max Planck (14). The FMD subunit vaccine protected animals Institute for Biochemistry, and Biogen S. A.) and against infection by the particular strain against a British team (Animal Virus Research Institute which the vaccine was made (although the field and Wellcome Research Laboratories) (9). Ch. 6—Agriculture . 765

Cloning of the genes that code for the surface stability when stored at room temperature are proteins of viruses of fowl plague, influenza, ve- desirable features of the new vaccines for use in sicular stomatitis, herpes simplex, and rabies also all the countries affected by the particular dis- has been achieved, and the cloned genes may lead eases. * to the development of effective subunit vaccines In addition to subunit vaccines that provide ac- for these animal diseases (2). Cloning projects for tive immunity, MAbs may be used to provide pas- virus proteins that cause gastroenteritis, infec- sive immunity against a variety of viral animal dis- tious bovine rhinotracheitis, Rift Valley fever, and eases. Several MAb-based products currently are paramyxovirus currently are underway (2), Dif- being developed. For instance, antirabies MAbs ferent challenges are associated with each proj- that protect mice from active rabies virus have ect. Rabies projects, for example, have encoun- been made (19). The use of these products, how- tered problems with the consistent expression of ever, is likely to be limited to herds (e.g., dairy the surface protein from rDNA plasmids (34). In- animals) where the passive vaccines can be readily fluenza virus projects, among others, face prob- and repeatedly administered. lems in that the natural viruses spontaneously change their surface proteins to evade the im- Bacterial Animal Diseases.—The potential mune system, making the choice of optimal genes for biotechnology in fighting bacterial diseases in for cloning difficult. animals is less clear than its potential in fighting viral diseases, but severaI promising advances are Another method being used to prepare new currently being made. In developing new methods subunit vaccines for animals, aside from the use to prevent these diseases, an understanding of the of rDNA technology, is chemical synthesis of pep- natural and pathogenic roles bacteria pIay in do- tides. Synthetic peptides corresponding to part mestic animals is important. Numerous types of of one viral surface protein of FMD protect test bacteria are normal inhabitants of both human animals against live FMD virus (3), and efforts are and animal gut. In general, disease may result underway to prepare synthetic rabies vaccines when animals, especially those predisposed to in- (28). As noted in Chapter 5: Pharmaceuficals, most fection (e.g., young, weak, or stressed animals), synthetic vaccines are prepared with the use of either succumb to pathogenic bacteria or suffer MAbs as purification tools, Chemically synthe- from overgrowths of their own native bacteria. sized peptides ma-y prove useful in rapid screen- Bacterial infections often occur simultaneously ing programs to determine which peptides act as with other infections, including viral invasions. the best vaccines; subsequently, the DNA corre- Because of the complexity of most of the currently sponding to these fragments may be cloned for important animal diseases in which bacteria are large-scale production in microbial systems. involved, the effectiveness of bacterial vaccines Whether produced from rDNA or chemical syn- produced by biotechnology is difficult to predict. thesis, subunit vaccines for viral animal diseases Bacterial vaccines against colibacillosis (scours), must satisfy several requirements to be effective. a widespread disease that causes diarrhea, dehy- In most instances, subunit vaccines must contain dration, and death in calves and piglets, are be- antigens from a sufficient number of different —.— strains of virus to offer comprehensive protec- * ~lt present, the ral)ies sut)unit \LitxIn[I IS mosI }]r[)ll~isil]g III tion against field challenge. The new vaccines meeting the criteriii for t) fw)ming a (umpetitii f> Ia(xInc ‘1’}NIIT ,ip - must induce a protective immune response to the pear to he onl) slight f’ariations in Sll[’tii(’(> ~)rott~in S(Y]U(JII(YS l) f~- ttveen rabies t’irus strains, anci these surta(r prott>il)s eli(’it liir~(~ same or greater degree than conventional vac- immune responses ‘1’h(’ RNA mroding s(w (>[iil \ ir.il surta(r pro- cines if they are to compete for market shares. teins has been cloned and expressed In 1,, (’{)/1 (3-I ) (~llestlons tt)at Proper dosage and timing of vaccination must be remain concerning the efficaq of this \ ii(’(’lll(i il)(.l~](lf~ 1 J I ht’ ntv’(] for gl~’ros~’lation of the rllNA-produ(. t tor pr(]f)[>l. flJII(.1 it)nil)g ISP(J determined. Ideally, the vaccines should be ad- {’lldptel’ 5: P/]dl’rlI;](’fl( ltl(’ii/,Jj, iin(j Z) prop(>r ddifwy sj’stmns, pl’lllliiI’i- ministered in a single injection to be amenable I V to \\,ilc{ animal respr~oirs such as skunks and fox(’s, \th(lI-(l riil)](>~ to most husbandry practices throughout the proliferates, and to (lisp(~rse(l iininlitl hrr(ls surh ;is thos(” In !+]~lth .lmeri(:i, where thr (l(~iittl of (iittl(~ infwted b~ the t)it(~s ot riil)i(i

world where animals are dispersed over wide ] I)ilt!l I’f>SUlt S in ill) t Sti IlliitWi }’f~arll 10SS t}lii[l $29 I’;impir(’ . . of morr tracts of land. Also, long shelf storage life and million (34) 166 ● Commercial Biotechnology: An International Analysis

ing made with biotechnology. Recombinant DNA (compared to $450 million in 1981) (35). At pres- technology is used to change bacterial plasmids ent, coccidiostats and anthelmintics are synthe- found in pathogenic strains of enteric bacteria sized by either chemical synthesis or microbial from a virulent to a harmless state. This approach bioprocess methods. These agents, many of which is used by both Intervet (Netherlands) and Cetus have been discovered serendipitously, are com- Corp. (U. S.) to prepare vaccines against colibacil- monly administered in animal feed (10). losis. These vaccines have been successfully tested The widespread use of coccidiostats, anthelmin - in pregnant cows, which transferred immunity tics, and antibacterial in animal feed raises con- against colibacillosis to their offspring, and the cerns about the nurturing of drug resistance products are now available commercially. * among populations of micro-organisms. These Using another approach to fight colibacillosis, risks are outlined in a 1979 OTA report entitled the NBF Molecular Genetics, Inc. (U. S.) uses hy - Drugs in Livestock Feed (30). As described in that bridomas to produce MAbs against the attach- report, the genes in bacteria that encode resist- ment antigens of the bacteria responsible for the ance to most drugs are located on plasmids. Re- disease. Incorporating these MAbs in milk fed to sistance to drugs may be shuttled via these plas- young calves within 36 hours of birth protects mids into pathogenic microa-oganisms such as Sal- the animals through the period for which they monella. Widespread use of antibacterial selects are most susceptible (36]. This product is ap- for bacteria, including Salmonella, that contain proved for use in the United States and Canada. resistance genes, perpetuating drug resistance among bacteria. Thus, wide use of antibacterial The development of biotechnological solutions in animal feed eventually may compromise the to bacterial animal diseases, as well as viral infec- effectiveness of the same drugs in treatment of tions, will require much basic research. Pasteurel- human diseases. Drug resistance among the pro- losis (a lower respiratory tract infection in cows, tozoa and parasites is even less well understood sheep, and pigs) and swine dysentery (which than is resistance among bacteria. Such resistance causes annual losses of $75 million in the United is difficult to quantify but may be increasing States) are among the major animal bacterial in- (13,30). fections about which more knowledge is needed before applications of biotechnology are possible. Fundamental knowledge may be gained by The potential for biotechnological production of using rDNA technology to explore the structure new bacterial vaccines and the development of and function of genes that confer resistance to successful delivery systems is largely unexplored. drugs. MAb technology and other conventional methods may be used to isolate, purify, and bet- protozoan and Parasitic Infections of ter understand antigens found on parasitic cells, Animals. -Coccidiostats (compounds that pre- perhaps resulting in vaccines effective against vent coccidiosis in poultry) and anthelmintics (sub- these parasites. The increased use of vaccines stances that fight helminthic parasites such as would decrease the use of feed additives and pre- roundworms, tapeworms, lung worms, and liver sumably lessen the problems of drug resistance. flukes) constitute large, rapidly expanding animal health product markets. In 1985, the global mar- Strong needs, large market potentials, and safe- ket for coccidiostats is expected to be $500 million ty considerations characterize the further devel- (compared to $300 million in 1981), and the global opment of compounds effective against protozoa market for anthelmintics may exceed $900 million and parasites that afflict animal populations. Be- cause of the complexity of most parasitic infections, however, biotechnological solutions may “These bacterial vaccines were made by replacing a “virulemx’ not be forthcoming immediately. [n addition, the gene” (a gene which encodes a protein that regulates cellular water loss and is responsible for the diarrhea) located on a plasmid with recent introduction of potent new antiparasitic a harmless gene and “infecting” animals with bacteria containing feed additive compounds, such as the avermec- these harmless plasmids. The bacteria continue to produce surface tins (which are microbially produced) (8), may antigens, but they do not produce the \rirulence protein. The surface antigens stimulate an immune response that prm’ents adherence lower incentives to explore new antiparasitic of natural \’irulent harteria (18) possibilities with biotechnology in the near term. Ch. 6—Agriculture ● 167 —.

one serious worldwide rickettsial disease that large share of feed additives (30). Some of these requires urgent attention is anaplasmosis. Ana - compounds act by enhancing the growth of ben- plasmosis, which is caused by blood-borne micro- eficial micro-organisms in the gut, others by re- organisms transmitted to cattle by ticks, causes ducing the prevalence of harmful micro-orga- severe anemia and subsequent death in afflicted nisms and parasites throughout the gastrointes- animals. In the United States, annual losses due tinal tract; still other compounds directly provide to anaplasmosis are estimated to exceed tens of animal nutrition. In cases where microbial meta- millions of dollars. At present, an unsatisfactory bolic pathways and products are known, biotech- attenuated vaccine exists, and attempts to culture nology may augment the production of com - the micro-organism and prepare better vaccines pounds used as feed additives by increasing the have been only marginally effective (36). production of specific microbial metabolizes. ” At present, however, applications of biotechnology Animal nutrition and growth to the production of metabolizes largely remain promotion unexploited (10). GHs produced by rDNA technology, in contrast, Practices and products that promote animal nu- currently are undergoing trials in humans and trition and growth have the potential to produce animals in efforts to demonstrate safety and ef- direct, substantial returns on investments. Animal fectiveness in stimulating growth. Several U.S. scientists seek better animal nutrition and feed- NBFs, including Genentech Corp. (in collaboration use efficiency in several ways, including the study with Monsanto Corp.), Molecular Genetics, Inc. of gut bacteria that participate in animal diges- (for American Cyanamid), Bio-Technology Gener- tion, feed additives that enhance absorption of al, Amgen, and Genex Corp., are producing GHs nutrients, and substances such as GHs that may for various animal species. In addition to yielding directly stimulate growth and animal productivity. potential commercial products, rDNA GH projects Synthetic steroids and natural hormones are are stimulating widespread research into the na- used widely to promote animal growth, as indi- ture of growth, development, and animal produc- cated in table 28. Furthermore, as noted above, health- and growth-promoting compounds from “’1’}1[> I)ro(iurti(m 01 (’ompoun(is” usf’d as fwd :Iddltiles is discussed industrially grown micro-organisms constitute a in [:liapter’ 7. Special t.\ [.’hemicals anci fi’ood Adcliti~ffis

Table 28.—World and U.S. Sales of Growth Promotants (millions of dollars)

Sales

1979 Products World U.S.

38 — 43 — 75 — 15 ”/0 $175 $ 95 $210 $106 $515 $246 250/o 168 . Commercial Biotechnology: An International Analysis

tivity. The results of experiments pertaining to genes and gene products that influence traits of GHs’ mode of action to date have yielded results productivity, vigor, and resistance to certain dis- that suggest caution. Previous observations that eases may be possible. injections of bovine pituitary gland extracts en- In the future, animal breeding programs may hance lactation in cows led to the finding that be augmented by biotechnology to achieve de- purified GHs increase milk yield by 10 to 17 per- sired changes with unprecedented speed and cent, without a concurrent change in feed intake selectivity. Biotechnology may be used in ongo- (24). Other experiments with sheep and pigs have ing breeding programs first to identify animals shown rapid growth following GH treatment (36). with desirable genes (e.g., genes that make the However, other evidence indicates that GHs stim- animals resistant to certain infections), and sec- ulate growth and feed-use efficiency at the ex- ond, to transfer these genes directly into the germ pense of body-fat deposition (24). Thus, critics line (cells that contain the genes that will be argue, GHs may impair long-term animal health passed onto future generations) of other animals. and productivity (24). Possible applications of biotechnology include the Substantial hurdles must be overcome before use of MAbs to identify and isolate gene products rDNA-produced GHs become commercially avail- correlated with certain traits, the use of rDNA able. In addition to requiring regulatory approval, technology to produce large quantities of desired the commercial success of GHs requires an ade- gene products for further study, gene transfer quate drug delivery system that introduces GH (micro-injection of isolated DNA into embryo slowly to animals. Oral administration of GHs, cells), and implantation of the embryo cells to although most convenient and marketable, is an which genes have been transferred into surrogate inadequate system of delivery because polypep- mothers. tides such as GHs are degraded by digestive en- The technology of gene transfer is in its infan- zymes. The hormones must be made available to cy. To date, it has been used only in laboratory the body’s circulation, where they can reach en- animals, In most instances, the gene(s) to be stud- docrine organs. Slow-releasing ear implants may ied is fused within a plasmid to a gene with a be used as alternatives to frequent injections (in- known “housekeeper” function required for jections are not amenable to most husbandry growth. The plasmid is injected into a host cell practices except those for dairy cattle), but, at that is deficient in the housekeeper function. Only present, dose requirements are too high for such host cells whose chromosomes incorporate the implants to be practical (21). Eli Lilly (U. S.) is de- foreign DNA have the restored housekeeping ac- veloping a long-lasting bolus to be used in the tivity and survive. These cells then are screened rumen. Presumably, enough GH is released direct- for activity of the desired gene. The GH gene has ly through gastrointestinal tract walls to avoid the been the subject of many recent gene transfer problem of enzymatic degradation. With the de- experiments, velopment of convenient delivery systems, better field trials to investigate the efficacy of GH may Thus far, gene transfer experiments in animals result. have increased fundamental understanding in ,, several areas. Scientists have made great gains in Genetic improvement of animal breeds preparing receptive host cells, transferring genes from one animal cell to another, and recogniz- Throughout the history of animal agriculture, ing the successful recombination of foreign DNA breeders have sought to improve animal produc- in host chromosomes (1,6,32)33). Fundamental tivity by selecting animals with desirable traits for understanding of mechanisms of gene control in breeding. Recent increases in the understanding mammals has also burgeoned in recent years. Sev- of animal reproductive biology and the genetic eral investigations have revealed that the host basis of traits have fostered new animal breeding tissues surrounding the cells that contain im- technologies (31). As a result of increased knowl- planted genes affect expression of the foreign edge due to biotechnology, the identification of genes (as surrounding tissue may regulate gene Ch.. 6—Agriculture 169 expression in normal cells) and that this “tissue- specific gene regulation” continues through successive generations (7, 12,23,25)27). Finally, gene transfer experiments have allowed the study of the expression of single genes that, with other genes, comprise traits that might be too complex for study by other methods. Gene transfer studies may reveal much about the function of single gene products. For instance, the transfer of genes implicated in immune responses and resistance/susceptibility to disease are being studied (some of these genes encode immunological cell-surface proteins called the HLA antigens) (11). The ability to transfer such genes into foreign cells to distinguish the production and function of their products may lead to valuable knowledge about animal diseases. In the future, gene transfer may prove to be the sole means of overcoming certain animal diseases that defy preventive vaccine technology and/or veterinary treatment. An example of such a disease is trypanosomiasis (“nagana” in cattle and “sIeeping sickness” in humans). Trypanosomiasis is caused by parasites borne in the saliva of certain insects and impedes livestock productivity throughout Africa (where the disease is transmitted by tsetse flies). Strains of cattle and sheep with resistance to trypanosomiasis (trypanotolerance) exist, and their resistance may be traceable to several distinct genes (26,29). Gene transfer may prove useful in better identifying these genes and selecting animals for breeding programs designed to encourage trypanotolerance in affected areas. In the future, transfer of these genes into cattle germ lines may rapidly foster widespread trypanotolerance where most other programs to control trypanosomiasis have failed. The application of knowledge gained from gene transfer experiments to animal agriculture will not be immediate, but such knowledge eventually may lead to considerable agricultural advances.

Commercial aspects of biotechnology in animal agriculture ● hlajor [1 .S, producers include S>ntrk, Pfiz[,l. I,li I,il]>, 1‘p;ohn SmithKline Beckman, ,American (: Janamid, Nlerrk, ,Ameriran }ionw Although field trials of several biotechnology Products, Johnson & Johnson, ‘1’ech America, and Schering-Plough products for animals are underway and a few \Iajor foreign producers inc]u(k) BL]l-]’ol]gl~s-\ \’tll]c’onlt~ (L1 .K ), Rhon~I- hlvrimlx Ik’ranw), ~{ow’hst ,4(; (h’ R (; ) [la} rr ,1(; [k- R (;.), (’onn,iught products (e.g., vaccines for colibacillosis) have i(’anada], Beecham (L] K ), Sol\ a~ (Belgium) Ekwhringer lngt~lht~lnl been approved for use, it is not yet clear to what (F’ R .(; .1, Intertet [Netherlands) and E;lt ,Aquit;iinc [E’rance),

25-561 0 - 84 - 12 —

170 ● Commercial Biotechnology: An International Analysis

Table 29.-Global Animal Health Product Markets

Estimated Estimated sales, 1981 annual growth, (millions of dollars) 1981-85 Nutritional products ...... $2,500 10-15%0 Medicinal products: BiologicslVaccines ...... 1,000 20-250/o Antibacterial ...... 2,000 10-15%0 Anthelmintics ...... 450 25-300/o Ectoparasiticides ...... 400 10-150/0 Coccidiostats ...... 300 15-200/o Growth promotants ...... 200 24-300/o Other ...... 650 15-200/o Subtotal...... 5,000 15-200/o Total...... $7,500 15-200/o SOURCE: S. J. Zimmer and R. B. Emmitt, “Industry Report: Animal Health Products Market” (New York: F. Eberstadt & Co., Inc., 19S1).

Table 30.—U.S. Producers of Animal Health Products

Estimated Estimated Percent of animal health sales animal health sales, Percent of corporate annual growth, 1981 (millions of dollars) corporate sales operating income 1981-85 Pfizer ...... $440 13 ”/0 130!0 100/0 Eli Lilly...... 365 130/0 150!0 200/0 American Cyanamid...... 265 7%0 7“/0 11%0 Merck ...... 200 70/0 7“/0 270/o SmithKline...... 155 70!0 50/0 1 70/0 Upjohn ...... 134 70!0 7“/0 110/0 N A.a Syntex ...... 83 120/0 + 110/0 e N A. = Information not available. SOURCE S. J Zimmer and R B. Emmitt, “Industry Report Animal Health Products Market” (New York: F, Eberstadt & Co., Inc , 1981) product sales by the U.S. companies that produce not lie in R&D to produce new animal health such products constitute a fairly low percentage products. As described earlier, applications of (an average of 11 percent) of the companies’ total biotechnology to the production of animal prod- sales. Investments in animal-related biotechnology ucts involve a substantial investment in basic re- R&D in those companies probably average about search. In some cases, healthy sales of conven- the same or less than the investments by the lead- tionally made products may dissuade a company ing NBFs that are applying biotechnology to ani- from pursuing basic research that could lead to mal agriculture (22). the development of a competing product. In other cases, corporate developers may choose to pur- As noted in Chapter 4: Firms Commercializing sue human pharmaceutical innovations of new Biotechnology, most major pharmaceutical and biotechnology, rather than applications of veterinary medicine companies are investing in biotechnology to animal health. Because of these biotechnology R&D, but there is some question considerations, innovation and new product de- as to their motivation for producing new products velopment in animal agriculture might be slowed. for large, established animal health care markets. Such markets include those for antibiotics, anthel- Innovation in smaller product market areas, mintics, and coccidiostats. Established companies such as animal vaccines and diagnostic products, with existing lines of conventionally made, widely however, is widespread, New or replacement ani- marketed animal health products may have mal vaccines are among the most promising strong interests in maintaining these products. In applications of biotechnology, as are MAb-based many cases, therefore, their primary interests do diagnostic products, Much of the innovation in Ch. 6—Agriculfture . 171

Table 32.—Major Producers of Animal Vaccines Sold in the United States

production of food from animals. MAb-based diagnostic products exemplify this promise. Other products, such as new vaccines, may face technical problems of dosage, formulation, and delivery before they are suitable to animal husbandry practices. Until these problems successfully are resolved, the impact of biotechnology on improving animal productivity will not be realized. Ap- plications of biotechnology such as gene transfer experiments and investigations into the nature of growth using rDNA-produced GHs currently serve to increase basic knowledge about animal biology. 172 ● Commercial Biotechnology: An International Analysis

Plant agriculture --

There are hundreds of forms of crop improve- legumes, which include soybeans, represent the ment whose purpose generally falls into one of second most common source of food for human three categories. The first is to increase crop and animal consumption. There are two philoso- yields by increasing resistances to pests or envi- phies, which are not incompatible, with regard ronmental conditions such as drought or soil salin- to improving crop plants. One is that there should ity or by developing more productive plants, The be diversification of crop plants and attention second is to improve crop quality by enhancing given to the domestication and breeding of new such features as nutritional value, flavor, or proc- major crop plants. Another philosophy is that essability. The third is to reduce agricultural pro- plant breeding, tissue culture, and biotechnology duction costs by reducing a crop’s dependence efforts should be devoted to the most successful on chemicals or by making harvesting easier (55, crop plants. The genetic diversity of some of the 56). world’s current crop plants is not great. Conse- quently, even if the major crop plants are the During the last century, plant breeders have focus of research efforts, some genetic material been efficiently and successfully addressing all of from exotic sources may be required to effect the these goals. The use of new biotechnology in crop desired improvements. In any case, the tech- improvement, as in other areas, is not a new be- niques discussed here are equally applicable to ginning, but an extension of previously evolved the improvement of both common and exotic skills. New biotechnology alone will not produce species, better crop plants, but combined with knowledge from other plant science and microbiological dis. Research on plants has shown that the genetic ciplines, biotechnology will develop techniques organization of plants exhibits striking similari- that could be very powerful in improving agri- ty to that of animals. The universal genetic code culturally important crops. Thus, the greatest ad- is used, and most genes contain intervening vances in crop improvement are likely to be made sequences and are surrounded by very similar using an interdisciplinary approach. regulatory sequences. Unlike animals, however, plants have a characteristic called totipotency The genetic manipulation and modification of that, for many species, indicates the potential for plants presents some special challenges. Most mo- regeneration of a single cell into a complete plant. lecular genetics to date has been done with simp- Because plants have this totipotent characteristic, le unicellular organisms and, to a lesser extent, certain genetic manipulations can be done in cell with laboratory animals. The application of mo- culture, and, after selection of cells with the ap- lecular genetics to plants is relatively more recent propriate qualities, the cells can be regenerated and consequently at an earlier stage of technical into parental plants (for breeding programs). Ad- development. Furthermore, there are fewer stud- justing the laboratory variables to achieve regen- ies of the physiology and biochemistry of plants eration from single cells is evolving from an art than there are studies of these aspects of animals. to a science and has yet to be accomplished con- The recent application of the new techniques of sistently for the principle cereal grains (mono- molecular biology to plants has produced astound- cots *), but regeneration research is proceeding ingly rapid results, however, and these techniques at a rapid rate. It is likely that many important are sure to have an impact on crop improvement crop plants will be able to be regenerated from in the next several years. single cells in the next few years. Of the several hundred domesticated plants in There are several potential applications of new the world today, only about 30 are of great eco- biotechnology for plants that may help in the im- nomic significance. Of these, eight domesticated grains, including rice, corn, and wheat, produce ‘E;arly in the evolutionary history of flowering plants, tt~o main t~’pes of plants, monocots and dicots, clitwrged. [:ereal grains (corn, most of the calories and protein consumed by hu- wheat, r}’e, barley, rice, etr. ) art’ monocots, whereas legumes ko~’- mans and agriculturally important animals. The h{ Ians, etr ) :irv dirols Ch. 6—Agriculture 173 —

Phofo Credit Dean Eflgler Agrfgenef~c5 Corp Freshly isolated plant protoplasts

Photo Credit” Dean Eng/er, Agrigeneflcs Corp

Plant shoots arising from protoplast-derived calli 174 . Commercial Biotechnology: An International Analysis

provement of crop species, as shown in figure 16. sis, liposome transfer may be instrumental New technologies for testing for the presence or in improving photosynthetic efficiency. absence of traits, for example, will save years of ● Vector-mediated DNA transfer (and micro- plant breeding time. Many applications to plant injection of DNA) is the most specific, and po- agriculture will be in the regulation of endogen- tentially the most versatile, of the genetic ous genes, and other improvements will be made manipulation techniques. Recently, foreign using techniques such as the following, which plant genes have been inserted and expressed transfer DNA from one species to another: in plants.

● The fusion of cells from two different plant Recent advances in the methods of plant cell species can be used to overcome species hy- culture and the techniques for introducing DNA bridization barriers. In order to be useful, the from one plant species to another are discussed resulting cell fusion product must be regen- in Box C.—Methodology Important in Plant Agri- erated to form a whole plant. To date, regen- culture. The applications of these methods to erated plants have only resulted from fusions specific problems in plant agriculture, such as dis- between closely related genera (62). The re- ease resistance, photosynthetic efficiency, and ni- generated plants are selected to express ben- trogen fixation and the commercial aspects of bio- eficial characteristics of both parents (94). As technology in plant agriculture are discussed in yet, no economically important variety has the sections that follow. been produced using this method (62). ● Transferring subcellular organelles such as Improvement of specific plant nuclei or chloroplasts from one plant species characteristics to another can be accomplished by a variety of techniques. One of these, liposome trans- Greater crop yields or a reduction in the cost fer, involves surrounding the organelle with of crop production would be possible if plants a lipid membrane. Because chloroplasts carry were resistant to disease and certain environmen- many of the genes important in photosynthe- tal factors and contained a larger amount of higher quality product. In the United States, there is great research interest in crop resistance and Figure 16.–Steps To Create a New Variety of Plant crop quality improvement in academic, Federal, by Using Biotechnology and industrial laboratories. Unlike most other plant traits, some resistances and specific improvements may be accomplished with one or a few gene modifications. This area, therefore, is probably the most active area of industrial research, and it is likely that considerable research progress in this area will be made in the next 5 to 10 years.

PLANT RESISTANCE FACTORS Disease and environmental resistances are important to most crops in most areas of the world. Important plant resistances are shown in table 33. Productivity losses often can be attributed to the lack of resistance to one or more factors (see tables 34 and 35). Thus, the study of resistances could lead to greatly improved productivity and an increased realization of genetic potential (42). Numerous single gene resistance factors are SOURCE. Office of Technology Assessment known in higher plants. The most common re- Ch. 6—Agriculture ● 175

,. .-, ,., ,

...... tI·~,~" in the pben9type 'in tissue· . 1ft pastJ ..... were -..gIlt after muta genesis treatment. ~ with work on sugaroar., llowever, the VM1abIIity uncovered or created 176 ● Commercial Biotechnology: An International Analysis

sistance genes are those that confer decreased Most of the existing disease-resistance genes susceptibility to disease (54,71,79). In maize, for have been introduced into economically impor- example, there are resistance genes to several tant lines of interbreeding plant species by tradi- diseases such as northern corn-leaf blight (s1). tional plant breeding. Currently, however, there Because most of the single gene resistance fac- is interest in cloning disease-resistance genes from tors confer resistance to a single pathogenic or- plants in order to study the nature of resistance ganism, it is thought that a single characteristic and to determine the possibility of transferring of the host and pathogen determine the outcome resistance factors among species that do not nor- of an infection. mally interbreed. It is not known in most cases Ch. 6—Agricu/ture 177

Table 33.—Plant Resistances of Economic Value need for spraying crops with pesticide * chemicals, and disease control would be more effective. Resistance to: Relevance in United States It should be kept in mind, however, that much Disease ...... All CfOPS Saline ...... Irrigated soils, particularly in of the agricultural research effort is being made California and Southwest by the agricultural chemical industry, and this Alkaline earth metals ...... Southeastern United States industry may see the early opportunity of devel- and West Anaerobic soil conditions. . . Areas subject to flooding oping pesticide-resistant plants rather than under- Drought ...... All crops taking the longer term effort of developing pest- Herbicides ...... All crops resistant plants. Pesticides ...... All crops Soil pH ...... Low pH on acid mine tail- Resistance to environmental conditions prob- ings and soil affected by acid rain; high pH on most ably depends on both single and multigenic inheri- Western soils tance. These traits, as well as disease resistance, SOURCE Office of Technology Assessment can be selected for in tissue culture. If analogs of the disease or detrimental environment conditions can be applied to plant cells in culture, the Table 34.—U. S. Soils With Environmental Limitations entire procedure can take place in a few test tubes Environmental limitation Percentage of U. S. soil or petri dishes in a laboratory setting. Millions of affected individual cells can be treated simultaneously and Drought ...... 25.30/o then examined for survivors. Stepwise selections Shallowness ...... 19.6 under gradually more stringent conditions (e.g., Cold ...... 16.5 Wet ...... 15.7 a gradual increase in the salinity of the medium) Saline or no soil ...... 4.5 are accomplished readily. Alkaline salts...... 2.9 Other...... 3.4 Some of the traits that could be selected in tissue None ...... 12.1 culture are listed in table 33. Many of the traits SOURCE: J S Boyer, “Plant Productivity and Environment,” Sclefrce 218443-448, 1982 are resistance factors that confer protection against disease and salinity. In selection schemes for these factors, the test organism is exposed Table 35.-Distribution of Insurance Indemnities From either to normally lethal doses of the toxins pro- Crop Losses in the United States From 1939 to 1978 duced by a disease organism or to high doses of salt (to mimic salinity), and the surviving cells are Cause of crop loss Proportion of payments ( 0/0) Drought ...... 40.80/o identified by their growth under these normally Excess water ...... 16.4 toxic conditions. This protocol holds great prom- Cold ...... 13.8 ise for identifying rare cells that have spontane- Hail ...... 11.3 ously acquired a novel resistance. Somaclonal Wind ...... 7.0 Insect ...... 4.5 variation probablv supplies much of the variation Disease ...... ;:; seen in tissue culture (see box C) (47). Flood ...... Other ...... , . . 1.5 A rate-limiting step in applying selection tech- SOURCE” J. S Boyer, “Plant Productivity and Environment,” Science 218443-448, niques more widely is the present inability to re- 1982 generate major cereal and legume crops from individual cells or small cell clumps on a routine what the disease-resistance genes in plants actual- basis. Furthermore, some of the traits selected in ly do to plant metabolism or structure. By under- tissue culture for resistance to a specific factor standing how the products of plant disease-resist- may not be manifested in the whole plant, be- ance genes work, better screening programs for cause it is possible for cells to develop nongenet - enhanced resistance can be designed. Environ- ‘,4 pesticide is an agent (hat prm’ents the growth or propq+ition mentally, it is desirable to develop pest-resistant of deleterious organisms, including weeds an(i insects Both iler - plants, because such plants would reduce the i)icides an(i insecticides are pesticicies. 178 ● Commercial Biotechnology: An International Analysis ic adaptations. Consequently, numerous regener- seeds of wild relatives; sometimes the increase is ated plants will be required to determine if a par- as much as tenfold (68). ticular selection procedure yields whole plants Although the agronomic (applied) research ef- with important agronomic traits. on the other fort is devoted primarily to increasing the amount hand, pollen or embryo manipulation may cir- of seeds and seed protein, current basic research cumvent some of these problems. efforts are devoted both to increasing the quali- Genetic manipulations can make plants resist- ty of the stored materials and to exploring plant ant to chemicals or can enhance their response gene structure. Because plants are capable of syn- to chemicals. These traits are of particular impor- thesizing all of the amino acids required for pro- tance to the agricultural chemical industry. For tein synthesis from simple carbon- and nitrogen- instance, various plant growth regulators are pro- containing precursor molecules, the exact amino duced by this industry. These chemicals can af- acid composition of the stored protein in seeds fect many stages of the growth or reproduction may not matter to a plant, and seed proteins often activities of plants to give a crop with increased have an unbalanced amino acid composition. Be- yield. Enhanced response to these chemicals al- cause humans and most animals are unable to lows the crop to be grown at a lower cost. synthesize eight amino acids (the essential amino acids), the composition of ingested protein mat- Producing herbicide-resistant plants can have ters very much in their nutrition, definite benefits, especially in crop rotation. For instance, corn is naturally resistant to triazine Much is known about the structure of the stor- herbicides, whereas soybeans are not. Occasional- age-protein products and the genes encoding ly, soybeans do not grow well in a field the year these proteins in the major crop plants. In all cases after triazine-sprayed corn was grown there. In studied so far, the storage-protein genes are found this case, one solution would be to introduce tri- in small gene families with 3 to 30 members. Typ- azine resistance into soybeans. This particular ically, a few genes of the multigene family con- resistance is due to a modified protein in the tribute a significant fraction of the total protein, chloroplast membrane. Therefore, resistance be- There is not much genetic variation among the tween dissimilar species could be transferred by seed storage-protein genes of a given species, al- protoplasm fusion or liposome-mediated chloro- though this low variation might be due to the lim- plast transfer (38,66). It should be noted, though, ited diversity of the varieties currently studied, that increased use of agricultural chemicals could These crops may have lost much of the original have serious environmental consequences. diversity present in the progenitor species during the intensive plant breeding activities that PRIMARY PLANT PRODUCTS have occurred throughout history. The largest research effort in the modification DNA clones of storage proteins are available of plant products using biotechnology is concen- from several crop species: soybean, garden bean, trated on the improvement of seeds and seed pro- corn, wheat, and other less significant crop plants. teins. Seeds serve a dual role in agriculture. They Changes in these genes can be made readily in are the major source of food for people and ani- vitro to improve the balance of amino acids in the mals and represent an easily stored form of plant protein. The difficult part is reintroducing the material, and they are also the material for propa- altered storage-protein gene back into the crop gating the next plant generation. The storage ma- plant and ensuring that this novel gene is ex- terials of seeds contain all of the materials neces- pressed appropriately. Most storage proteins are sary to nourish a plant, because each seed must present only in seeds. Retention of this tissue support the initial phases of germinlation and specificity is important; storage proteins’ presence seedling establishment until the plant is self-suffi- in other plant cells may be detrimental. Another cient. During domestication, various crops have important consideration is that the storage-pro- undergone an enormous exaggeration of the nor- tein genes are found in families. Introduction of mal storage reserves. Today, far more material a new gene may change only a fraction of the total is stored in agricultural crop seeds than in the protein produced. To modify the overall amino Ch. 6—Agriculture ● 179 acid composition, several genes may have to be Table 36.—Examples of Secondary Plant Products of introduced or the natural genes deleted and Economic Value replaced by novel genes. In some crops such as Agricuitural chemicais: corn, there are mutations that reduce the pro- Pyrethrins duction of zein, the storage protein. These mu- Rotenone Nicotine tant genes can be used to reduce the zein concen- Allelopathic compounds tration, thus allowing an introduced gene to have Antibiotics against soil microbes a greater impact on overall amino acid composi- Pharmaceutical drugs: tion.’ Codeine Morphine An alternative to the modification of existing Steroids Cardiac glycosides crop species’ genes is the introduction of com- Alkaloids pletely novel genes isolated from other organisms. Reserpine Genes whose products are very rich in the amino Retinoic acid Caffeine acids that are deficient in a particular seed type Cannabinoids could be introduced to increase the concentra- Antitumor compounds tion of specific amino acids. One promising ex- Fiavorlngs and saits: ample of this type is the storage protein of the Licorice Brazil nut (97). This protein is composed of 25 per- Coumarin Coiorings and pigments: cent sulfur-containing amino acids (methionine Anthocyanins and betacyanins and cysteine). Legume seed protein usually is defi- Carotenoids cient in these amino acids. Introduction of a few industrial intermediates: copies of the Brazil nut storage-protein gene into Latex Lignin legume species might overcome the sulfur amino Dye bases acid deficiency. Proteins of unusual composition Steroid and alkaloids products may offer the quickest method of preparing a SOURCE Off Ice of Technology Assessment, adapted from E A Bell and B V Charlwood (ads.) Secondary Plant Products (New York” Springer-Verlag, gene to complement deficiencies in major crop 1980). storage proteins. compound to a bacterial or fungal cell, for in- SECONDARY COMPOuNDS FROM PLANTS* stance, could offer an opportunity for providing Table 36 lists some of the desirable secondary a steady supply of these compounds, although products from plants. Very little research has much more knowledge concerning the genetics been done on the tissue culture production of and biochemistry of the pathways that produce these compounds, yet it should be possible to pro- these compounds is necessary. Another possibility duce important high-value plant products using is identifying and modifying the gene coding for culture systems instead of gathering plants from the enzyme responsible for the rate-limiting step nature. Cell culture offers the advantages of re- in product production. Overproduction of the producibility and control over production where products could result from the plants being seasonal variations, weather changes, or disease grown in culture or in the field. are not problems (40,57,95). On the other hand, There is little current U.S. research effort to a difficulty in the production of some products improve the yield of secondary plant compounds is maintaining the plant cell culture in a differen- from cultured cells or whole plants. The Federal tiated state such that compound production Republic of Germany, Canada, India, and Japan, occurs. on the other hand, have large research programs, Biotechnology offers many opportunities for the as measured by the number of papers presented production of secondary plant compounds. The at the 1982 International Congress of Plant Tissue transfer of the plant metabolic pathway for a and Cell Culture (58). Japan, for instance, has — . scaled up the growth of tobacco cells to 7,000 ““[-his topic was cotered by a recent OTA workshop entitled “Plants: The Potent ial for Extracting Protein, Nledicines, and other liters, and researchers at the University of British (Isefu] (;h~mlra]s” ($j~) Columbia are growing 100 liter batches of Mada- 180 . Commercial Biotechnology: An International Analysis gascar periwinkle cells in order to isolate antican- mental factors such as light, water, and temper- cer compounds (58). In fact, the Japanese Gov- ature. Many proposals have been made to im- ernment is spending $150 million over 10 years prove the efficiency of this system by genetic for research on obtaining secondary compounds manipulation. from plants. It is argued by some, though, that The critical step of the photosynthetic CO fix- plant cell culture for producing secondary prod- Z ation cycle is catalyzed by the enzyme ribulose ucts is necessary only when good farm land is not bisphosphate carboxylase (RuBPCase), probably abundant (65). the most abundant protein on Earth. This enqyme PLANT GROWTH RATE is sequestered in chloroplasts, the cellular organelles where photosynthesis occurs. It is a complex The rate at which plants grow can limit both molecule synthesized from both chloroplast genes the amount of harvestable biomass (food, fiber, and nuclear genes (50,51). secondary products) and the length of time between planting and harvesting. Traditional plant When photosynthesis originated, the Earth’s at- breeding has been quite successful in modifying mosphere is postulated to have been nearly and improving plants to respond to modern ag- devoid of oxygen. The oxygen we have today is ricultural practices of herbicide, pesticide, irriga- a byproduct of photosynthesis, and oxygen com- tion, cultivation, and high-fertilizer application. prises about 20 percent of our atmosphere. RuBP- These breeding programs have established that Case initially evolved in a low oxygen atmosphere there is no single gene for yield. On the other but now must fix CO. with a large excess of 0. hand, much is known about the genetics of har- present. RuBPCase can utilize this 0, in what ap- vestable products such as seed size. Additional- pears to be a nonproductive enzymatic reaction. ly, there are single gene mutants, such as that for This process is called photorespiration and results gibberellic acid, that can affect plant growth in a net loss of fixed COZ (45). Photorespiration dramatically. Increased understanding of these can decrease crop yields by as much as 50 per- areas of genetics may have an impact on this area cent (82). It is ironic that RuBPCase activity over of plant biology. For instance, a plant can be im- the past millions of years has produced the Oz agined that had a decreased amount of total bio- that now decreases the efficiency of photosynthe- mass but an increased amount of harvestable sis. On the other hand, it has been postulated that product. the ubiquitous and continued presence of photo- respiratory activity implies some natural selection PHOTOSYNTHETIC EFFICIENCY advantage (61). Photosynthesis is the basis for most life on Suggestions have been made for modifying Earth. Higher green plants, algae, and some bac- RuBPCase or other enzymes involved in the pho- teria can utilize the energy in sunlight to split tosynthetic system. For instance, genetic manip- water molecules; in this process, energy is gen- ulations that would increase the affinity of erated and utilized to combine atmospheric car- RuBPCase for COZ or decrease its affinity for Oz bon dioxide (CO,) into an organic form as well as could substantially increase net COZ fixation. It to drive other energy requiring processes of has yet to be determined what effects these plants. A byproduct of this reaction is molecular changes would have on the survivability of plants. oxygen (O ). Thus, photosynthesis is not only the z In addition to manipulating the enzymatic sys- ultimate source of fixed carbon we use as food tem, changing the plant’s anatomy, such as the and fiber, but also of the oxygen we breathe. types of cells in leaves, might be possible. Several Because photosynthesis is so important to food groups of higher plants have increased rates of production, much research has focused on the COZ fixation that correlate with modified anatomy mechanism of photosynthetic action. The photo- and physiology. Very little is known about the synthetic system is very complex, combining en- genetic control of leaf and cellular anatomical zymatic activities, key roles played by cellular development, so near-term success in modifying organelles, and plant anatomy as well as environ- these aspects of plant anatomy is unlikely. Ch. 6—Agriculture ● 181

Genetic manipulations to increase photosyn- them to nonresistant plants. Biotechnology also thetic efficiency, and consequently food produc- could aid in the understanding of their production, are very difficult now because of the com- tion and possibly help develop their production plexity of the system. It will be several years in controlled laboratory culture systems. before rDNA technology will aid in producing agriculturally important plants with increased inherent photosynthetic efficiency. Uses of micro-organisms for crop improvement PLANT-PRODUCED PESTICIDES Applications of biotechnology in the area of Some species of plants are highly resistant to crop improvement include genetic manipulations potentially damaging insects. Although not very of micro-organisms that interact with plants in much is understood about this phenomenon, it nitrogen fixation, for example, or that produce appears that certain plants can produce com- substances such as insecticides of potential benefit pounds that are toxic to specific species of insects to plants. These applications are discussed fur- ) Or that interfere w’ith the insects normal repro- ther below. ductive or growth functions (86). An African plant, for example, produces a compound that in- NITROGEN FIXATION terferes with a particular caterpillar’s molting, Plants have a universal need for metabolically and, as a result, the insect cannot eat (48). other usable nitrogen in the form of ammonia (NH), plants are known that produce chemicals that which can originate either from the air or from cause potentially harmful insects to avoid those applied ammonia fertilizer. Biological nitrogen fix- plants for feeding or egg laying (59). The specifici- ation, the process by which living systems con- ty of these plant-produced insecticides and non- vert nitrogen gas in air to NH, is catalyzed in liv- preference chemicals allows the control of pests ing systems by the enzyme nitrogenase. Nitrogen- while permitting potentially useful insects to sur- ase, and consequently the capacity to fix nitrogen, vive. Many applied chemical pesticides do not is found only in prokaryotes, either bacteria or have this specificity. 1t may be feasible soon to blue-green algae. Some nitrogen-fixing prokary - clone and transfer the genes that code for these otes are free-living and can be either anaerobic naturally occurring chemicals, allowing them to or aerobic; other prokaryotes fix nitrogen only be expressed in other plants. The result of these when they coexist symbiotically with a higher gene transfers could be to reduce greatly the plant host. The application of biotechnology to amount of agricultural chemicals needed and, nitrogen fixation may result in more efficient pro- hence, the cost of production. karyotic nitrogen fixation or the transfer of ni- Investigations into chemicals released by some trogen-fixing ability to plants themselves. plants that adversely affect neighboring plants is Nitrogen-fixing prokaryotes share some com- receiving an increased amount of attention ($10). mon physiologic features. First, nitrogen fixation These herbicides, known as allelopathic chemi- typically does not occur in cells already supplied cals, may influence another plant directly or may with usable nitrogen. Second, nitrogenase is ox- act by inhibiting the micro~organisms normally ygen-sensitive, so all nitrogen-fixing organisms associated with that plant. Allelopathic chemicals have mechanisms for limiting oxygen. Third, NH,, consist of a wide variety of chemical types, and which is toxic at high concentration, must be con- their actions range from inhibiting cell division verted readily into organic nitrogen, to protein synthesis to photosynthesis. Much more still is to be learned about these naturally Biological nitrogen fixation is energy intensive occurring chemicals, including the factors influ- (84,88,93), and in plant-microbe associations, this encing their production and how best to use them energy is derived from the plant. Estimating the agriculturally. A goal of biotechnology is to iden- energy expenditures for biological nitrogen fixa- tify the genes responsible for the synthesis and tion is difficult, and few reliable numbers are release of the plant pesticides and to transfer available. The energy cost of nitrogen fixation is 182 . Commercial Biotechnology: An International Analysis an appropriate concern, but this cost should be Recent work on legume-Rhizobium symbiosis has compared with the true cost of nitrogen nutri- focused on several areas, including the determination in field-grown plants (i.e., the cost of chemical tion of energy costs, pathways of nitrogen assim- fertilizer synthesis and other biological costs to ilation and transport, the biochemistry of sym- the plant). biotic nodule development, and the genetics of the bacterial partner. It may be possible to decrease the energy required for nitrogen fixation by 30 to 50 percent Symbiotic nitrogen fixation can be a significant by preventing the evolution of hydrogen during source of nitrogen nutrition for legume crops, but nitrogen fixation. Some bacteria have a set of its practical application can be limited by several genes that allow for hydrogen recycling. These sets of factors, some environmental, others intrin- genes have been cloned and inserted into less sic to the plant-bacterial partners. Soil conditions efficient nitrogen-fixing bacteria. The recipient and environmental levels of fixed nitrogen have bacteria showed increased nitrogen-fixing effi- significant effects on rhizobial survival, nodule ciency (37). formation, and levels of nitrogen fixation. One crucial area, poorly understood at present, is the Agriculturally important nitrogen-fixation sys- role played in symbiotic nitrogen fixation of soil tems discussed below are nonlegume nitrogen fix- micro-organisms other than Rhizobium. Under- ation and symbiotic nitrogen fixation in legumes. standing nodule formation in detail will help ex- Nonlegume Nitrogen Fixation.—Nitrogen plain environmental effects on infection that may fixation is performed by several groups of bac- relate to competitiveness and effectiveness of teria and blue-green algae that live free in soil or various Rhizobium inocula. In addition, an in aquatic habitats. The best studied nitrogen- understanding of why legumes, and not other fixing bacterium is the free-living Klebsiella pneu- plants, can nodulate would be essential for at- monia, which can easily be grown in the labora- tempting to extend host range. tory. * The gene complex coding for the nitrogen- Another nitrogen-fixing micro-organism, the fixing function in Klebsiel]a pneumonia is com- actinomycete Frankia, is of interest because it prised of 17 genes, and the regulation and activi- nodulates a number of unrelated plant genera. ties of these genes now are being studied exten- This ability suggests a simpler genetic symbiosis sively. Still, the nitrogen-fixing function is ex- than that of Rhizobium and legumes. If this is tremely complex and not well understood. true, it may be easier to extend genetically the Algae have been used to fix nitrogen in Asian host range of the symbiotic relationship of Frankia rice paddies for many years. Recently, research than to extend that of Rhizobium (41). has produced strains of algae that could be used Specific host proteins are produced in nodules. in soil to fix nitrogen for domestic crops. Algae One of these is leghemoglobin, which controls the are inexpensive compared to nitrogen fertilizer, oxygen content of the infected nodule cells. This and because they release nitrogen slowly into the protein is produced in high quantities in nodules. soil, algae bypass the problem of nitrogen leaching Two research groups have cloned the genes for (60). Furthermore, algae are being considered the soybean leghemoglobin (77,96), but their mech- botanical equivalent of yeast for genetic manipula- anism of action is not understood. Other new pro- tion, and vector systems for algae transformation teins appear when nodules develop (76). These are in development (41). are called “nodulins” and are likely to be essen- Symbiotic Nitrogen Fixation in Legumes.— tial for symbiotic nitrogen fixation; however, their The legume-llhizobium symbiosis is the most exact role is not known. Some of these might be agriculturally significant biological source of fix- enzymes, such as those for ammonium assimila- ed nitrogen. Both grain and forage legumes have tion (67). When nodulins and their functions are large amounts of nitrogen fixed by Rhizobium. better understood, a logical extension of current research will be to move cloned modulation genes ● Two other free-living nitrogen-fixing bacteria, Azosporillum and into other plants. This may make it possible to Azotobacter, also are important agriculturally. extend nitrogen fixation to other plant species. Ch. 6—Agriculture ● 183

Summary. -Individual nitrogen-fixing systems do not appear to harm humans or animals, and can be improved or extended by a knowledge of they are biodegradable. how they work and by techniques that permit the There are three natural sources of microbial genes for nitrogen fixation to be altered and mov- insecticides: bacterial, viral, and fungal. About 100 ed. One line of research will be the improvement bacteria have been reported to synthesize toxins of existing systems. Some new nitrogen-fixing sys- that are insecticidal. Very few of these bacteria tems have been proposed, as well. Proposals have have been studied extensively, but in one case (Ba- been made, for example, to insert directly the cillus thuringiemis kurstaki), the gene that con- genes for nitrogen fixation into the plant genome. trols the synthesis of a toxin has been cloned using Success of these as well as other systems in the rDNA technology (69). The cellular mechanism of end will be measured by the practicality of the the toxin’s insecticidal activity is not yet well new association, The problems of specificity, ox- understood. Genes for bacterial toxins could be ygen regulation, and effect on yield must be con- put into other bacteria that normally exist on the sidered, and these will require broad-based know- surface of plants (48). ledge of biochemistry, genetics, and physiology in a variety of nitrogen-fixing organisms (see table Viruses also can be insecticidal by virtue of their 37). There is a considerable amount of research ability to cause disease in various insects. Several being done in the area of nitrogen fixation, and families of viruses have been identified as poten- genetically manipulated Rhizobiwn maybe field tially pathogenic to insects, but the family Bacu- tested soon (85). Zoviridae has received the most attention. The U.S. Environmental Protection Agency (EPA) has regis- MICROBIALLY PRODUCED INSECTICIDES tered, or is considering registering, several bacu- loviruses for the treatment of such diseases as cot- Problems or drawbacks associated with chem- ton bollworm, Douglas fir tussock moth, gypsy ical insecticides, including their increasing cost moth, and alfalfa looper (81). One particular bacu- and environmental hazards, their lack of specifici- lovirus [Autographa californica nuclear polyhe- ty, and the ease with which insect resistances to drosis virus (AcNPV)) has been genetically and mo- such insecticides are developed, have sparked lecularly well characterized, making the use of renewed interest in microbially induced insect rDNA techniques with this virus feasible, control to improve crop yield. Microbial insecticides, because of their narrow host ranges, can In contrast to bacterial and viral insecticides, control specific pests while allowing natural pred- fungal pathogens need not be ingested; they can ators and beneficial insects to survive. Further- disable or kill the insect by colonizing its surface. more, the few characterized microbial pesticides More than 500 fungal species can infect insects,

Table 37.—importance of Basic Research (Model Systems) on Nitrogen Fixation

Research area Or9anisms used in research Importance Cloning nitrogenase genes...... Klebsiella pneumonia Direct study of genes Introduction of nitrogen-fixing genes into other organisms Physiology of nitrogen fixation ...... Azotobacter Improving energy efficiency of nitrogen Anbaena fixation in the cell Klebsie/la Understanding role of ammonia in nitrogen fixation Biochemistry of nitrogenase ...... Clostridium Understanding oxygen sensitivity of Azotobacter n itrogenase Klebsiella Improving energy efficiency of Rhodospirillum nitrogenase enzyme Cell and developmental biology of modulation ...... Rhizobium Bacteriallplant recognition process Modulation process SOURCE Office of Technology Assessment 184 . Commercial Biotechnology: An /international Analysis

and there are susceptible hosts in all the major searchers intended to spray these new bacteria orders of insects (72). The use of fungal insec- on field crops early in the growing season, so that ticides will require a better understanding of their they became the established strain and crowded pathogenesis and ecological requirements. The out the natural, harmful bacteria. * It is thought large-scale production of these pathogens is dif- that this approach could prevent up to $5 billion ficult, and, in many cases, the technology is not worth of damage to crops throughout the world developed. Also, their safety with regard to higher (80). animals and humans has not been adequately studied (43,44)81). Conclusion The first successes in DNA transformation of DISEASE-SUPPRESSIVE AND GROWTH- plants to give novel characteristics have been REGULATING MICRO-ORGANISMS achieved. Continued research on vectors and Increasing plant yields may be achieved through plant tissue culture is needed to extend these suc- better understanding of the many bacteria that cesses from model systems to major crop plants. protect plants from naturally occurring, deleteri- The identification of genes that would substan- ous conditions (80,92). Some of these bacteria act tially improve a crop plant requires cooperation by producing compounds that bind iron. Others between traditional breeders and geneticists. act by altering the pH or the salinity of the soil. Plant molecular biologists need the knowledge of Still others prevent frost damage to leaves. Fur- the more traditional plant disciplines to produce thermore, there are other bacteria that produce agronomically useful plants more rapidly. Inter- compounds that regulate plant growth. The disciplinary basic research on plant biochemistry, mechanisms by which these processes occur is development, and physiology will be required to not well known. With better understanding of the help identify important genetic traits, to define genetics and biochemistry of some of these biosynthetic pathways in plants, and consequent- bacteria and their environment, it may be possi- ly, to develop better plants. Many single gene ble to program them genetically to produce com- traits in agronomic species have been used in past pounds to change any number of soil and growth breeding programs; such genes also can be stud- conditions. ied using new biotechnology, The novel technologies also can introduce genetic material from For two reasons, it probably will not be eco- plants that normally do not interbreed and pos- nomically feasible to incorporate the useful micro- sibly provide simultaneous introduction of many organisms directly into soil on a regular basis, specific traits into a single breeding line. because large amounts of the micro~organisms would be required and because the useful micro- The next 5 years will produce major break- organisms might not be able to compete with the throughs in DNA transformation in model sys- well-established microorganisms already present tems and routine regeneration of plants from our in the soil. Instead of being incorporated into soil, major crop species. Problems such as changing the useful microorganisms could be given a com- the composition of the storage proteins of cereals petitive advantage by applying them to the seeds and legumes are difficult, because multigene or other plant parts prior to planting. Then they families limit the impact of single gene introduc- would already have established a niche allowing tions. Within the next decade, however, genes them an advantage over naturally occurring conferring resistance to stress and disease are micro-organisms (92). likely to be introduced and expressed in plants. The first authorized deliberate release of genetically manipulated bacteria, planned for the fall of 1983, was to prevent frost damage. The genes ● This experiment was indefinitely postponed pending the outcome coding for the compounds that initiate ice crystals of a lawsuit filed against the U.S. Government raising the question of the necessitJ’ of filing an I+;nvironmental Impact Statement prior were identified and deleted from a bacterial strain to the deliberate release into the environment of a genetically normally found on many crop plants. The re - manipulated microorganism. Ch. 6—Agriculture . 185

The production of better plants has obvious val- largest segment of the market, $1.2 billion, is for ue in food production, but biotechnological de- corn seed. The world market for seeds is esti- velopments in plants certainly will have other mated at $30 billion. The United States exports applications. Contributions to health care in the $250 million of seeds per year, and U.S. subsidi- form of novel biological substances may result. aries overseas contribute to world seed produc- Floriculture and the forestry industry will bene- tion (85). fit from the development of new strains and accel- Another potentially lucrative market is the mar- eration of breeding programs. Plants could be ket for cut flowers. This market may be one of used potentially as a source of industrial enzymes. the easiest horticultural markets to enter with The fiber industry is likely to see an increase in novel plants produced by biotechnology because the production and quality of plant fibers, and it readily accepts and depends on novel pheno- an increased production of biomass (organic mat- types. ter that grows by photosynthetic conversion of solar energy) should contribute to the generation It is likely that genetically manipulated plants of energy in the form of ethanol (39). The pro- may increase the demand for commercial seeds. duction of energy from biomass is discussed fur- Drought-resistant plants could increase the acre- ther in Chapter 9: Commodity Chemicals and age planted, and other plants might be planted Energy Production. at higher density, both resulting in an increase in the number of seeds sold. Commercial aspects of biotechnology A phenomenon not necessarily related to bioin plant agriculture technology is the long-established movement by U.S. farmers toward buying new seeds every Although the generation of new plant varieties year, rather than saving and planting seeds from may be important to the farmer in increased crops produced the previous year. The evidence yields or decreased costs of production or to the is gathering that seeds from companies give bet- end processor in better food products, the com- ter results than a farmer’s own seeds. Because mercialization of plants developed using new bio- the cost of seeds is only 3 to 7 percent of agricul- technology is in the hands of seed and live plant tural direct costs, it behooves the farmer to get producers. The ability of the U.S. seed and plant the best seeds possible (85,100). The U.S. soybean producers to develop and market new plants will industry, for example, has moved recently from determine the competitive position of the United buying approximately 20 percent of its seeds a States in plant agriculture. In general, seed pro- few years ago to buying approximately 40 per- duction is not a business where international com- cent of its seeds today (85). This trend could petition plays a role. Because the climates around amplify the demand for seeds produced by bio- the world vary so greatly, researchers would have technology. to do field trials and grow seed in other countries. The industrial production of agricultural chem- Thus, each locality generally does its own re- icals now produced by micro-oraganisms or plants search and seed production. could be a substantial market. These pesticides, Excellent research programs in the applications along with pest-resistant and nitrogen-fixing of biotechnology to plant agriculture exist in the plants, could begin to capture the $10 billion United States, the United Kingdom, and Australia. domestic agricultural chemical market (78). Because of the climatic differences among these U.S. corporate investment in agricultural re- countries, the research is concentrated on dif- search has been high in the last few years. Many ferent species. of the firms that have invested in plant biotech- The seed market is one of the largest markets nology are chemical firms, especially firms that to which biotechnology is directed. In the United produce agricultural chemicals. The investment States, $4.5 billion of seed are sold to farmers each may be a response to a potential decrease in the year. Cuttings of vegetatively propagated plants agricultural chemical market due to the develop- account for $500 million of this market, and the ment of plants not needing chemicals (e.g., nitro-

25-561 0 - 84 - 13 186 ● Commercial Biotechnology: An International Analysis gen-fixing plants, pest-resistant plants), the devel- The seed and vegetative cutting market is very opment of biological pesticides, or the develop- large, and it appears that U.S. companies are ori- ment of plants with enhanced responses to chem- ented mainly toward domestic markets because icals. Another major industrial sector investing of the transportation costs and the expense and in plant biotechnology in the United States is the inconvenience of field trials in other countries. petroleum industry. The firms in this sector may Probably because of large domestic markets, see plants as the next source of energy, either in many new entrepreneurial firms are directing the form of biomass or photosynthesis itself. Phar- their efforts toward plant agriculture. In fact, the maceutical and food companies also are investing number of NBFs in plant agriculture is third only in plant agriculture. How the large chemical and to the number in pharmaceuticals and animal ag- petroleum corporations, the existing seed com- riculture (see Chapter 4: Firms Commercializing panies, and the NBFs will compete for market Biotechnology). shares is yet to be seen.

Priorities for future research

Animal agriculture nological applications are realistic. Advances in basic knowledge about metabolic pathways in The prospects for the application of biotech- beneficial bacteria may lead to useful growth-en- nology in the areas of animal and plant agriculture hancing compounds. Finally, more basic knowl- are truly exciting. To encourage the introduction edge concerning the actions of nascent products and progress of biotechnology in animal agricul- such as rDNA-produced GH is needed to discern ture, however, several persistent problems must effectiveness and safety. be overcome. These problems include the following: Given the novelty of disciplines such as molecular genetics and cellular biology in animal sci- ● developing effective delivery systems for ence, there is some question as to whether suffi- almost all products of new biotechnology to cient communicative links are established yet be- be used in animals; tween basic and applied scientists. The efforts of ● achieving consistent expression of polypep- applied scientists usually are communicated to tides such as those used for subunit vaccines animal growers in the United States through the from rDNA systems; land grant universities’ State Agricultural Experi- ● developing host/vector systems that yield ment Stations and extension services, supported products more closely resembling mammali- by USDA. A corollary to the productiveness of an molecules (e.g., glycosylated proteins) and future research rests in encouraging the establish- that secrete products for easier purification. ment of communication between basic and ap- ● demonstrating product stability under the cli- plied scientists to encourage biotechnological ap- mactic and handling conditions where these plications in animal agriculture. products (e.g., subunit vaccines) will be implemented; and ● achieving higher immune responses with Plant agriculture * subunit vaccines, for example, by developing delivery systems that prolong exposure Because interest in plant molecular biology is to the vaccine. fairly recent, the most important research priority is an increased understanding of DNA structure More basic knowledge about biological processes in animals and about the cellular and —..— “Research goals similar to those outlined in this section were pub- molecular biology of pathogenic bacteria and lished recently by the National Research Council (83) and the Na- animal parasites is required before many biotech- tional Academy of Sciences (82). Ch. 6—Agriculture . 187

and gene expression in plants. * The knowledge novel traits from other plants. Both approaches generated from investigations of DNA sequences warrant investigation. and their functions will be essential to the use of Plants are known to produce a variety of sec- biotechnology in crop improvement, although the ondary metabolizes that have either pharmaceu- initial contributions of biotechnology will not be tical or agricultural uses, yet little is known about in crop improvement but in acquiring a better the genetic regulation of their production or the understanding of the basic biology of plants. development of culture systems for optimal pro- It is unlikely that results from laboratory duction. Better understanding of these areas “model” species can be extrapolated to agricul- could lead to the production of new, improved, turally important crop plants. Therefore, research or less expensive drugs and compounds that at- is needed for improving and understanding the tract or repel insects for controlling weeds and laboratory culture conditions for cells from these pests. important plants. These plants must be able to Goals for improved biological nitrogen fixation be regenerated from single cells on a routine basis include extending nitrogen-fixing bacterial sys- before many experiments using novel biological tems to a wider variety of plants, transferring the techniques can be performed. Much more work bacterial nitrogen-fixing genes to plants, and mak- needs to be done before any plant cell vector can ing existing nitrogen-fixing systems more efficient. be used routinely. Additionally, a continued Genetic studies will reveal how nitrogen-fixing search for vectors for monocots is necessary if genes are regulated, including how they respond rDNA technology is to have an impact on some to environmental levels of nitrogen and oxygen. of the most important crop species. The extension of any of the nitrogen-fixing sys- It also is important to develop better selection ems depends partly on understanding more about methods. For instance, it is essential to be able survival and competition of nitrogen-fixing to determine rapidly which cells carry specific bacteria in field conditions. Temperature ex- genes and whether or not those genes are acting tremes, nutrient and pH status of soils, and pres- appropriately. ence of other micro-organisms are factors that Both basic and applied research efforts in im- influence colonization of host plants. Reliable, proved plant characteristics are quite active. The analytical descriptions of the field ecology and economic impact of finding disease or environ- physiology of nitrogen-fixing organisms are mental resistances in the near term are potentially needed. great enough that this research area is the pri- Much basic biology of microbial insecticides is mary thrust of many of the new plant genetics yet to be understood. In order to determine the companies in the United States. Considerable ef- appropriate strategy for their use, it is necessary fort continues in universities, as well, although to study the influence of such factors as sunlight, overall funding for the university effort probably temperature, rain, and relative humidity on the is much less than that represented by the cur- microorganisms. Additionally, little is known rent industrial effort. For many desirable traits, about the mode and schedule of application and the actual protein product of the gene is not dose required for effective use of microa-- known. Cloning and genetic analysis of such genes ganisms in the field. Criteria established by EPA would greatly increase the knowledge of what require an analysis of the pathogen’s possible ef- kinds of proteins are involved in disease and other fect on human and animal health and the environ- resistances. Other improvements in specific plant ment. characteristics may be made by modifying genes in major crop plants or by the introduction of Even with the lack of biological knowledge currently, it is possible to apply the techniques of ● ’1’11[’S(’ prioriti[’s onl} c(n er the trrhniques discussed in this re- biotechnology to the field of microbial insecti- port It should I](; noted, though, that gerwtir ad~ancm and applications are ciependent on concurrent research in plant hiorhemistr} cides. Approaches include the development of and ph~’siologj’ more potent strains, an increase in their tolerance 188 ● Commercial Biotechnology: An International Analysis to environmental stresses, and an extension of of action. Further research on this topic would their host ranges. The cloning of the Bacillus toxin allow for more specific, effective, and environ- gene, for example, opens up possibilities for the mentally sound insecticides. genetic manipulation of this gene to produce a Because of the complexity of the photosynthetic more potent toxin and for the transfer of the gene system, more basic research is needed on the en- to other microaganisms. zymatic processes of photosynthesis and their The virus AcNPV currently is well enough char- regulation and compartmentalization. Photosyn- acterized that its use as a vector is now possible. thesis is used for the production of carbohydrates, Some ideas for genetic manipulation include the and understanding how these compounds are introduction of insect-specific toxins and broaden- partitioned throughout the plant may allow the ing the host range of the virus. The use of fungal ability to direct them into the harvestable parts insecticides requires a better understanding of the of the plant. physiology, genetics, and pathogenicity of the Finally, knowledge concerning the ecological genes that code for these insecticides. This under- results of growing plants more densely or of standing should lead to the development of strains growing plants on marginal land is scant. More with increased virulence and greater ease of pro- research is needed on soil and water use and min- duction in culture (81). eral cycling plants. Plants are capable of producing insecticides, yet little is known about their biosynthesis or mode

Chapter 6 references*

Animal agriculture references 6. 1 7.

2 8.

10.

11.

12.

13. Ch. 6—Agriculture ● 189

*31 15,

32. 16,

17,

18,

19,

for the Office of Technology Assessment, U.S. Congress, August 1982.

Plant agriculture references

38. 24

*39. 25. 40.

26 41.

42.

27 43.

44. 28

45 190 . Commercial Biotechnology: An International Analysis

63.

64.

65.

66.

67.

69.

70,

,71

75 Ch.. 6—Agriculture . 191

80 92

81 93

*82

*83. 95

97,

98.

99.

100.

101 chapter 7 specialty Chemicals and Food Additives Contents

Introduction...... 195 Amino Acids ...... 195 Glutamic Acid...... 196 Methionine ...... 197 Lysine ...... 197 Tryptophan ...... 197 Aspartic Acid ...... 198 Phenylalanine...... 198 Enzymes ...... 198 Vitamins...... 200 Vitamin B2 ...... 201 Vitamin B12 ...... 201 Vitamin C ...... 201 Vitamin E ...... 202 Summary ...... 202 Single-Cell Protein...... 202 Complex Lipids ...... 205 Fatty Acids ...... 205 Fatty Alcohols ...... 206 Microbial Oils...... 206 Sophorolipids ...... 207 Steroids ...... 207 Aromatic Specialty Chemicals ...... 208 Polysaccharide Biopolymers ...... 209 Commercial Aspects of Biotechnology in Specialty Chemicals ...... 211 Priorities for Future Research ...... 212 Chapter p references ...... 212

Table Table No. Page 38. Typical 1982 Selling Prices of Selected Microbial, Plant, and Animal Protein Products . . . 203

Figures figure No. Page 17. Uses of Amino Acids ...... 196 18, Conversion of Starch Into High Fructose Corn Syrup (HFCS) ...... 199 19. Hydrolysis of Triglycerides ...... 206 20. Microbial Modifications of Steroid Molecules ...... 208 21.An Example of a Microbial Aromatic Hydroxylation ...... 209 Chapter 7 Specialty Chemicals and Food Additives

Introduction

In the production of specialty chemicals, de- process if a microorganism were identified that fined in this report as chemicals whose price ex- performed the synthesis. Both individual enzymes ceeds $1/lb (50¢kg) in cost, there are many poten- and biosynthetic pathways consisting of several tial applications of biotechnology. * The nearest enzymes can be manipulated genetically to in- term applications are in the production of special- crease production. ty chemicals that are already produced by proc- Finally, it should be noted that there are some esses using micro~organisms, e.g., amino acids and specialty chemicals synthesized in nature, such enzymes. Enzymes are the direct products of as complex polysaccharides, for which chemical genes, so their production is particularly accessi- synthesis is not feasible. Improving the syntheses ble with new genetic technologies. of these specialty chemicals in controlled micro- A number of specialty chemicals are chemical- bial processes is beginning to be investigated. ly synthesized. Some, including some vitamins, This chapter discusses the applications of bio- are synthesized chemically from petrochemicals. technology to the production of specialty chemi- Others, including fatty acids and steroids, are syn- cals. It also discusses applications to the produc- thesized chemically from naturally occurring tion of animal feed and human food additives, be- compounds. Current chemical synthesis produc- cause many of the genetic techniques applicable tion processes often require large energy inputs, to the production of specialty chemicals also apply have complicated synthesis steps, and yield many to the production of such additives. Since the byproducts. Potentially, some of the steps in cur- main difference between specialty chemicals and rent chemical synthesis processes could be re- food additives is in the Food and Drug Administra- placed by biological steps catalyzed by enzymes. tion’s (FDA’s) regulatory approval process for food Enzymes that perform some of the necessary con- and food additives, food additives are discussed versions in a very specific manner and with small here as a subset of specialty chemicals.** energy inputs are already known. If appropriate microbial enzymes (or higher organism enzymes) The several kinds of products that could be pro- were identified and characterized, the appropri- duced using biotechnology, which are discussed ate genetic information could be cloned and ex- in this chapter, are only representative of the pressed fairly rapidly in well-studied micro-orga- large range of products that could be synthesized nisms to produce or modify compounds such as using biotechnology. The specialty chemicals and vitamins, lipids, steroids, and aromatic chemicals. food additives market is extremely broad, and Alternatively, a chemical synthesis production many other applications of biotechnology to the process might be replaced entirely by a biological production of such products may be evident in the future. ● ’III{’ application of l)iot(~(’}~rlot(]g;” to the production of cornmodit~ chemirals, det In{’d in this report as chemicals that sell for less than

$1 per pound, IS discussed in (’hapfer 9.’ [.’omnwdi(.}’ [,’hemical.s ami ● ● F-I)A’s regulatory apprm’al processes are ciiscussd in (,’haptf~r khergif Prociu(’tion 15 Health, Safe[\, and En\’ironnwntal Regulation,

Amino acids _

In 1982, the worldwide sales volume of amino rate of 7 to 10 percent is expected during the re- acids was 455,000 metric tons (tonnes) valued at mainder of this decade. The world markets for $1.15 billion (see fig. 17), and an annual growth amino acids are currently dominated by Japanese

195 196 ● Commercial Biotechnology: An International Analysis

Figure 17.— Uses of Amino Acids

Specialties 1“/0

Anim 3

>ds 0/0

Anirnal 30

Worldwide volume Sales value 1982 total = 455,000 tonnes 1982 total = $1.15 billion

SOURCE: Office of Technology Assessment, adapted from P. L. Layman, “Capacity Jumps for Amino Acids, ” Chem. & Eng. News, Jan 3, 1983

producers, the largest of which is Ajinomoto. Glutamic acid Amino acid production in the United States, however, is beginning to expand. W. R. Grace is plan- The largest world market for an amino acid is ning to use a new plant in Maryland to produce the market for glutamic acid; the sodium salt of pharmaceutical-grade amino acids, and two Jap- glutamic acid, monosodium glutamate (MSG), is anese producers, Ajinomoto and Kyowa Hakko, used as a food additive. On the order of 300,000 are opening plants in the United States (47). tonnes of glutamic acid are produced annually worldwide (23,25). Approximately 30,000 tonnes Amino acids have traditionally been used as an- are used in the United States, and about one-half imal feed and human food additives, and their use of U.S. needs are met through imports at a price as animal feed additives may increase as other of about $2/kg (10). proteinaceous feedstuffs become more expensive. Recently, there has been increased use of phar- MSG is produced by an efficient bioprocess maceutical-grade amino acids for enteral and in- using a strain of Corynebacterjum. This strain travenous feeding solutions. Important constit- was first isolated, on the basis of the micro- uents of these feeding solutions are the essential organism’s ability to synthesize and excrete glu- amino acids, those that the human body cannot tamic acid, by the Japanese in the late 1950’s. Re- make. Leading U.S. manufacturers of such solu- ports through the Japanese patent literature in- tions are Abbott Labs, Baxter Travenol, and Amer- dicate that Ajinomoto, the world’s leading MSG ican Hospital Supply (30). As shown in figure 17, manufacturer, is applying recombinant DNA the specialty market accounts for only 1 percent (rDNA) techniques to Corynebacterium strains in of world volume of amino acid production, but an effort to improve glutamic acid production. * amounts to 18 percent of the sales value. The pro- *Strains of Corynebacterium are used extensively in Japan for duction of pharmaceutical-grade amino acids synthesis of several amino acids, but the Japanese bioprocess industry did not do basic research with these bacteria until recently. using biotechnology is receiving attention from However, patents and reports in the literature indicate that Japanese both U.S. and Japanese companies (28,47). amino acid producing firms have begun application of rDNA tech- Ch. 7—Specialty Chemicals and Food Additives ● 197

Methionine limiting essential amino acid in combination feeds for swine and poultry (58). Although tryptophan Another large market for amino acids is in ani- would seem to be a prime candidate for the animal feeds (47). Typical corn/soybean animal feeds mal feed supplement business, marketing analyses have low concentrations of the amino acids meth- have shown that the cost of tryptophan would ionine and lysine, so their nutritive value in animal have to be reduced to the $10/kg range (i.e., about diets is Iimited. Methionine and Iysine (see below), three times the cost of lysine) in order to interest therefore, are widely used as animal feed addi- feed formulators in its use [47). The current cost tives. Two companies in the United States, Mon- of tryptophan, $95/kg, makes its addition to ani- santo and the U.S. affiliate of the West German mal feeds out of the question at this time. firm Degussa, produce feed-grade methionine using a chemical process (9). Because this process The development of efficient bioprocesses for is quite inexpensive, it is not likely that competi- tryptophan production using either modified Cor- tive biological routes to methionine production ynebacterium or enterobacteria (intestinal bac- will be developed in the near future. teria) such as Escherichia coli could potentially lower tryptophan costs. The current level of un- Lysine derstanding of the E. coli aromatic amino acid pathway and sophisticated rDNA techniques that The production of the amino acid lysine is dom- are available should facilitate strain construction inated by three Japanese producers, Ajinomoto, in the enterobacteria. As for constructing a tryp- Kyowa Hakko, and Toray Industries (1 1), which tophan-producing Corynebacterium, basic under- together account for 90 percent of the world mar- standing of the synthetic pathway and develop- ket. Manufacturers’ prices are variable, general- ment of a vector system remain to be achieved. ly in the range of $3 to $4/kg for feed-grade lysine Manipulating any micro-organism to produce (43). The United States imports all its Iysine (67) tryptophan efficiently may be difficult, however, and in 1981 imported approximately 11,000 because the synthesis of tryptophan requires a tonnes (68). A plant for lysine production is be- greater expenditure of energy than does that of ing built in Cape Girardeau, MO. ) by the Japanese any other amino acid (l). The yield of tryptophan manufacturer Kyowa Hakko, and it is projected from a given carbon source, therefore, will be that the plant initial production of lysine will be lower than the yield for other amino acids. The

7)500 tonnes per year (40). yield of product from glucose is an important factor in determining production cost in a bioproc- Most lysine is produced in a bioprocess using ess. Information concerning production cost im- mutant strains of Cory/nebacterjum. A substan- provements made by the Japanese companies tial increase in lysine production and a corre- now manufacturing tryptophan is not available. sponding decrease in cost can be expected to result from applying rDNA techniques to these Progress has been made in developing a two- bacteria (30). In production processes, Corynebac- step enzymatic process for tryptophan produc- terium mutants already yield large amounts of tion (32). This approach requires three substrates: Iysine from a crude carbon source such as mo- glycine, formaldehyde, and indole. The high levels lasses (45). Amplification of Iysine biosynthetic en- of the two enzymes required for this process are zymes in these bacteria through gene cloning obtained by cloning and amplifying each of the should result in an increased synthesis rate and genes for these enzymes. This process has not yet amount. been commercialized, but is being investigated by the new biotechnology firm (NBF)* Genex (US.). Tryptophan Commercialization requires that the three substrates be priced low enough to meet the target The amino acid tryptophan is the second limit- price for tryptophan. Another enzymatic process ing essential amino acid in corn and the third for the production of tryptophan has been devel- niques to (,’oq’nebacteriu rn. Genex and W. R. Grace also have re- ● NBFs, as defined in Chapter 4: Firms Commercializing Biotech- search programs to develop genetic techniques for these bacteria nology, are firms that have been started up specifically to capitalize (30). on new biotechnology. 198 ● Commercial Biotechnology: An International Analysis

oped by Mitsui Toatsu Chemicals. Commercial substitute aspartame has spurred process devel- production of tryptophan by this Japanese firm opment. Aspartic acid is already available at an was due to begin in January 1983 (7,12). attractive price, and the research described below will make reasonably priced phenylalanine avail- The relative costs of corn and soybean meal in- able soon (30). Phenylalanine, like tryptophan, re- fluence the use of these products as animal feed quires large amounts of energy for the microbial additives. As the price of soybean meal, the main cell to make. However, it should be possible to source of protein, and thus amino acids, in poul- genetically manipulate enterobacteria or Coryne- try and swine feeds rises relative to feed-corn bacterium strains to overproduce phenylalanine, prices, as is expected during the 1980’s, there will thereby making the process economic. be a tendency to use less soybean meal in animal diets if less expensive feedstuffs are available. A A group of Australian scientists at the Univer- reduction in lysine production cost and a substan- sity of New South Wales, Kensington, is construct- tial reduction in tryptophan cost could result in ing E. coli mutants to overproduce phenylalanine increased incorporation of these amino acids in in either a batch or continuous-flow bioprocess animal diets as a substitute for proteinaceous soy- (15). No report of the commercialization of their bean meal. process has been made, Amino acid producers in Japan (Ajinomoto and Kyowa Hakko) may also be Aspartic acid applying rDNA techniques to improve phenylalanine production by their Corynebacterium Innovative processes for amino acid production strains in order to reduce phenylalanine costs. that involve immobilization of whole cells or enzymes for bioconversion of precursors to amino A single-step enzymatic process to produce acids are being developed (30). In the case of phenylalanine for use in aspartame is being aspartic acid, a constituent of the sugar substitute developed in the United States by Genex and in aspartame, an immobilized process has reduced Japan by Tanabe Seiyaku (31,73). In this process, the costs of production. An early process for yeast cells that contain the enzyme phenylalanine aspartic acid production involved the enzyme ammonia lyase (PAL) are utilized, Under the ap- aspartase in a one-step batch reaction. The life propriate conditions, PAL will catalyze the for- of the catalyst in this process was, at most, a few mation of phenylalanine from cinnamic acid and days. When the enzyme aspartase was immobil- ammonia. The economics of the PAL process are ized and a continuous-flow process was devel- very sensitive to the cost of the major raw ma- oped, a 40-percent saving in aspartic acid produc- terial, cinnamic acid, which is currently rather tion cost was realized (14). The life of enzymes expensive. Recovery of phenylalanine from the in immobilized systems can be increased many PAL process, however, will be much more fold, up to several months. Cost savings are due straightforward than recovery from the complex to reductions in the amount of catalyst required, broth that results from a batch bioprocess. High in the size of equipment used, and in the labor recovery yields in the PAL process may offset the needed to operate the system. disadvantage of a more expensive raw material.

Phenylalanine

The demand for the amino acids aspartic acid and phenylalanine as components of the sugar

Enzvmesw

Enzymes are proteins whose function in living cially since the 1890’s, when fungal cell extracts systems is to catalyze the making and breaking were first added to brewing vats to facilitate the of chemical bonds. They have been used commer- breakdown of starch into sugar. The size of the Ch. 7—Specialty Chemicals and Food Additives ● 199 world industrial enzyme market for 1981 was es- $1.3 billion in U.S. payments for sugar imports timated to be 65,000 tonnes at a value of $400 was saved in 1980 because of the domestic use million. A growth rate resulting in 75,000 tonnes of corn sweeteners (17). valued at $600 million has been predicted for the The process for converting glucose to fructose end of 1985. Fewer than 20 enzymes comprise is catalyzed by the enzyme glucose isomerase. Ini- the large majority of this market. Economic tially, the conversion was done using a batch reac- sources of enzymes include a limited number of tion; in 1972, however, a continuous system using plants and animals and a few species of micro- immobilized glucose isomerase was initiated (36). organisms (33). The immobilized glucose isomerase process rep- The enzyme industry is dominated by two Euro- resents the largest immobilized enzyme process pean companies, Novo Industri (Denmark) and used in production in the world. A large process- Gist-Brocades NV (Netherlands), which together ing plant can convert 2 million pounds of corn have about 65 percent of the current world mar- starch into high-fructose corn syrup per day (19). ket (25), other companies marketing or planning Because of expanded sales in, for example, the to market large volume enzymes include CPC In- detergent and high-fructose corn syrup markets, ternational (US.), ADM (a division of Clinton, U.S.), demand for enzymes will increase. The applica- Miles (U.S.), Pfizer (U.S.), Dawi Kasi (Japan), Alko tion of rDNA techniques to microbial enzyme pro- (Finland), Finnish Sugar (Finland), and Rohm (a duction is expected to facilitate the expansion of division of Henkel, F, R.G.). the enzyme industry (25). Additionally, enzymatic activities of higher organisms could be cloned into The leading enzymes on the world market in micro-organisms, also expanding the enzyme in- terms of volume are the proteases, amylases, and dustry, The fact that enzymes are direct gene glucose isomerase (25). Alkaline protease is added products makes them good candidates for im- to detergents as a cleaning aid and is widely used proved production through rDNA technology. For in Western Europe. Trypsin, another type of pro- example, a 500-fold increase in the yield of a tease, is important in the leather industry. Two Iigase, used for connecting DNA strands in rDNA amylases, alpha-amylase and glucoamylase, and research, was obtained by cloning the gene for glucose isomerase are corn-processing enzymes. that enzyme on an E. coli plasmid vector (25). The reactions catalyzed by these three enzymes Several research enzymes now on the market are represent the three steps by which starch is con- produced by microorganisms modified using verted into high-fructose corn syrup (see fig. 18). rDNA techniques, Some are restriction endonu - Fructose is sweeter than glucose and can be used cleases used for cutting DNA, and others are DNA- in place of table sugar (sucrose) in preparation modifying enzymes. Companies that market these of candy, bread, carbonated beverages, and in enzymes include Bethesda Research Laboratories canning. Historically, the United States imported (U.S.), New England Biolabs (U.S.), P-L Biochemi- sugar, but with the commercial development of cal (U.S.), and Boehringer Mannheim (F. R. G.) (30). an economic process for converting glucose to fructose in the late 1960’s, corn sweeteners have Recombinant DNA technology could potential- decreased the amount of sugar imported. About ly be used to increase glucose isomerase produc -

reaction)

SOURCE Off Ice of Technology Assessment 200 . Commercial Biotechnology: An International Analysis

tion in microaganisms and to improve the en- erties. The world market for rennet from various zyme’s properties. An improved glucose isomer- sources is valued at approximately $64 million, ase would have the following properties: over half of which is the more valuable calf rennet (25). The increasing scarcity of calf rennet has . a lower pi-l optimum to decrease the brown- made this enzyme a very attractive candidate for ing reaction caused by the alkaline pH now gene cloning and subsequent production in a mi- required; crobial bioprocess. The first announcement of the ● thermostability so that the reaction temper- cloning of the rennet gene came from a Japanese ature can be raised, thus pushing the equi- scientist (53). Since then, it also has been cloned librium of isomerization to a higher percent- by four NBFs: the U.S. firms Genex, Collaborative age fructose; and Research (29), and Genencor (56), and the British . improved reaction rates to decrease produc- firm Celltech (24,35). The first marketing of calf tion time. rennet produced by genetically manipulated bac- Improvements in glucose isomerase will first teria is likely to occur in 1984 (30). come from the cloning of its gene into vectors and Enzymes, such as urokinase and streptokinase, micro-organisms that have been developed for are being used increasingly for treatment of high production. It is also possible that screen- human disorders. Their use and importance are ing a broad range of micro-organisms will yield discussed in Chapter 5: Pharmaceuticals. Many enzymes with some improved properties. Final- other enzymes are used for research and medical ly, it will be possible in the future to identify the purposes in small quantities. Because rDNA tech- regions of the enzyme that are responsible for nology potentially allows the construction of en- its various properties, such as pH optimum, and zymes with improved stability and faster reaction to direct changes in the gene structure to modify rates, the use of enzymes industrially and medical- these properties. ly could increase dramatically. Rennet is an enzyme that is essential to the cheese industry because of its milk+ lotting prop-

Vitamins

In 1981, the U.S. Department of Commerce re- (26) because of a decrease in the consumption of ported that sales of vitamins for human use animal products. amounted to $1.1 billion (69). This market is ex- Vitamins are either synthesized chemically or pected to grow substantially over the next decade isolated from natural sources, and to date, because of the current trend toward a more biotechnology has had essentially no impact on health- and nutrition-conscious population. A vitamin production. Nevertheless, some oppor- smaller but significant sector of the human vita- tunities do exist for reducing vitamin production min market is for food processing and fortifica- costs using biotechnology. First, the cost of ex- tion. isting bioprocesses for vitamin production, such Another important use of vitamins is in com- as that for vitamin B12, might be reduced by using mercially prepared animal feeds. The vitamin con- a genetically manipulated microa-ganism that tent of natural feedstuffs is variable, so animal synthesizes the vitamin in larger amounts at a producers often supplement animal diets with vi- higher rate. Second, some steps in a chemical syn- tamins. The U.S. market for vitamins as supple- thesis might be replaced by biological steps, or ments in commercially prepared animal feed is the chemical synthesis might be replaced entire- large but is expected to increase an average of ly by identifying microorganisms able to synthe- only 2.5 percent annually over the next decade size particular vitamins. Once such microbes have Ch. 7—Specialty Chemicals and Food Additives 201 been identified, vitamin synthesis can be en- of the feed-grade vitamin B 12 market, while im- hanced by various biochemical, traditional genet- ports from Europe account for the major portion ic, and rDNA techniques. Finally, a micro-orga- of the pharmaceutical grade (30). The current nism might be identified that produces a vitamin manufacturers’ price for vitamin B 12 is approx- precursor. Such a micro-organism might then be imately $8,000/kg for pure material (9). * genetically modified so that it would produce the Reducing the cost of vitamin B12 production vitamin itself by introducing a gene (or genes) that will require genetic modifications of bacterial specifies an enzyme that would convert the pre- strains so that the micro-organisms synthesize cursor to the vitamin. . vitamin B 12 more efficiently. Vitamin B 12 is one There are technical problems that introduce of the most complex molecules of living systems, risks to research programs for new process de- however, and its biosynthetic pathway has not velopments for vitamins. one major problem is been definitively characterized. the dearth of information concerning vitamin biosynthetic pathways, especially in micro-orga- Vitamin C nisms. Another problem is that any new biotechnology-based process will have to be very efficient The U.S. market for vitamin C is very large, to compete with the established chemical produc- 17,500 tonnes in 1982 (30). Approximately two- tion methods. thirds of this volume is supplied by U.S. producers, while the remaining third is imported. Since vitamins are naturally occurring sub- The current price of vitamin C is approximately stances, they all have the potential for biotech- $12/kg (9). nological production. The discussion below concentrates on vitamins B2, B12, C, and E to illus- Although some of the synthesis of vitamin C is trate the range of biosynthetic pathways and po- done microbially, efforts to replace other steps tential problems for industrial production. with bioconversions have not been successful (18). The synthesis of vitamin C has been reported in Vitamin B2 a few micro-organisms (50). The first step in developing a vitamin C bioprocess, therefore, will Riboflavin (vitamin B2) is known to be synthe- be screening for a potential production organism. sized in small quantities by micro-organisms, but Analysis of the biosynthetic pathway must be is manufactured primarily by chemical synthesis. done, because little is known about microbial The synthesis of riboflavin by the bacterium Ba- pathways for vitamin C synthesis. Once the rate- cillus subtilis has been studied extensively by a limiting steps of the pathway have been identi- group of Soviet scientists (13), and strains of B. fied, rDNA techniques could possibly be used to subtilis that overproduce and excrete riboflavin increase production. A complicating factor in a have been isolated (22). Because B. subtilis has vitamin C bioprocess is the fact that this vitamin, been the subject of extensive studies by U.S. and in solution, is readily oxidized when exposed to European scientists, techniques such as DNA air. Controlling dissolved oxygen and completing transformation, protoplasm fusion, and gene clon- vitamin C with other compounds are two poten- ing have been developed for this bacterium (21). tial techniques for controlling the rate of vitamin The availability of such techniques should facili- breakdown during production. The wealth of tate the construction of a strain of B. subtilis for unknowns makes it impossible at this time to pre- the production of riboflavin. dict a time frame for developing an improved vitamin C production process. Vitamin B12

Vitamin B12 is currently produced by a microbial bioprocess (27). The U.S. market for vitamin ● The prices in this reference are for small volumes. “l’he purchase B12 is supplied both by U.S. and European firms. of large quantities of these chemicals can result in a substantial price One U.S. company (Merck) supplies the major part reduction,

25-561 0 - 84 - 14 202 ● Commercial Biotechnology: An International Analysis —.—..——— . .

Vitamin E The discovery in bacteria, such as E. coli B. subtilis, and Pseudomonas, of a compound that is If an approach to natural vitamin E production potentially a vitamin E precursor suggests another using biotechnology could be developed, its im- route for vitamin E production (37). These bac- pact would be quite significant. In 1979, approx- teria are well-characterized species for which ge- imately 3,200 tonnes of vitamin E were used in netic transfer techniques are developed. Con- the United States (39). Of this amount, 700 tonnes struction of a vitamin E-producing strain first were the natural form of vitamin E. The remain- would involve isolating mutants that overproduce ing 2,500 tonnes were synthetic forms. Synthetic the precursor, Then the genes for the enzyme vitamin E is a mixture of closely related com- that catalyzes the conversion of the precursor to pounds that vary in biological activity, whereas vitamin E could be isolated from blue-green algae the natural vitamin preparation consists of only and introduced into the potential production the most active compound. Demand for vitamin strain. Although the savings in production cost E as an antioxidant could increase the market for of vitamin E could be great, this project involves this vitamin by as much as 1,500 tonnes per year, a substantial amount of risk related to the lack depending on FDA’s decisions concerning contin- of information concerning the biosynthesis of this ued use of chemical antioxidants. The U.S. de- vitamin. For example, it is not known if only one mand for natural vitamin E is met by two U.S. enzyme is needed for the conversion of precur- manufacturers, Eastman Chemicals and Henkel, sor to vitamin, how complex such an enzyme is, and 95 percent of synthetic vitamin E is produced how many genes encode it, and what cofactor re- in the United States (30). The May 1983 price of quirements it might have. the synthetic vitamin mixture was $27/kg (9). The price of the natural vitamin was several times that Summary amount, depending on the activity of the preparation. Biotechnological techniques for improving the efficiency of vitamin production are similar to Natural vitamin E is now purified from vegeta- those being used in amino acid process develop- ble oil by a process that involves several steps. ment. The research and development (R&D) ef- If a one-step fermentation process could be de- fort for vitamins will be more extensive than that veloped based on a high-producing microbial for the amino acids, because vitamin biosynthetic strain, the manufacturing cost of natural vitamin pathways are more complex and less understood. E might be lowered substantially. In some instances, screening programs to identify micro-organisms with potential for producing Blue-green algae are the only well-characterized a particular vitamin may be required. Further- micro-organisms that are known to produce vi- more, for some micro-organisms that have good tamin E (20,55). It might be possible to increase potential for vitamin production, it will be nec- vitamin E synthesis by altering the biosynthetic essary to develop techniques of genetic manipula- pathway in blue-green algae, but the biochemistry tion. In summary, the impact of biotechnology on and physiology of this pathway is poorly under- vitamin production will be more long range than stood, and gene cloning in these microorganisms its impact on the production of either amino acids is at a rudimentary stage of development. or enzymes.

Single-cell protein

The term “single-cell protein” (SCP) refers to high protein content, it also contains fats, carbo- cells, or protein extracts, of micro-organisms hydrates, nucleic acids, vitamins, and minerals. grown in large quantities for use as human or an- Interest in SCP production is not new, as evi- imal protein supplements. Although SCP has a denced by the fact that Dutch, German, and Brit- Ch. 7—Specialty Chemicals and Food Additives ● 203 ish patents for SCP production were issued as and taste of SCP suggest real potential in feed and early as 1920 (51). Interest in SCP has waxed and food markets. In prepared aquiculture feeds waned throughout the ensuing years, but SCP where, for juvenile animals, protein content up production has never achieved great significance, to 50 percent and above is required, SCP appears mostly because of economic considerations to be an attractive product. Another application (49,64). With the advent of new biotechnology and is as a calf, lamb, or kid starter, thus leaving more the threat of potential world food shortages, in- milk for human consumption. terest in SCP may once again return (49). Incentives for production of SCP are fourfold. SCP can be used as a protein supplement for First, some parts of the world, for example, the both humans and animals. In animal feed, it is a high rainfall, tropical areas, have agricultural feed replacement for more traditional supplements, and food products high in carbohydrates; in such such as soybean meal and fishmeal. For humans, places, there is a chronic shortage of protein, S(;P is used either as a protein supplement or as which results in deteriorated physical and men- a food additive to improve product functionali- tal health. SCP would raise the protein content ty, for example, flavor, whipping action, or fat of food. Second, the land in other regions, includ- binding (49). The use of SCP in human food pre- ing the Middle East and Africa south of the Saha- sents a problem: humans have a limited capacity ra, cannot produce sufficient food of any type to to degrade nucleic acids. Therefore, additional prevent hunger. Here also an SCP supplement processing is necessary before SCP can be used would be an asset. Third, there is demand world- in human food. The animal feed market is more wide for very high protein ingredients for feeds attractive for SCP, not only because there is less in the aquiculture industry, i.e., in the produc- processing of the product, but also because the tion of shrimp, prawns, trout, salmon, and other regulatory approval process is less stringent. finfish and shellfish. Finally, SCP does not rely on temperature, rainfall, or sun for survival. At least Relative protein content of the various commer- one of the variety of feedstocks is usually avail- cial sources of concentrated protein is shown in able in almost any country or region of the world. table 38. Nutritionally, the amino acid composi- The security of having such an internal source tion of SCP resembles meat, fish, and shrimp meal of protein is attractive to many countries. rather than vegetable protein. It has been shown through extensive testing both in the United Economically feasible SCP production is depend- States and abroad to be a suitable substitute for ent on the efficient use of an inexpensive feed- at least part of the former high-cost protein stock by a microorganism. A large variety of feed- sources. The high protein content, good storage stocks have been used for SCP production over properties in dry form, texture, and bland odor the years, including carbon dioxide, methane, methanol, ethanol, sugars, petroleum hydrocarbons, and industrial and agricultural wastes. Table 38.—Typical 1982 Selling Prices of Selected These feedstocks have been used industrially with Microbial, Plant, and Animal Protein Products different micro-organisms, including algae, acti- Protein 1982 selling nomycetes, bacteria, yeasts, molds, and higher content price fungi. The choice of a feedstock includes such Product (0/0) ($lkg) considerations as cost, availability, efficient Food-grade products: growth of the microorganism, and requirements Candida uti/is (tortula yeast). . . . . 50 to 55 $1.87 to $2.24 for pretreatment (49). K/uyveromyces ffagi/is...... 45 to 50 2.09 to 2,29 Soy protein concentrate ...... 72 0.88 to 1.03 Soy protein isolate ...... 92 2.59 to 2.68 SCP has yet to become an important source of Dried skim milk...... , ... , . 37 1.16 to 1.21 protein, mainly because of high production costs. Feed-grade products: Some Scp-production processes that were eco- Saccharomyces cerevisiae ...... 45 to 50 $0.48 to $0.66 nomical at one time have not remained so because Soybean meal ...... 44 0.19 to 0.20 Meat and bonemeal ...... 50 0.19 to 0.21 of changes in prices of competitive sources of pro- Fishmeal ...... 65 0.23 to 0.40 tein such as soybean meal or fishmeal. In com- SOURCE J H Litchfield, “Single.Cell Proteins, ” Science 219’740-746, 1963. parison to SCP, these protein sources are quite 204 “ Commercial Biotechnology: An International Analysis

inexpensive (see table 38), In fact, the price of production plants in the last 15 years (3,5,64). most SCP processes would have to be decreased Many of these are no longer operating because one-half to one-fifth for SCP to be competitive of high production costs and regulatory approval with soybean meal and fishmeal. problems. Nevertheless, there are several companies operating plants, including Shell Chemicals Through the years, the high cost of SCP relative (Netherlands), British Petroleum (U.K.), ICI (U.K.), to that of these other sources of concentrated pro- Rank Hovis McDougall (U.K.), Sosa Texaco (Mex- tein has prevented extensive utilization of SCP, ico), Finnish pulp and Paper Institute (Finland), primarily in animal feeds. In the case of SCP pro- Amoco (U.S.), Phillips Petroleum (U.S.), Pure Cul- duced from methanol, for example, the methanol ture Products (U.S.), Rhinelander Paper Corp. represents approximately 50 percent of the cost (US.), and Amber Laboratories (U.S.). In addition, of the product. In the United States, the cost of there is one plant in the German Democratic Re- SCP made from methanol exceeds the average public, and there are several in the U.S.S.R. cost of fishmeal by a factor of 2 to 5. A plant in the United Kingdom (ICI) is operating at a loss The center of SCP technology is in England, es- because of such a situation (49,52). In some parts pecially at ICI (71). The ICI process uses aerobic of the world, such as the Middle East, low-cost bacteria with methanol and ammonia as feed- methanol and high shipping costs for fishmeal and stocks. The bacteria are grown in the world’s larg- other natural protein sources make the cost dif- est continuous bioprocess system with computer- ferential considerably less. In countries without ized control and monitoring of performance. The @ methanol, biomass presents an option as a cheap product, Pruteen ) contains 80 percent crude pro- feedstock source. However, this market has not tein as well as a high content of essential micro- been developed yet. nutrients, especially B group vitamins. Pruteen@ is used in animal feed diets (poultry, swine, fish) It is possible that the application of biotech- and as a milk replacer (calves). In 1981, ICI had nology will help to reduce the cost of production scaled up its process to produce 3,000 tons of SCP of SCP. Strains of micro-organisms could be im- per month. It is beginning research using rDNA proved using rDNA techniques. Improvements technology to facilitate protein harvesting (49). So could include increasing the production of pro- far, however, the production of Pruteen” has not teins with a better amino acid balance* or improv- been economic even though it is twice as nutri- ing the ability of the microorganism to utilize the tious as soybean meal (52). feedstock efficiently. Technological improvements in the process and recovery steps would also be Two of the SCP plants in the United States (Am- important. The use of automated, continuous ber and Rhinelander) use wastes produced in processes could improve the efficiency of produc- other parts of their plants for feedstocks, assur- tion. Recovery steps could be aided by using ing a constant and inexpensive source of raw ma- micro-organisms that have been genetically materials for SCP production (49). This type of small- nipulated to excrete protein. Additionally, it is scale operation using internally generated wastes possible that an enzyme that degrades cell walls as feedstocks may be the most appropriate use could be cloned and produced in large amounts. of SCP technology in the United States and other Its use would help in the production of a protein countries where animal- and plant-derived pro- concentrate from cells. New technologies will tein sources are abundant. probably improve the production of SCP, but The U.S.S.R. is actively pursuing the production widespread introduction of SCP will be governed of SCP. The Soviets consider the construction of by economic and regulatory factors. plants to produce SCP a high priority in order to Several companies in Western and Eastern Eu- decrease their dependency on foreign sources of rope, the United States, and Japan have built SCP protein for animal feed (5). The U.S.S.R. produces about 1 million tons of SCP per year, but produc- *As do proteins from plants, proteins from microaganisms often tion has not increased since 1976 (62). About half lack one or more essential amino acids. Most commercial SCP prod- of the Soviets’ SCP feedstock is cellulose, and the ucts are low in methionine (51). balance is petroleum. The current Five-Year Plan Ch. 7—Specialty Chemicals and Food Additives ● 205 calls for doubling SCP production by 1985 to 2 range of utilizable feedstocks; 2) increasing the million tons per year, but the Soviets will have optimum bioprocessing temperature and achiev- to produce a total of 3 million tons per year in ing a concomitant decrease in cooling require- order to be able to stop importing soybeans for ments; 3) increasing the efficiency of utilization use as a protein source. of the feedstock with the associated benefit of decreased generation of heat; 4) optimizing the bal- Low-cost or waste biomass feedstocks have ance of the essential amino acids in the product; been cited as one means to product cost reduc- and 5) producing of high-value products in con- tion. Inedible biomass can serve as an indirect junction with the SCP (e.g., growth stimulators) feedstock for SCP processes by high-temperature which may be either left in the SCP product or conversion to synthesis gas and then to methanol isolated from the broth. (2). The future of SCP depends largely on reduc- Engineering improvements expected include tion in cost and improvement in quality. Means bioreactor designs for continuous operation and to meet these requirements involve lower cost high cell density. High cell densities decrease cost, feedstocks, improved engineering of the conver- because at high cell densities, the cell suspension sion and recovery processes, and upgrading the leaving the fermenter can be dried without pre - yield and quality of the product through conven- concentration of the cells by centrifugation, and tional genetic and rDNA methods. The renewed because extracellular nutrients are recovered in interest in all of biotechnology, in part due to the product. rDNA technology, is leading to increased effort Conventional genetic and rDNA methods for in developing economically competitive SCP with SCP production are currently being directed improved qualities. toward the following goals: 1) broadening the

Complex lipids

Lipids are water-insoluble compounds found in Fatty acids cells whose many functions include serving as the structural components of membranes and stor- Fatty acids are important industrial chemicals ing of metabolic fuel. The term lipid designates used in cosmetics, plastics, lubricating greases, a general class of compounds that includes the rubber compounding, polymer emulsifiers, spe- complex lipids (saponifiable lipids) which contain cialty household cleaners, foods, paints, varnishes, fatty acid components and simple lipids (nonsa- and flotation reagents (46). In the United States ponifiable lipids) which have no fatty acid com- alone, the present consumption of fatty acids is ponent. The simple lipids include some vitamins, about 1.65 billion pounds annually (46). The ma- steroid hormones, and other highly specialized jor sources of fatty acids are the naturally occur- fat-soluble biomolecules. ring fats and oils of plants and animals. The major plant sources of fatty acids in the United States Complex lipids are readily available and are ex- are tall oils and coconut oil, and the major animal tracted from natural sources. Some lipids such source is tallow (46). Synthesizing fatty acids from as sophorolipids have commercial uses. By far the petroleum feedstocks is possible, but the process most valuable attributes of lipids, however, are requires complex reactions and is more expen- the products that can be derived from them, in- sive than obtaining the acids from natural cluding fatty acids and fatty alcohols and the sources. potential of lipids to replace petroleum feedstocks (48). Biotechnology could be used to develop new Fats and oils are composed of triglycerides, methods for economical production of lipid-de- which can be broken down to free fatty acids and rived products. glycerol, a valuable coproduct. The usual decom - 206 ● Commercial Biotechnology: An International Analysis

position method is a chemical process whereby tion of lipases that are more amenable to immo- the triglycerides are continuously hydrolyzed (16). bilization should result in the development of an This chemical process is efficient; 99 percent of immobilized enzyme process for the production the available triglycerides are hydrolyzed to free of fatty acids. Such process development might fatty acids and glycerol. Because the process re- take several years. quires both high temperatures and high pressure, The cost of obtaining sufficient quantities of however, it is also energy-intensive. lipase will have a major impact on the economic An attractive alternative to chemical hydrolysis viability of such processes. The application of of triglycerides is an enzymatic process that uses biotechnology to develop or improve techniques lipases to split the triglycerides into free fatty for the recovery and reuse of lipases would be acids and glycerol (see fig. 19). Such a process does desirable. Supplies of specific lipases could be in- not require severe reaction conditions and is creased through gene cloning and amplification. therefore more energy-efficient. Two Japanese companies have begun to commercialize the pro- Fatty alcohols duction of fatty acids from natural oils and fats using lipases. Miyoshi Oil and Fat Co. has report- Fatty alcohols are important industrial chemi- edly constructed two plants for the lipase-cata- cals. The plasticizer ester industry uses large lyzed production of fatty acids. Its initial plant quantities of shorter chain (6 to 10 carbons) reportedly is producing 300 tons of fatty acids alcohols, while alcohols of longer length (11 to 18 annually. Similarity, the Nippon Oil and Fat Co. carbons) are used to make detergents. Fatty al- has begun trial operation of a pilot plant at its cohols can be synthesized chemically from eth- Amagaski facility, It plans to produce initially ylene, which is derived from petroleum feed- about 1,000 tons of fatty acids per month. These stocks. Alternatively, some Japanese companies Japanese companies report that the lipase-based use a chemical process to convert fatty acids ob- production of fatty acids is both energy- and tained from coconut oil into fatty alcohols (30). labor-efficient (38,39). Although the Japanese chemical process does not rely on nonrenewable petroleum feedstocks, it Because of their stability and lack of cofactor does require extreme reaction conditions and requirements, lipases are good candidates for use therefore high energy consumption. A number in an immobilized enzyme process. At the pres- of microaganisms are capable of converting fat- ent time, however, the apparent requirement of ty acids to fatty alcohols, but these biological con- lipases for an emulsified substrate represents a versions are also energy consumptive. Further- barrier to an immobilized enzyme process. Re- more, both the substrate and product are toxic search on both process design and the identifica- to micro-organisms. Hence, the development of a biological process would require, at best, a number of years of R&D effort.

Microbial oils

Although naturally occurring fats and oils can currently be obtained cheaply from plants and animals, there is a resurgence of interest in exploiting microorganisms for the production of oil. Israel, for example, is actively pursuing the development of a microbial source for oil (57) to reduce its dependence on imports. A number of eukaryotic oil-producing micro-organisms have Trlglycerlde Glycerol Fatty acids already been identified, and preliminary research in developing micro-organisms as a source of oil SOURCE Off Ice of Technology Assessment is underway. It is impossible to predict when such Ch. 7—Specialty Chemicals and Food Additives ● 207 ——.————. processes will be commercial. The United States derived emulsifying agents). one group of glyco- has sufficient plant and animal sources for fats lipids, the sophorolipids, shows considerable and oils, but the supply is affected by climate. promise for use as biosurfactants. Sophorolipids European countries, unless they develop a micro- can be produced from vegetable oils by the yeast bial source, will have to rely on imported mate- Torulopsis. These sophorolipids are comparable rials to satisfy demands for vegetable oils and fats in activity to other surfactants, but are produced (57). by the yeast in much higher yield and are easily separated from reaction broths, thus minimizing Sophorolipids costs. Further characterization of the sophoro - lipids and their potential markets is required There is increasing interest in identifying and before applications of biotechnology to their pro- exploiting microbial biosurfactants (biologically duction are likely to be considered.

Steroids

With the recognition of the therapeutic value Microbial delta I-dehydrogenations are used of the natural steroid hormones and their analogs, commercially today. However, an efficient micro- it became necessary to develop efficient processes bial process that combines delta-dehydrogenation for producing these products. The steroids cur- and 11-beta-hydroxylation has not vet been de- rently in therapeutic use are synthesized primari- veloped. Biotechnology could make a significant ly by modifying naturally occurring steroids ob- contribution to the steroid industry by achieving tained from plants. Two commercially important both the delta l-dehydrogenation and 11-beta-hy- modifications, 11-beta -hydroxylation and delta l- droxylation in a single biological process step. The dehydrogenation, are difficult to achieve via latter reaction is catalyzed by a complex enzyme, chemical routes, but micro-organisms have been so it is unlikely that an immobilized enzyme sys- reported to perform both reactions. Examples of tem could be developed for it. Therefore, the most a microbial 11-beta -hydroxylation and a delta 1- efficient process would be to have the two reac- dehydrogenation are shown in figure 20. tions carried out by one cell. Microbial reactions have been identified for the The steroid market is readily accessible to bio - hydroxylation of virtually every position of the technology. Microbial processes are used routine- steroid nucleus. Because whole-cell bioconver- ly in the manufacture of steroid products. Fur- sions for introducing the 1 l-beta-hydroxyl group thermore, bioconversions with potential value to occur at low levels and are plagued by the for- the steroid industry have been identified, and mation of byproducts, they have not been devel- rDNA technology could be used to construct a oped for commercial use. Further study of the microorganism that more efficiently converts the enzymatic process should establish whether the steroid substrate to the desired product. The pri- byproducts are the result of many steroid-metab- mary barriers to further biotechnological applica- olizing enzymes or a lack of specificity of the tions in the manufacture of steroids are the lack 1 l-beta-hydroxylating enzyme. If the enzyme is of rDNA host/vector systems for some of the specific, it may be possible to obtain the desired micro-organisms involved and a lack of under- conversion levels by cloning and expressing at standing of the specific enzymatic processes of high levels the genes that encode the 11-beta- steroid synthesis. hydroxylase. —

208 ● Commercial Biotechnology: An International Analysis —

Figure 20.— Microbial Modifications of Steroid Molecules

SOURCE: Genex Corp., “Impact of Biotechnology on the Specialty Chemicals Industry,” contract paper prepared for the Of- fice of Technology Assessment, U.S. Congress, April 1983

Aromatic specialty chemicals

Aromatic compounds occur in many household The chemical hydroxylation of the aromatic products, medicines, agricultural products, ring is generally an inherently expensive step in pesticides, paints, cosmetics, and dyes, and their the synthesis of an aromatic specialty chemical. synthesis is a major component of the specialty This expense often results from the nonspecificity chemical industry (6). Aromatic compounds that of the hydroxylation reaction, which forms un- contain a hydroxyl group on the aromatic ring wanted byproducts and is therefore an inefficient are an important group of specialty chemicals. Ex- use of the starting material. Additional process- amples are the parabens and their esters, which ing may be required in order to remove the by- are used as preservatives; 2,4-dichlorophenoxy - products and to dispose of them properly. Chem- acetic acid (2,4-D), which is the most extensively ical hydroxylations also require severe reaction used herbicide; and N-acetylated para-aminophe- conditions and therefore consume a large amount nol, an aspirin substitute. The synthesis of each of energy. In addition, chemical reactions can of these compounds requires the specific hydrox - result in the formation of undesirable contami- ylation of the aromatic ring. nants. One highly publicized case is the dioxin Ch. 7—Specialty Chemicals and Food Additives . 209 contamination that occurs during the chemical Figure 21.—An synthesis of 2)4,5 -trichlorophenoxy acetic acid (2,4,5-T), an herbicide and a component of the now banned Agent Orange. OH By replacing a chemical reaction with a biological process, biotechnology has the potential to decrease the manufacturing cost of aromatic specialty chemicals, especially in processes that involve aromatic hvdroxylations.. Many microarga- nisms are able to grow on aromatic compounds, and aromatic hydroxylations are key reactions in these growth pathways. These enzymatic reactions occur under mild conditions and result in specific hydroxylations of the aromatic ring. Fur- thermore, using enzymatic reactions, hydroxyla - tions can be obtained at positions not readily hydroxylated by chemical reactions. The development of bioprocesses for aromatic hydroxylation reactions represents a valuable biotechnological opportunity for the specialty chemical industry. SOURCE Office of Technology Assessment Microbial aromatic hydroxylations are mediated gene(s) have been cloned and expressed in an ap- principally by oxygenates that catalyze the direct propriate production strain, more research time incorporation of molecular oxygen into the aro- and effort will be required for process develop- matic ring (6,54,65)66). An example of an aromatic ment. One major consideration is how to mini- hydroxylation mediated by a microbial oxygenase mize the toxic effects of the aromatic compounds is shown in figure 21. Many oxygenates have been on microorganisms. One solution would be to studied in detail; while differences do exist among develop an immobilized enzyme process; how- the various types of oxygenates, oxygenates gen- ever, because of the complexity of the hydroxyl- erally are complex enzyme systems that require ation reaction it may not be possible to apply this cofactors for activity. technology. Toxic effects in bioprocesses have As found in nature, the conversion efficiencies been minimized by innovative process design, and of most aromatic hydroxylations are generally too it is anticipated that there will continue to be low to be commercially viable (30). However, the significant advances in this area of research. conversion efficiency could be improved by clon- Another consideration in developing an effective ing the gene(s) encoding the oxygenase and ex- process is that the substrates and products are pressing the cloned gene at high levels in an ap- not soluble in water. Again, innovative process propriate production strain. Once the oxygenase design could minimize this problem.

Polysaccharide biopolymers

Biopolymers are naturally occurring macromol- The major commercially available water-soluble ecules that include proteins, nucleic acids, and biopolymers are used as viscosifiers (thickening polysaccharides. The discussion here will empha- agents), flocculating agents (aggregating agents), size the polysaccharide biopolymers and the op- and lubricants. Currently, there is a trend toward portunities for the application of biotechnology increased use of synthetic polymers as flocculat- to their synthesis, ing agents in place of natural products (70). This 210 ● Commercial Biotechnology: An International Analysis trend, however, is sensitive to the availability and gum, dextran, polytran, and gellan are current- cost of the petroleum feedstocks required for ly being produced commercially (44,72). In terms manufacturing synthetic polymers, and biopoly - of production volume, xanthan gum is the major mers will be important if the price of oil rises. microbial polysaccharide. At present, over 20,000 tons of xanthan gum are manufactured in the The market for viscosifiers is several times United States annually (30). Xanthan gum’s pri- larger than that for flocculants. The currently mary use is as a food additive for stabilizing liq- used viscosifiers, unlike flocculants, are biopoly - uid suspensions and for gelling soft foods, such mers obtained from plants, especially seaweed. as ice creams and cheese spreads. More recent- Although these sources are not dependent on ly, it has been used in the new clear-gel tooth- petroleum feedstocks, the use of plants as biopoly - pastes. The use of xanthan gum in enhanced oil mer sources has several disadvantages, including recovery is still experimental, but this appears to labor costs associated with extraction and puri- be the largest potential market for this product. * fication, limited availability of the sources, and Xanthan gum is commercially produced in an aer- a supply that can be affected by adverse climatic obic batch bioprocess using the bacterium Xan - conditions. Microorganisms could provide a con- thomonas campestris (30), stant and reliable supply of these products (72). Microbial biopolymers produced in controlled The importance of polysaccharide biopolymers processes would not suffer from the problems is likely to grow. For example, the microbial poly - associated with climate, disease, and other fac- saccharide pullulan is synthesized by Aureoba - tors that normally affect plant products. Further- sidium pullulans from a number of substrates more, microbial biopolymers have relatively uni- (42). Pulhdan has potential applications in the form chemical and physical properties. cosmetic industry, in diet foods, and, more importantly, as a biodegradable plastic to be used These attributes have led to increasing interest in place of wraps and plastic containers. Plastic in the production of biopolymers that could be wraps and containers are now made from petro- used in novel applications as well as in place of leum-based plastics which are not biodegradable commercial biopolymers that are not now micro- and are dependent on nonrenewable feedstocks. bially produced. For example, alginate is a com- The Japanese are already at the pilot plant stage mercially important gum obtained from kelp. The for the microbial production of pullulan, and markets for alginates demand different specific pullulan has the potential to develop into a signifi- characteristics such as solution viscosities and gell- cant market. ing qualities. The alginates obtained from kelp can vary in composition, so they must be separated, Another microbial biopolymer that is expected evaluated, and categorized for the different mar- to be available commercially in 1983 is emulsan. kets. Alginate is also synthesized by Azotobacter A potent hydrocarbon emulsifier, emulsan is ex- vinelandii (41). Because the composition of the pected to gain widespread use in cleaning oil-con- microbial alginate can be closely controlled by bio - taminated vessels, oil spill management, and en- processing conditions, separate microbial bioproc- hanced oil recovery (4). * * Like many biological- esses could be developed to produce specific ally produced polymers, emulsan exhibits a speci- ginates with uniform chemical and physical prop- ficity that generally is not observed in chemically erties. Another microbial biopolymer that has synthesized materials; the emulsifying activity of been developed by the Kelco Co. and has recent- emulsan is substrate-specific, acting only on ly become commercially available is gellan. Gellan hydrocarbons that have both aliphatic and cyclic is a Pseudomonas polysaccharide that can be used components. Emulsan was originally discovered as a solidifying agent for laboratory media or food by researchers in Israel (34,59,60,61,75). products (44). While a number of microbial biopolymers are ● Enhanced oil recovery is discussed in Chapter 8: Ent;ironmen- being developed for commercial applications as tal Applications. gums, plastics, and other products, only xanthan * ● See discussion in Chapter ~: b;r]t’ir’c)nll]er][al ,Applications Ch. 7—Specialty Chemicals and Food Additives ● 211

Emulsan was awarded patents in the United important to have an understanding of the com- States in 1982, and Petrofirm, USA, a subsidiary plex biochemical pathways for the production of of Petroleum Fermentations, N. V,, headquartered the biopolymer and its regulation. Most biotech- in Netherlands Antilles, is developing emulsan as nology advances will only appear several years a commercial product (4). To date, the develop- into the future, if at all. ment has been confined to strain improvement More immediate improvements in the produc- through mutation and selection techniques. Be- tion of microbial biopolymers might be realized cause of the complexity surrounding the micro- by the development of novel bioreactor designs. bial biopolymer, the feasibility of applying rDNA The polysaccharides have very large molecular technology for strain improvement is uncertain. weights and are viscous, two characteristics that IJseful microbial biopolymers can extend be- preclude the use of most standard bioreactors. yond the polysaccharides. For example, polyhy - One way to generate a large quantity of polysac - droxybutyrate (PHB), a metabolic product of the charides is to maintain live cells in an immobil- bacterium Alcaligenes eutrophus, has potential ized cell bioreactor. The cells cannot be micro- commercial applications as a biodegradable ther- encapsulated, because the product is too large to moplastic that could be used as a surgical mater- be washed away. Therefore, they need to be at- ial. The unique electrical properties of PHB are tached to a solid surface by a procedure that does also useful in other specialty markets (8). ICI (U. K.) not damage the cells. Another critical research soon will market a PHB product known as area is improved product recovery from the Biopol@, made with a bioprocess using glucose as broth. Current methods for the recovery of xan - a feedstock. ICI does not know yet what Biopol ” than gum, for example, often result in prepara- first markets will be. PHB has-properties similar tions that contain water-insoluble solids such as to polypropylene but costs substantially more. Its nonviable cells and residual medium constituents, edge is its biodegradability, and ICI believes that For xanthan gums to be used in enhanced oil re- its customers will pay the higher price for this covery, it is important to have a product free of quality (63). cells and other fine particulate because the fluid must be able to flow through porous rocks. There are several inherent problems in using bacteria to produce polysaccharides (30). There Another area of research is the identification are probably at least 100 enzymatic steps impor- of thermophilic polysaccharide producers. Devel - tant in the production of these biopolymers, very opment of a thermophilic micro-organism could few if any of urhich have been identified. There- result in substantial gains in productivity and fore, it is much more likely that classical genetic lower process costs due to energy conservation. selection techniques will be more useful than Screening thermophiles for polysaccharide pro- rDNA techniques initially for improving the char- duction is an active area of research (74). To date, acteristics of the compounds. Before it is possi- no thermophilic xanthan gum producers have ble to predict the role that rDNA technology will been identified. Thermophilic Bacillus and Clos - play in microbial biopolymer production, the pro- tridium bacteria are being screened for the producing micro-organism will have to be character- duction of polymers that would be useful as bio - ized genetically and physiologically. It will also be surfactants (74).

Commercial aspects of biotechnology in specialty chemicals ——.—.

Some specialty chemicals are currently made by Japanese companies, especially Ajinomoto and using bioprocesses, most notably amino acids and Kyowa Hakko, whereas the enzyme markets are enzymes. The amino acid markets are dominated dominated by two European firms, Notro and Gist- 212 ● Commercial Biotechnology: An International Analysis

Brocades. Japan also leads the world in the bio- U.S. companies are beginning to enter some spe- technological production of fatty acids, a relatively cialty chemical markets with biotechnology prod- new process. ucts. Corn sweetener companies are planning to market enzymes that they have produced for in- Most of the opportunities for the use of biotech- house use for some time. Other established firms, nology in the production of specialty chemicals such as W. R. Grace, are entering markets with are still in planning or early development stages. biotechnologically derived specialty chemicals. Many potential bioprocesses would replace chem- Several U.S. NBFs, such as Genex, Genentech, ical processes, necessitating a large investment in Chiron, Amgen, Ingene, Enzo, and Industrial Ge- new plants. Thus, the potential of a process using netics, have stated interests in specialty chemical biotechnology must justify this investment. On the markets. Although 20 percent of U.S. companies other hand, enzymes that could withstand high using biotechnology say they are working in the temperatures and pressures could be used to re- specialty chemicals field, their interests are not place existing chemical steps without having to well known and most of their research is highly change the basic chemical process. Enzymes with proprietary. these characteristics are beginning to be studied.

Priorities for future research

The most glaring lack of knowledge for the suc- For the specialty chemical industry to take full cessful application of biotechnology to the produc- advantage of biotechnology, sharing of information of specialty chemicals is in the identification tion between industrial chemists and biologists and characterization of microaganisms that per- is needed. The sharing of information has to pro- form particular chemical conversions. often ceed beyond identification of specific steps in a when industrially useful reactions in microorga- chemical synthesis that are inherently expensive nisms have been identified, the micro-organism to discussion of the total process for the manu- is so poorly understood that the application of facture of a specialty chemical. Broad discussion new biotechnology is not possible. There are could suggest a bioconversion that uses a less ex- many opportunities for the specialty chemical in- pensive starting material and that would replace dustry to expand and improve its production cap- several steps of the chemical process. Processes abilities using biotechnology, but before it can for the manufacture of many specialty chemicals take advantage of these opportunities, useful could ultimately combine chemical and biological micro-organisms, especially those that function steps, thereby resulting in more economic and at high temperature and pressure, will have to energy-efficient manufacturing. be screened and identified.

Chapter 7 references

1. Atkinson, D. E., “Adenine Nucleotides as Univer- tation Process Produces Single-Cell Protein Plus sal Stoichiometric Metabolic Coupling Agents,” Ad- Arctic Diesel Fuel,” Mar. 1, 1982, p. 3. vances in Enzyme Regulation, G. weber (cd. ) (New 4. Biotechnolo~ Newswatch, “Oil-Eating Bioemulsi- York: Pergamon Press, 1971). fier Passes Field Tests, Wins Patents, Federal OKS,” 2. Biomass Digest, “International Harvester Builds Apr. 5, 1982, pp. 1-2. Methanol Units Around SERI Gasifier,” November 5. Carter, G. B., “Is Biotechnology Feeding the Rus- 1982, pp. 4-6. sians?” New Scientist, Apr. 23, 1981, pp. 216-218. 3. Biotechnolo~ Newswatch, “East German Fermen- 6. Cernigha, C. E., “Aromatic Hydrocarbons: Metab- Ch. 7—Specialty Chemicals and Food Additives ● 213

9. 30.

10. 31. 11. 32, 12.

13.

14. 33 15.

34 16.

17 35. 18

19 36.

20. 37.

21.

38. 22. 39.

23. 40,

24 41,

25 42, 214 ● Commercial Biotechnology: An International Analysis —— ————. ——

46.

47.

48.

49.

50.

52.

53. 71.

72, 54.

73. 56,

57,

74. 58.

59. 75.

60. Chapter 8 Environmental Applications —

Contents

. . Page Introduction...... 217 Pollution Control and Toxic Waste Treatment ...... 217 Treatment of Nontoxic Liquid and Solid Wastes ...... 217 Toxic Waste Treatment ...... 222 Slime Control ...... 223 Grease Decomposition...... 223 Commercial Aspects of Biotechnology in Pollution Control and Toxic Waste Treatment . . . 224 Microbiological Mining ...... 226 Mineral Leaching ...... , 226 Concentrationof Metals ...... 227 Commercial Aspects of Biotechnology in Microbiological Mining ...... 228 Microbial Enhanced Oil Recovery...... 228 Uses of Micro-Organisms in Oil Wells ...... 229 Use of Microbially Produced Compounds in Oil Wells...... 229 Commercial Aspects of Biotechnology in Microbial Enhanced Oil Recovery ...... 230 Priorities for Future Research ...... 230 Chapter p references ...... 231

Figures

FigureNo. Page 22. Steps in Waste Treatment ...... 218 23.One Possible Configuration for a Leaching Process...... 227 Chapter 8 Environmental Applications

Introduction

Micro-organisms have several uses in the envi- technology is in enhanced oil recovery. About 50 ronment, and new biotechnology can potential- percent of the world’s subterranean oil is either ly be used to improve these micro-organisms. one reserves trapped in rock or is too viscous to application is in the control of pollution and treat- pump. It is possible that either micro-organisms ment of toxic wastes. As discussed in this chapter, themselves or microbially produced compounds micro-organisms are currently used in pollution could be injected into oil wells to release the control, and the potential applications of biotech- trapped oil. nology to treat liquid and solid wastes are numer- None of the environmental applications Of new’ ous. Additionally, techniques are beginning to be biotechnology are ready to be marketed, and used to select micro-organisms that can degrade there are still many technological problems to be extremely toxic compounds. In the mining indus - overcome. Nevertheless, several companies are try, microbes are used to leach metals from mine pursuing research and development (R&D) in dumps and concentrate metals from dilute solu- these environmental applications, and their de- tions, and there are possibilities for using biotech- velopment will progress over the next several nology to improve the efficiencies of these proc- years. esses. A third environmental application of bio-

Pollution control and toxic waste treatment

Waste products and the pollution problems Treatment of nontoxic liquid associated with such products have been part of and solid wastes human existence since the dawn of civilization. Troublesome wastes are of three types: those in Of the conventional microbiological systems for the atmosphere, those in aqueous systems, and the treatment of liquid wastes now in use, the solids, In the treatment of both liquid and solid most complex is that found in publicly owned wastes, there are significant opportunities for the water treatment plants. As shown in figure 22, use of biotechnology. Indeed, most liquid and solid there are four basic unit operations in a waste- wastes have been dealt with for millennia by nat - water treatment plant: ural biological processes, Moreover, humans in ● primary processing; their initial attempts to control such wastes have ● secondary processing; generally resorted to contained biological systems, ● tertiary processing; and particularly for the treatment of liquid wastes. ● digestion. The possibilities for using biological systems to control atmospheric pollution, in contrast, are The primary treatment step removes solids rather limited. The discussion here, therefore, from the wastewater. These solids (sludge) are focuses on the applications of biotechnology in then either disposed of or sent to a sludge digest- the treatment of liquid and solid wastes. er, and the wastewater is forwarded to second-

217

25-561 0 - 84 - 15 .

218 ● Commercial Biotechnology: An International Analysis

Figure 22.—Steps in Waste Treatment

Primary Secondary Settling/ Aerobic/ Settling/ separation micro-organisms separation

Raw Discharged waste * water

Solids Air Solids (cellulosic (spent and carbohydrate) cells)

Filtrate return

Digestiona

To disposal (farm, landfill, incineration)

NOTE: aMay be aerobic.

SOURCE Office of Technology Assessment. ary treatment. The secondary treatment system the absence of tertiary treatment, from the sec - generally consists of natural aerobic microbes in ondary unit) is returned to the environment. a large open basin with some type of forced aeration. The purpose of this processing step is to The sludge digestion process used to treat the degrade the dissolved organic compounds. The sludge resulting from the primary and secondary sludge resulting from this operation is primarily treatments is conventionally an anaerobic bio- composed of microbial cells and is either disposed process. Its purpose is threefold: to reduce the of or sent to a digester. The liquid from the sec- total volume of solids requiring disposal, to reduce ondary operation is sometimes subjected to ter- the odor, and to reduce the number of pathogenic tiary processing, which can involve precipitation organisms. Another potential objective of solid and separation of phosphorous and nitrogen, waste treatment can be to recover useful methane sand filtration, detention ponds, or biological from the anaerobic bioprocess. Although the ef- filters. The water from the tertiary unit (or, in fective anaerobic treatment of solid wastes is Ch. 8—Environmental Applications 219

more a problem of engineering than of biotech- accomplishing these separation and thickening nology, there is a possibility that enzymes added operations generally include the use of materiaIs to the waste could improve the efficiency of this known as flocculants. Because of the increased treatment. Like secondary processing, sludge use and reuse of water, the U.S. market for floe - digestion is a classic bioprocess open to further culants is expanding (8,10). technological improvements. Examples of classical flocculants are iron or The total cost of running publicly owned water aluminum salts and activated silica. In recent treatment systems in the United States has been years, synthetic polymers have been used as floc- estimated to be $5 billion to $6 billion per year culants, and in some cases, they have produced (12). The cost of the chemicals used in these sys- very promising results (8,10). Unfortunately, most tems represents approximately 20 percent of the of these synthetic polymers are based on acryl- total operating costs (12). The biotechnology-based amide, a toxic compound. Moreover, these syn- improvements that could be used by these treat- thetic polymers are usually subjected to postpoly - ment systems will either: merization chemical modification, which adds to their cost. For both safety and economic reasons, ● increase the capacity of the treatment plants therefore, biologically derived flocculants could and therefore reduce the need for new be very desirable. capital expenditures, ● replace existing synthetic organic chemical A few microbially produced polyelectrolyte additives, or polysaccharides that may prove to be effective ● remove newly identified, potentially harm- flocculants have been identified (15). Before these ful materials. potential bioflocculants can be commercially applied, microorganisms with the potential for high- Processes similar to those just described for Ievel production of effective polysaccharides at publicly owned water treatment plants are also low cost will have to be identified. The potential used in the treatment of industrial wastewater, bioflocculants will also have to be tested for their particularly wastewater from the chemical, flocculating ability in waste treatment situations. petroleum, food processing, and pulp and paper Because the potential bioflocculants are polysac - industries. For that reason, biotechnology-based charides and not proteins, improving their pro- improvements in bioprocessing or solids separa- duction through recombinant DNA (rDNA) tech- tion procedures that are applicable to public nology may be a complex task (see discussion of water treatment systems will very likely be ap- polysaccharide biopolymers in Chapter 7: Special- plicable to the industrial sector. t-v Chemicals and Food Additives). It should be IMPROVEMENT OF CONVENTIONAL noted, however, that improvements in microbial WASTEWATER TREATMENT PROCESSES polysaccharide production have already been achieved with classical chemical mutagenesis and Both physical and biological processes are uti- selection (34). lized in the treatment of wastewater. Improve- ments in any of these operations would be re- Sludge Dewatering. –For ease of handling of flected in reduced capital and operating costs for solid residues from water treatment processes, the wastewater treatment. Some specific opportuni- water content of such residues must be reduced ties for biotechnology-based improvements in to a minimum to reduce their total weight. It is wastewater treatment are discussed below. particularly important to reduce the water content of these residues to the smallest practical Solids Separation: Flocculation.-The major value if the sludge is to be disposed of by incin- physical operation in wastewater treatment is that eration. of solids separation. Suspended solids must be separated during both the primary and secondary The sludge dewatering operations with current treatment steps, Quite frequently, it is also desir- technology (filtration and centrifugation, for ex- able to “thicken” the sludges resulting from these ample) result in a solids content of 15 to 40 per- settling operations. The present techniques for cent, leaving a water content of 60 to 85 percent. —— . . .

220 ● Commercial Biotechnology: An International Analysis

A significant proportion of the water that is One potential byproduct of anaerobic bioproc - retained is “microscopic” in nature, i.e., it is esses is gas. Solid wastes, when held in sanitary associated with microbial cells and organic debris landfill, very often encourage the growth of present in the sludge. If techniques for releasing micro-organisms that produce methane. The this retained water could be developed, they generation of methane has become a serious would find a ready and profitable market in the problem in many sanitary landfill sites around the field of residue disposal. country. Experiments concerning the possibility of tapping this methane as an energy resource Because much of the water retained in sludge are in progress (39). Preliminary results indicate is probably held in polymeric matrixes composed that the costs of the required anaerobic equip- of cellulosics, fats, polysaccharides, and proteins ment are so high as to make the methane gas thus (38), partial degradation of these matrixes by generated uneconomic as an energy source (39). using some combination of cellulases, proteases, Research is continuing, however, and it is con- amylases, and polysaccharide hydrolyses should ceivable that at some point in the future, im- release it. Some enzymes potentially useful for proved micro-organisms or added enzymes could sludge dewatering may already be available in suf- improve to a limited extent the economics of ficient quantities and at economically attractive methane production from solid waste. costs. For other potentially useful enzymes, techniques for economic, high-yield production will CONTROL OF ORGANIC MICROPOLLUTANTS have to be developed. In some instances, these In recent years, significant pollution problems developments will simply involve process develop- have arisen with regard to drinking water (27). ment using known microbial strains, In other in- Analyses of surface waters in the United States stances, it may be necessary to construct genet- and Europe have demonstrated the presence at ically strains of microorganisms for high-level low concentrations of certain naturally arising production of specific enzymes and perhaps spe- soluble organic compounds that, when chlori- cifically alter the characteristics of the enzymes nated, lead to the formation of trihalomethanes through directed protein modification. It may also (THMs) (23,24,25,28,35,36). Increasing attention be desirable to identify new enzymes from nature is being focused on these precursors of THM, that have superior characteristics for use in because THMs are classified as potential car- sludge dewatering. cinogens (23,24,25,28,31,35,36). In addition, there has been a series of toxic compounds discovered Conventional Uses of Biological Proc- in ground water called volatile organic com- esses.—Biological processes are used in two opera- pounds (VOCS). VOCS are apparently leached tions of wastewater treatment plants, the secondary from a variety of sources in the ground. Both treatment step involving an aerobic process and the VOCS and the precursors of THMs are potential- sludge digestion operation involving an anaerobic ly amenable to biological treatment methods. process. The performance of these standard aerobic and anaerobic biological treatment processes Biotechnology can potentially offer improved could conceivably be improved by the addition techniques for the removal of organic micropol- of specific enzymes that could augment the ability lutants (13). It is possible, for example, that their of the natural micro-organisms to degrade, for removal could be accomplished by the use of en- example, protein, starch, polysaccharides, and zymes that are capable of polymerizing aromatic cellulosics. Such enzymes could be applied selec- compounds (e.g., fulvic acids and phenolic com- tively at specific wastewater treatment plants pounds) that often contaminate drinking water. where their particular substrates are present in These low molecular weight aromatic compounds unusually high concentrations. Enzyme “augmen- are not precipitated in the traditional flocculation tation” might also help accommodate fluctuating procedures, and they do not adsorb readily to ac- loads on a particular treatment plant. The R&D tivated carbon (26). These compounds also con- involved in providing enzymes for this purpose tribute to the formation of THMs and chlorophen- would be similar to that for providing enzymes OIS during chlorination procedures (2,23,24,25, for sludge dewatering. 28,35,36). Ch. 8—Environmental Applications ● 221

Enzymatic polymerization should result in the strains developed in the laboratory to the natural- removal of most of these low molecular weight ly occurring micro-organisms to encourage their aromatic compounds during flocculation proce- survival in the environment. dures. Horseradish peroxidase is one enzyme that The comments above have been made with re- can catalyze polymerization reactions of this type spect to the control of organic micropollutants (1, 19,20), but it is not clear that purified or even in drinking water. Any technology developed to crude horseradish peroxidase could be employed solve the problems associated with drinking wa- in a cost-effective manner, Other potentially use- ter, however, would most likely be applicable to ful polymerizing enzymes are synthesized by similar organic contamination problems in indus- micro-organisms, but the current production trial wastewater. levels are much too low for these enzymes to be commercially viable (5,6, 11,33). Development of enzymatic polymerization to remove low molec- CONTROL OF HEAVY METAL CONTAMINATION ular weight aromatic compounds will therefore Heavy metals in drinking water have long been require one or more of the following biotech- of concern (3). The concern has focused on lead, nological developments (13): zinc, copper, and cadmium, although iron, at rel- microbial strain improvement and process atively high concentrations, can also present development programs using known poly- health risks (38). In addition to contaminating merizing enzyme-producing microbial drinking water supplies, heavy metals can have strains; detrimental effects on the operation and perform- identification of micro-organisms that pro- ance of biological processes used in wastewater duce useful polymerizing enzymes in high treatment (3), Moreover, heavy metal contami- yield; or nants in effluents from wastewater treatment the genetic manipulation of a microorganism plants can have potentially deleterious effects on to produce high levels of a polymerizing en- downstream flora and fauna (3). zyme. Micro-organisms used in metal accumulation Another potential approach for using biotech- (see section on microbiological mining below) are nology to remove organic micropollutants from not useful for concentrating the heavy metals dis- water is to develop micro-organisms that will cussed here (except copper), because most metals better degrade these contaminating compounds. found in contaminated water are toxic to micro- Such micro-organisms could be introduced into organisms. One potential approach to solving the the water treatment cycle by seeding them onto problems of heavy metal contamination involves activated carbon. When activated carbon is em- the use of metallothioneins (see also section on ployed in water treatment processes, it accumu- microbiological mining). These proteins, found lates naturally occurring microbes from the wa- principally in higher organisms, have a high after. The goal would be to expand the degradative finity for various heavy metals (21). The econom- capacity of that microbial population. Although ics of this process would depend on efficient certain micro-organisms of various genera (Pseu- release of the bound metals and reuse of the domonas, Acinetobacter, Arthrobacter, Klebsiella) metallothionein. In fact, the gene coding for will degrade a variety of organic compounds, it mouse metallothionein has been cloned and ex- will probably be necessary to identify or develop pressed (22,46). It is possible, therefore, that this novel micro-organisms for the degradation of protein could be produced in large amounts by specific classes of pollutants. One procedure for bacteria, immobilized on a solid support, and used accomplishing this, plasmid-assisted molecular to extract metals from any solution passed over breeding, is discussed below in the section on tox- the immobilized protein (41). This process would ic waste treatment. Because micro-organisms of be highly controlled and could be used not only the genera listed above are generally present in for decontamination of waste streams from any natural populations, it should be possible to trans- industrial process, but also for concentrating fer genes that encode degradative enzymes from metals by the mining industry. 222 ● Commercial Biotechnology: An International Analysis

Toxic waste treatment degrade the toxic compound. In the case of certain toxic wastes, it may be possible to accelerate The chemical and petroleum industries produce this natural mutation and selection process in the a variety of highly toxic organic wastes that are laboratory by the use of a technique called chem - not initially amenable to conventional microbial ostat selection. treatment. Such wastes can be either liquid or solid. For developing biologically based processes In traditional chemostat selection, the natural that will degrade or otherwise detoxify them, a microbial populations present in soil or water variety of techniques can be envisioned. A specific samples collected from or near the waste disposal microorganism or enzyme will probably have to sites are grown continuously over several months be developed for each toxic compound. in the presence of steadily increasing concentra- As the number of toxic compounds that are tions of the relevant toxic compound. This proc- leached or dispersed into the environment in- ess provides steadily increasing selective pressure creases, the development of technologies for the for the growth of mutant micro-organisms able treatment of toxic wastes becomes more critical. to tolerate and potentially degrade the toxic Toxic wastes are often resistant to natural bio- substrate. The mutation rate in the chemostat can logical degradation and therefore persist in the often be increased by the use of chemical or phys - environment. Because of their toxic character, de- ical agents. veloping biotechnological approaches for effec- In a more modern version of chemostat selective treatment of such wastes may be difficult, tion, plasmid-assisted molecular breeding, labora- Toxic wastes are generally present in the envi- tory strains of Pseudomonas that contain plasmids ronment in one of two forms. In some cases, they encoding enzymes involved in the degradation of are purposefully concentrated at specific disposal toxic compounds are added to the chemostat (16). sites in the form of dumps or lagoons. In other This technique is based on the observation that instances, the toxic compounds have already been in nature degradative plasmids often evolve by dispersed into the environment, and they are the recruitment of genes from other plasmids in often present at very low concentrations in soil other micro-organisms. Plasmid-assisted molecu- and water over a fairly large geographical area, lar breeding has resulted in the generation of both In general, toxic wastes in dumps or lagoons are a mixed-culture and a pure Pseudomonas strain likely to be more amenable to biological treatment that degrade the normally recalcitrant molecule, than those that have been more widely dispersed. 2)4,5-T) which is a component of herbicides and Dumps and lagoons have the advantage of pre- Agent Orange (16,17). It has also been possible senting a reasonably high concentration of a par- to develop microorganisms that degrade novel ticular type of compound or family of compounds substrates by introducing into a single bacterial at a specific site. Thus, the feasibility of develop- strain plasmids specifying the degradation of dif- ing a very specific treatment process tailored to ferent, but analogous, compounds or different both the waste to be detoxified and the environ- portions of a single degradative pathway (32). ment in which it is found is increased. For more Because degradation of a toxic compound usual- widely distributed wastes, even if biological ly involves a complex and often uncharacterized methods for detoxification are developed, it may series of reactions, it has generally been prefer- be impossible to apply them effectively. able to let nature select for the proper genetic combination rather than to attempt to construct It has often been observed in traditional bio- it de novo in the laboratory. logical waste treatment systems that the microbial population will adjust to the presence of a toxic More recently, however, in a joint research compound and eventually achieve some degree project between the University of Geneva of efficiency in its decomposition. This phenom- (Switzerland) and the University of Gottingen enon, traditionally termed acclimatization, prob- (F.R.G.), researchers have cloned the gene for one ably represents the selection of mutant micro- of the key enzymes in the degradation of 2,4,5-T. organisms that are able to both tolerate and Their hope is to understand better the degrada- Ch. 8—Environmental Applications ● 223 tion pathways that have been naturally selected slime control is of major concern because slimes and possibly use this knowledge to develop a have a very deleterious effect on product quali- more capable micro-organism (4). ty (7,9)29,30). This problem arises because of the high nutrient availability and favorable tempera- one or more of the techniques described above ture and pH in the paper processing environment. could potentially lead to the isolation of either a mixed culture or a pure strain that degrades a The slimicides currently in use are often heavy particular toxic compound that might be able to metal-based poisons that can result in significant be used at a disposal site or in a contaminated pollution and waste treatment problems (7,9,29, area. The Pseudomonas strain that degrades 30). However, the potential for using enzymatic 2,4,5-T has been shown to function successfully methods for slime control appears quite promis- both in laboratory tests using contaminated soil ing. The formation of slimes is principally due to and in field tests (17). The micro-organisms be- the extracellular polysaccharides produced by ing investigated now are aerobic. However, if the micro-organisms, so it should be possible to use toxic waste is present in a dump, it may be nec- polysaccharide hydrolyses to degrade the slimes essary to develop anaerobic micro-organisms for rather than toxic agents to destroy the micro- detoxification. organisms. The development of micro-organisms for the degradation of both organic micropollutants and Grease decomposition toxic wastes will require screening of natural mi- Facilities processing meats, poultry, and cer- crobial populations or chemostat selection for the tain other foods have particularly difficult prob- appropriate degradative abilities. Once micro- lems with grease. Grease problems also appear organisms with the ability to degrade the offend- throughout the wastewater collection and treating compound(s) are available, it may be desirable ment cycle. Both pipe collection branches and to transfer that ability to a different microbial host pump stations are susceptible to the problems of by using rDNA technology to increase the effi- grease accumulation, which include plugging of ciency of degradation or to increase the ability lines, accumulation of debris in wet wells, slip- of the micro-organisms to survive in the environ- pery working surfaces, unsightly conditions, ment in which they are utilized. odor, and operational problems at the facility site. For certain toxic wastes, an alternative ap- Scum layers on sedimentation tanks and scum proach to detoxification might involve the use of mats in digesters cause additional problems. The specific enzymes. Enzymatic processes would not two basic problems are the congealing (solidify- totally degrade the toxic compound but simply ing) of the grease and the difficulty, if not an im- would convert it to a nontoxic derivative that possibility, of decomposing the grease once it ar- might then be degraded through natural biologi- rives at the wastewater treatment plant. cal processes. Development of such enzymatic Techniques that result in the emulsification and processes would probably involve an extensive decomposition of grease would significantly im- research effort, and only very hazardous toxic prove the operation of all waste treatment facili- wastes would justify this degree of effort. ties. Bacterial formulations have been used in the past for grease decomposition (18). Improvement Slime control of these cultures might be possible. Additionally, an enzymatic approach, such as the use of lipases, Slime can be broadly defined as an aggregation could improve the operation of waste facilities. * of microbial cells held together by the extra- However, because grease contamination generally cellular polysaccharides produced by the micro- is in the form of nonaqueous, congealed deposits, organisms. Wherever water moves in significant substrate availability may be a significant prob- quantities, slimes proliferate. The proliferation merely requires the presence of a nutrient, even in minute quantities. In the manufacture of paper, *!XW Chapter 7: Special%\, (,-hwnirals an(i b-ood .4[i(iiti\ws 224 . Commercial Biotechnology: An International Analysis

Photo credit, David W Taylor, Naval Ship Research and Development Center Photo credit: David W. Taylor, Naval Ship Research and Development Center Grease buildup in a holding tank on a U.S. Navy ship after Grease buildup in the same tank after 4% months of 5 months of normal operation operation with daily addition of decreasing bacteria produced through classical genetic selection techniques lem. A mechanism for delivering the enzyme to the substrate might solve the problem, but no making initial assessments of the impact of ad- approaches for accomplishing this have been vanced biotechnology in this area. Japan is also postulated. conducting a small amount of R&D in this area. In the United States, there probably is more ac- Commercial aspects of biotechnology tivity oriented to biotechnology, much of it fi- in pollution control and toxic nanced by the U.S. Government, in the municipal waste treatment solid waste treatment sector than in either the air or liquid waste treatment sectors. Additionally, In contemporary times, basic developments and R&D efforts aimed at improving the technology improvements in water treatment have originated of wastewater treatment are concentrated in a primarily in Western Europe and spread through handful of small bioprocess-oriented companies the Western Hemisphere. Higher population and and certain academic microbiology laboratories. industrial densities coupled with fewer water Only recently did interactions begin between resources have forced Western European coun- these research groups and the plant operators in- tries to advance the technology at a much faster volved in purifying wastewater (14). In the past, pace than required in the United States. In a industry has relied primarily on engineering con- sense, Western Europe has been the proving sultants, not technology-based companies, to ad- ground for new technologies used for water and dress pollution problems; these consultants have wastewater treatment. This historical pattern sug- used the most basic existing technologies for treat- gests that Western Europe has probably been ment of organic wastes. Ch. 8—Environmental Applications ● 225

Two potential barriers to the commercial ap- partially to the private sector. At the present time, plication of novel approaches to the problems of most industries will not fund biotechnological re- pollution control and waste treatment are the per- search on waste treatment problems. They are formance of the products that are developed and only interested in licensing or purchasing such scientific uncertainty regarding their application. technology if it has already been developed. For example, although the technology for high- Another potential barrier to commercialization level production of enzymes and metallothioneins of products for pollution control is Government certainly exists or can be developed, the perform- regulation of the products themselves. In the case ance of these products in the desired application of enzymes and other proteins, few significant is as yet untested. If their performance turns out safety problems requiring regulation are antici- to be poor, then the R&D effort for commercial- pated, although care must be taken in handling ization would be much more extensive and might these products. The application of micro-orga- not be worth pursuing. Furthermore, although nisms, in contrast, could involve significant reg- reasonable approaches can be designed to iden- ulatory implications. Since the micro-organisms tify or develop microa-ganisms for the degrada- proposed here will have the potential for being tion of organic micropollutants and toxic wastes, released into the environment, it will probably the success of these approaches is uncertain. It be necessary to establish their safety or to develop is also unclear whether genetically manipulated methods for their containment at the site of treat- micro-organisms or micro-organisms that have ment. U.S. policy with regard to the regulation been otherwise selected in the laboratory will be of micro-organisms, particularly genetically ma- able to survive in a nonlaboratory environment. nipulated ones, is dynamic. The regulatory con- Their ability to survive and function in the field straints that will be placed on the use of micro- will probably be greatest if the desired degra- organisms in the future, therefore, cannot be dative activities can be introduced through accurately predicted. The benefits of using micro- minimal alteration of a naturally occurring micro- organisms in the area of pollution control to pro- organism. tect human health will have to be carefully bal- If the technological barriers to commercial ap- anced against any perceived dangers associated plication can be surmounted, the other areas of with their use. importance will be markets, Government policy, , and regulation. Biotechnological improvements in # -r “ the area of conventional wastewater treatment processes and slime control would provide economic benefits. If the performance is satisfactory, markets for these products should develop. The primary limitation to commercialization will be the rate of acceptance by the treatment plant operators. In the case of pollution control, whether it be control of organic micropollutants, heavy metals, or toxic wastes, the primary nontechnological barrier will be Federal Government policy. Biotech- nological solutions to these problems are likely to be vigorously pursued only if the Government sets goals and criteria for reducing these contam- inants that must be met by both the public and private sectors, The effort for developing these biotechnological solutions will probably initially require Federal funding, However, the require- Photo credit” G E. Pterce and M K Mulks ments could eventually create a demand for a Pseudomonas putida, a bacterium capable of degrading commercial product, and funding might then shift hydrocarbons 226 ● Commercial Biotechnology: An International Analysis

Microbiological mining

Micro-organisms have been used to some ex- quently the best studied, is Thiobacillus ferrooxi- tent in mineral leaching and metal concentration dans. T. ferrooxidans has also been shown to ef- processes for many years. For the most part, fect solubilization of cobalt, nickel, zinc, and lead these processes have been fortuitous, relying on (43). This organism, and most of the other bacteria micro-organisms found associated with mine found in mine dump sites, are autotrophic: they dumps. With the recent advent of novel biologi- use carbon dioxide from the air for their carbon cal techniques, people in the mining industry and source, and they generate their energy from the biologists have begun to think about ways to oxidation of inorganic matter. In other words, manipulate genetically some of the micro- they need no raw material input from miners who organisms important in metal recovery processes wish to exploit them. to increase their efficiency and allow them to function on a larger variety of substrates. The solubilization (leaching) of metals from ore by bacteria occurs in two ways: indirect and Mineral leaching direct. The indirect method involves the transformation of ferrous iron to ferric iron by T. fer- More than 10 percent of the copper produced rooxidans. The ferric iron is a very powerful ox- by the United States is leached from ores by idizing agent that consequently converts metal micro-organisms (41,48). The micro-organisms sulfide minerals into acid soluble metal sulfate used are found naturally associated with ores; the compounds. For example, ferric iron reacts with ores are not inoculated with selected strains. Until copper sulfide to form soluble copper sulfate. The recently, the use of micro-organisms in the min- direct method involves an enzymatic attack by ing industry received little research attention the bacteria on sulfide minerals to give soluble because of the ease of mining high-grade ores and sulfates and, in the process, also oxidizes the fer- the relatively low energy cost for conventional rous iron to ferric iron. The result is the same, mineral processing. The use of micro-organisms i.e., the metal is soluble in an acid solution. The is gaining new attention, not only because of the metal-laden solutions are collected and the metals depletion of high-grade ore and the soaring cost are removed from solution by chemical and phys- of energy, but also because of the possibility for ical processes (see fig. 23). Additionally, since the genetic manipulation to increase the efficiency use of coal as an energy source will increase, bac- and broaden the application of microbial leaching. teria may be used to extract the sulfur from coal, There are many advantages to the use of micro- making it less polluting. organisms. Besides having a low energy require- Biotechnology could be used by the mining in- ment due to their growth at ambient temperature and pressure, micro-organisms work efficiently dustry to create more efficient micro-organisms. Recombinant DNA technology could be used to and are less polluting than smelting techniques. It is possible they could be used for leaching in effect the following improvements in selected deep underground sites that are inaccessible to bacteria: more traditional mining equipment. Mining with ● an enhancement in the rate at which the bac- microorganisms requires relatively low capital teria regenerate the ferric iron; and operating costs, making it feasible for small- ● greater tolerance to acidic conditions; scale mining operations. The major drawback to ● greater tolerance to saline conditions; the use of micro-organisms is that the biological ● a decrease in the bacteria’s sensitivity to some processes are slow compared to the equivalent metals, especially thorium, silver, mercury, chemical ones (4 I). and cadmium; and Microorganisms have been used mostly to leach ● an increase in the bacteria’s ability to with- copper and uranium (40). The organism that is stand high temperatures for deep mine oper- most often used in these operations, and conse- ations. Ch. 8—Environmental Applications 227

for a stocks will be prepared to suit the micro-organism. It seems that the most likely application for genetically manipulated micro-organisms in mineral leaching will be in the same area in which microorganisms are used now, for the treatment of large quantities of discarded waste rock that have small quantities of valuable metals (41,43). Because the leaching process takes place in the environment, the biological process cannot be completely controlled. Nevertheless, there are ways to optimize the reaction conditions for the microorganisms of interest. The particle size and particle-to-solution ratio of the mine dumps can be manipulated. It is also possible to some extent to control the pH, temperature, and oxygen and carbon dioxide levels. By optimizing these conditions, the leaching organisms can be given an advantage over naturally occurring organisms. In recent years, the search for new microorganisms in such primeval environments as hot acid springs, volcanic regions, and deep ocean ther- mal vents has revealed many micro-organisms capable of metal transformations under harsh conditions. Not only are these organisms likely to have application in commercial metal recovery, SOURCE Off Ice of Technology Assessment but they also represent an enormous gene pool for improving existing leaching bacteria through It is likely that rDNA technology will be able to rDNA technology. address some of these problems in the near future (41)43,47)! Concentration of metals Microorganisms used in a metal-leaching operation are subjected to very different stresses than Another area where micro-organisms could be those used in a laboratory setting. These differ- useful to the mining industry is the concentra- ences must be kept in mind when considering the tion of metals from aqueous solutions. The R&D use of rDNA technology, especially since most of of this kind of process is somewhat easier than the experience with the new technology has fo- R&D of leaching because it can occur in more cused on well-defined laboratory strains in con- controlled laboratory situations, making manip- trolled environments. The bacteria used in leach- ulation of the organism’s environment possible. ing endure variable weather conditions, some There are two biological methods for concentrat- quite inhospitable for most organisms. When a ing metals. In one case, the metals are nonspe- micro-organism is placed in the environment, it cifically adsorbed to the surface of the organism. will most likely have to interact with other orga- In the other, the metals are specifically bound and nisms, and this fact has to be taken into account taken up by the organism. In the latter mecha- when researching organisms of interest. Addi- nism, metals can be ”concentrated up to 10)000 tionally, the mineralogy at each mine site is times. There is a great diversity of organisms that unique, so microorganisms either will have to be have been shown to concentrate metals, including modified for each site or will have to be able to bacteria, fungi, and algae. The metals they con- act on varied feedstocks. It is unlikely that feed- centrate are primarily copper, uranium, silver, 228 Commercial Biotechnology: An International Analysis and the lanthanides. Recombinant DNA technol- bac (Allentown, Pa.), Genex, and Biogen S. A.* are ogy could be useful in developing organisms to researching mining and metal microbiology. expand the range of metals concentrated. Two spinoff applications could derive from the Another approach to concentrating metals in- work in the area of microbiological mining. one volves the use of specific metal-binding proteins application is the recovery of expensive metals produced in higher organisms. One of the best such as silver from processes such as photograph studied metal-binding proteins is metallothionein, developing. In the past, the developing solutions which binds cadmium, zinc, mercury, and cop- containing the silver were disposed, but with the per. The use of these proteins is discussed earlier increased price of silver over the past few years, in the section on pollution control and toxic waste there has been increasing interest in silver recov- treatment. ery. Another application is using microa-ganisms to reactivate metal catalysts, recovering metals that have been deposited on the catalyst. Both the Commercial aspects of biotechnology catalyst is regenerated and the metal is recovered in microbiological mining (48). In the United States, there is no Federal R&D Several other countries, notably the United funding specifically earmarked for mining micro- Kingdom, Australia, South Africa, and Canada, are biology. The National Science Foundation and the interested in the applications of biotechnology in U.S. Department of Energy (DOE) have funds the mining industry. The majority of the R&D, under various programs that can be used for however, is being done by private industry. Very basic research studies on microorganisms impor- little is funded by the Governments of these coun- tant in mining. In fiscal year 1984, neither agen- tries. cy anticipates funding at levels more than As of mid-1983, there were no genetically ma- $300,000. The Bureau of Mines of the U.S. Depart- nipulated micro-organisms on the market (4.4). Yet ment of the Interior did not fund any micro- it is possible that research efforts could yield biology in fiscal years 1981 and 1982. In fiscal year useful, new bacteria for leaching and concentra- 1983, it funded the Idaho National Engineering tion of metals in a few years. If scale-ups and field Laboratory at about $300,000 to study the leach- trials (for leaching) were carried out expedient- ing and concentrating of cobalt. The Bureau in- ly, marketable products for leaching and concen- tends to continue the funding of this project at tration could be available in less than 10 years the same level in fiscal year 1984 (45). (42). This research is proceeding slowly, however, Much of the R&D funding in this field comes because of the currently depressed state of the from both large and small firms in the mining in- minerals market. Most industry experts hesitate dustry. Atlantic Richfield Co. is doing a substan- to speculate when micro-oganisms used for min- tial amount of research in this area. Other large ing might reach the marketplace, because the companies investing in microbiological mining in- worldwide availability and price of these metals clude General Electric, Koppers, Eastman Kodak, will determine how fast the research will proceed. International Nickel Co., Chevron, W. R. Grace, There will have to be a scarcity of the metal be- and Standard Oil of California. Additionally, at fore much microbiological research will be done. least four small U.S. companies, Advanced Min- “Biogen is about 80-percent U.S. owned, but most of its work in eral Technologies, Inc. (Socorro, N. Mex.), Poly - microbiological mining is done by Biogen S.A. in Switzerland.

Microbial enhanced oil recovery

Conventional oil extraction technologies can re- trapped in rock or is too viscous to pump. The cover only about 50 percent of the world’s sub- application of microa-ganisms or their products terranean oil reserves. The balance either is possibly could be used to aid in the recovery of Ch. 8—Environmental Applications . 229 trapped oil. The use of microbial processes for dence that the oil reservoir is not as an untenable, this purpose is called microbial enhanced oil restrictive environment for micro-organisms as recovery (MEOR). some laboratory studies would indicate. Micro- organisms can, in fact, be isolated from deep res- The interest in MEOR has increased substan- ervoirs, and they may have developed specialized tially since 1975. Several conferences on the sub- mechanisms to cope with low amounts of oxygen. ject have brought together petroleum engineers Other micro-organisms have been isolated that and microbiologists to begin to analyze the roles do not need oxygen for growth. Further study that micro-organisms could play in the recovery of these organisms may lead to the development of trapped oil. TO date, several field tests have of micro-organisms useful to the petroleum in- been done, but none have yet revealed a micro- dustry (52). organism that is broadly applicable in MEOR (51).

There are three general experimental ap- Use of microbially produced proaches to MEOR (.51): compounds in oil wells ● the stimulation of endogeneous micro-orga- Another approach to MEOR, the use of micro- nisms by injection of nutrients into the well, bially produced compounds in oil wells, could be ● the injection of laboratory-selected micro- a relatively near-term application of biotechnol- organisms into the well, and ogy. Biological compounds that could be injected ● the production by micro-organisms of spe- into wells include surfactants and viscosity en- cific biological compounds and the subse- hancers and decreases. The search has begun quent use of these compounds in wells. for these compounds, but it is becoming increas- As discussed further below, new biotechnology ingly obvious that little is known about these com- offers possibilities in the latter two approaches. pounds and the micro-organisms that produce them. Uses of micro-organisms in oil wells Even with the lack of knowledge, however, two Various microorganisms are now being isolated promising compounds have been isolated and and examined for properties useful for oil extrac- studied. One substance, characterized at the tion. Micro-organisms evolve gases, notably car- University of Georgia, is a glycolipid from a bon dioxide, that could aid in repressurizing an bacteria named H-13. This substance reduces the oil well. An ideal microbe would use the less val- viscosity of various heavy crude oils (51). Another uable parts of oil as a carbon source to produce substance, originally isolated in Israel but now surfactants or emulsifiers to lower the viscosity studied in the United States, is called emulsan and of the oil allowing it to be pumped to the surface. has the property of emulsifying oil, allowing bet- Several problems complicate this senario. No ter flow and dispersal (54). * Field trials have in- micro-organism has yet been found that degrades cluded the cleaning of an oil tanker hold and an only the less useful components of oil; micro- aircraft carrier runway (57). Emulsan proved ef- organisms usually also degrade the compounds fective at these jobs and holds promise for use important to the petroleum industry. Some micro- in oil wells. Emulsan is being developed by Petro- organisms will not degrade the oil at all, but these ferm, USA (Amelia Island, Florida), and produced and marketed by Pfizer (50). micro-organisms need to have a carbon source, usually molasses, pumped into the well, and this increases the cost of production. Microbes currently being studied survive only under conditions of moderate heat, salinity, and pressure (55,56). Given the wide variability in geological deposits, these micro-organisms have lim- ● Emulsan is discussed further in Chapter 7: Special?.}’ Chemicaf,s ited usefulness. However, there is substantial evi- and F’wxf ,4dditit’es, ......

230 ● Commercial Biotechnology: An International Analysis

Commercial aspects of biotechnology Foreign companies and countries are also in- in microbial enhanced oil recovery vestigating MEOR, notably the Swiss firm Petro- genetic AG, the British Government and British Many of the major oil companies are thought Petroleum, the U. S. S. R., and the Peoples Republic to be investing in MEOR (49). The U.S. leader in of China (49,53), this field appears to be Phillips Petroleum. Small U.S. firms doing R&D in MEOR include Petro- The status of potential markets for MEOR is ferm, Genetics International (Boston), and Worne very questionable because of the lack of knowl- Biotechnology (Medford, N.J.). Only one company, edge about MEOR’s real potential. However, Shell Oil Co., has stated that MEOR is too specu- MEOR could potentially increase the production lative for its R&D laboratories (55). Additionally, of oil and decrease the costs of recovery signifi- the LJ.S. Government, through DOE, is investigat- cantly. ing MEOR.

Priorities for future research

The applications of new biotechnology in the ● the development of microbial strains or en- environment are at a rudimentary stage, primari- zymes that degrade toxic compounds, and ly because of the lack of knowledge about the ge- ● the development of improved polysaccharide netics and biochemistry of the potentially useful hydrolyses to degrade slimes. microaganisms and the environment in which Specific challenges for microbiological mining they operate. Currently, most basic research is include: done with pure cultures that do not represent the real world situation. There is certainly no guar- ● the development of micro-organisms that antee that a species of bacterium will perform in could leach valuable metals such as thorium, an outdoor environment as it does in the labora- silver, mercury, gold, platinum, and cadmi- tory. Additionally, scale-up problems will be great um; because of the large size of the operations. Studies ● a better understanding of the interactions be- in all of these research areas are interdisciplinary. tween the micro-organisms and the mineral Unless there is close collaboration between biol- substances; and ogists and engineers, it is unlikely that the re- ● the development of DNA transfer technolo- search will be very productive, gies for use at low pHs. Specific challenges for pollution control and Specific challenges for MEOR include: toxic waste treatment include: ● better biochemical and physiological under- ● the isolation and characterization of enzymes standing of microorganisms already present to polymerize low molecular weight organic in oil reservoirs, compounds, ● the development of a microaganism that de- ● better characterization of metallothioneins grades only the less useful components of oil, from various species, and ● the identification of polysaccharides to serve ● screening of microorganisms for the produc- as bioflocculants, tion of surfactants and viscosity enhancers ● the development of enzymes for sludge de- and decreases. watering, Ch. 8—Environmental Applications ● 231

Chapter 8 references pollution control and toxic waste treatment references

20.

21,

22.

9. 23.

10.

24. 11

12.

13. 25.

14.

26. 232 ● Commercial Biotechnology: An International Analysis

and Conservation

references

43<

44,

45.

46.

33 47.

34.

50.

51.

38 52.

39 Ch. 8–Environmental Applications ● 233

54. Gutnick, D. L., et al., “The Interaction of Emulsan 56. Springham, D., “Bugs to the Oil Industry’s Rescue,” With Hydrocarbons, ” Proceedings of the Interna- Newr Scientist, May 13, 1982, pp. 408-410. tional Conference on Microbial Enhancement of .57. Warren, R., Naval Air Systems Command, personal Oil Recovexy, Afton, Okla., in press, 1982. communication, 1983. 55. Lancaster, H., “Scientists Turning to Microbes To Improve Oil Well Output, ” Wall Street Journal, May 28, 1982, p. 17.

25-561 0 - 84 - 16 Chapter 9 Commodity chemicals and Energy production Contents

...... 237 ...... 239 ...... 240 ...... 241 ...... 242 ...... 242 ...... 243 ...... 244 ,,.,...... 247 ...... 248 ...... 248 ...... 249

United States ...... 237 for the ...... 246

Page

Cellulose ...... $ ...... 240 ...... 240 ...... 241 242 245 Chapter 9 Commodity Chemicals and Energy Production —.

Introduction

In 1982, the U.S. chemical industry produced Practically all commodity chemicals are cur- about 158 billion pounds (lb) of organic chemicals rently made from petroleum and natural gas re- (36). About 30 commodity chemicals–defined in sources and are used as precursors for a variety this report as chemicals that sell for less than $1 of materials such as polymers and solvents. The per lb” —constitute the majority of this market United States, which now imports about 30 per- (see table 39). cent of its petroleum (34), uses about 7 to 8 per- —— cent of its total petroleum and natural gas sup- “(:h[~rnicals with higher value such as \’itamins, food additives, ii ml amino aci(L\, form the suhject of Chapter 7: Speciahv Chemicals ply for the production of commodity chemicals i]l][/ 1<’ood ,.lddifh es ‘1’he difference between “comrnodit:’” and “spc- (10,18,22); the remainder of this supply is used cialt}” chemicals is somewhat fluidlv cietermined hv prire versus as an energy source. quantities produred Some of the compounds descrihed in chapter 7 are considered by some analj~sts to be commodity chemicals. These The chemical industry’s reliance on petroleum ln(lude tcgetahle oils and their dcrit”atives, single cell protein, and fructose. Because of their predominant use as food additives, how- feedstocks raises a number of problems. Two e~’er, these compounds are considered in the earlier chapter. problems are the fluctuating cost and uncertain

Table 39.—Annual Production and Selling Price of the Major Organic Commodity Chemicals in the United States

Production in 1982 Price in 1982 Chemical (billion pounds) (Mb) Major uses Ethylene ...... 24.7 25.5 Polyethylene derivatives Toluene ...... 15.3 26.7 Benzene, gas additive, solvents, polyfoams Propylene ...... 12.3 24.0 Polypropylene, isopropanol Ethylene dichloride ...... 10.0 13.7 Vinyl chloride Benzene ...... 7.9 21.1 Styrene, phenol, cyclohexane Methanol ., ...... 7.3 10.8 Formaldehyde Ethylbenzene ...... 6.6 30.0 Styrene Vinyl chloride ...... 6.5 22.0 Polyvinyl chloride, resins Styrene ...... 5.9 37.5 Pol yst yrenes Xylene ...... 5.3 18,9 p- and o-xylene, gas additive, solvent Terephthalic acid ...... 5.0 N.A. Polyester fibers Ethylene oxide ...... 4.9 45.0 Ethylene glycol Formaldehyde ...... 4.7 24.4 Resins Ethylene glycol ...... 4.0 33.0 Antifreeze, polyesters p-xylene ...... 3.2 31.0 Synthetic fibers Acetic acid...... 2.8 26.5 Vinyl and celtulosic acetate Cumene ...... 2.7 24.0 Phenol Phenol ...... 2.1 36.0 Acrylonitrile ...... , . . . 2.0 44.5 Polymers Vinyl acetate ...... 1.9 37.5 Polyvinyl acetates, alcohols Butadiene...... 1.8 40.0 Rubber Acetone ...... 1.8 31.0 Propylene oxide ...... 1.5 40.5 Propylene glycol, urethanes Isopropanol ...... 1.3 32.9 Acetone, solvents Cyclohexane ...... 1.3 25.3 Nylon, caprolactum Adipic acid...... 1.2 57.0 Nylon Acetic anhydride...... 1.1 41.0 Cellulose esters Ethanol ...... 1.1 25.8 Detergent, solubilizer, cosmetics, solvent, fuel SOURCE Office of Technology Assessment, adapted from D Webber, “Basic Chemical Output Fell Third Year in a Row,” Ctrern. Eng. News, May 2, 1983, pp. 10-13; T C O’Brien, “Feedstock Trends for the Organic Chemical Industry,” Planning Report 15, U.S. Department of Commerce, National Bureau of Standards, April 1983, and Ctrermica/ Marketing Reporter, “Weekly Price Report, ” May 31, 1982, pp. 35-39.

237 238 ● Commercial Biotechnology: An International Analysis

supplies of petroleum. Commodity chemical companies in the United States, Europe, and Japan prices are especially sensitive to the cost of may have to develop new ways of using commodi- petroleum because feedstock costs typically ty chemicals to produce compounds of greater represent 50 to 75 percent of commodity chemi- value or to move directly to the manufacture of cal manufacturing costs (6). Other problems of higher value-added chemicals from biomass. In the commodity chemical industry include a cur- any case, a rapid or dramatic shift in feedstock rent overcapacity of production by the capital- use is unlikely; it is much more probable that intensive petrochemical companies, the high costs there will be a slow transition to the use of of energy associated with “cracking” petroleum biomass as a feedstock in particular instances. into chemical feedstocks, and environmental, safety, and ideological concerns surrounding the use Although nonrenewable resources such as coal of nonrenewable, fossil resources (6). will probably be adopted earlier, biomass—including crop and forest product wastes and municipal These well-publicized problems, which increase and agricultural wastes—may provide solutions in urgency with the passing of time, have intensi- to some of the long-term problems associated with fied the search for nonpetroleum feedstocks for chemical and energy production from petroleum. chemical and energy production. The options be- It is technologically possible to produce essentially ing pursued at present include the liquification all commodity chemicals from biomass feedstocks and gasification of coal, the development of syn- such as starch or cellulose, and most commodity thetic fuel from natural gas, and the conversion chemicals can be synthesized biologically (10,24). of biomass* * to fuels and a wide variety of or- A viable biomass feedstock for the production of ganic chemicals. commodity chemicals may be starch. Less than The substitution of natural gas, coal, and other I percent of the U.S. corn crop would be required nonrenewable resources for petroleum are issues to obtain the cornstarch needed to produce a typ- that have been discussed in several previous OTA ical commodity chemical at the rate of I billion reports (28)29,31). Despite the drawbacks outlined lb per year (18). Although a few high-volume in those reports, coal is favored as an alternative chemicals that could be produced from biomass, resource by U.S. petroleum companies, which such as ethanol, can be used for fuel, the volume control 20 percent of U.S. coal production and of biomass needed to produce a nation’s energy 25 percent of US. coal reserves (3,27). Processed would be substantially greater than that needed coal feedstocks fit readily into most petroleum to produce its commodity chemicals. Starch prob- feedstock schemes for the production of commod- ably could not be used for energy production ity chemicals and thus do not require large capital without putting a strain on food and feed uses. investments for new chemical plants. Neverthe- Thus, if biomass is to be used extensively for less, at least one analyst thinks that petroleum will energy production, the biomass source will most continue to be used as a feedstock for commodi- likely be lignocellulose. ty chemicals for some time and that coal will not make a significant impact on the production of Biomass as an alternative to petroleum for U.S. chemicals until the 21st century (22). energy production was described in OTA’S July 1980 report Energy From Biological Processes It appears that countries with substantial inex- (30). As emphasized in that report, substantial pensive supplies of petroleum, such as Mexico and societal change, i.e., more public support and a Saudi Arabia, are turning to the production of higher priority for research on biomass use in the commodity chemicals as a way of adding value U.S. Departments of Agriculture and Energy pro- to their resources, Thus, countries with petro- grams, will be necessary if biomass is to become leum may begin to control the price of these a viable alternative to petroleum as a source of chemicals. Because such countries may be able energy in the near future. At present, the level to produce commodity chemicals at a lower price, of U.S. public support for biomass research is not

● ● Biomass is all organic matter that grows by the photosynthetic high. Furthermore, Federal support of applied recent’ersion of solar energy. search and development (R&D) programs for al- Ch. 9—Commodity Chemicals and Energy Production 239 ternative fuel sources has been plummeting in the technology might improve the efficiency of bio- recent climate of intense fiscal scrutiny. mass conversion, thus facilitating the transition to the use of biomass resources. The advances A shift from petrochemical processes to bio- biotechnology could provide for the improved processes for the production of commodity chem- growth of plants used for biomass conversion are icals will be difficult because of the existing in- discussed in Chapter 6: Agriculture. frastructure of chemical and energy production. This infrastructure allows a barrel of oil to be con- Since commodity chemicals represent only a verted to products in a highly integrated system small portion of today’s U.S. petroleum consump- in which the byproduct of one reaction may form tion, a transition to biomass-based commodity the substrate for another reaction. Most chemi- chemical production without a concurrent tran- cals derived from biomass cannot yet compete sition to biomass-based energy production will not economically. with chemicals made from oil in this substantially reduce the country’s dependence on infrastructure. petrochemical resources. For moving the United States toward the goal of reduced reliance on im- AS the costs of bioprocesses are reduced ported, nonrenewable resources, a unified ap- through R&D, however, a transition to biomass proach to chemical and fuel production will be resources may become a more realistic proposi- necessary. tion. This chapter examines ways in which bio-

Biomass resources

The United States has abundant biomass re- This chapter emphasizes the use of the two sources. The largest potential amount of cellulosic most abundant feedstocks from biomass: starch biomass is from cropland residues such as corn and cellulose. Starch and cellulose are both poly- stover and cereal straw, * although the potential mers of glucose units [6-carbon simple sugars) amount of cellulosic biomass from forest re- which, when hydrolyzed, yield glucose molecules sources is also quite large. About 550 million dry (see fig. 24). These glucose sugars provide the tons of hgnocelhdose are easily collected and avail- starting point for biological chemical production, able for conversion to chemicals each year. In for example, the transformation of glucose to eth- addition, some percentage of the 190 million dry anol. Other derivatives of biomass, such as vege- tons of corn produced yearly could be converted table oils, are used in bioprocesses, and those to starch and used for chemical production (21). resources are considered in Chapter 7: Specialty Chemicals and Food Additives. Parameters used to determine the optimal kind of biomass used in microbial systems include One drawback to the use of biomass as a feed- availability of the biomass, its energy content per stock for commodity chemical and energy pro- dry weight, the amount of energy that must be duction is its relatively low energy content per expended to achieve the desired products, the unit dry weight. Dry cellulose biomass, for exam- environmental impact of the process, and the ple, yields roughly 16 million Btu per ton and amenability of the material to conversion by ex- cornstarch yields 15 million Btu per ton, whereas isting microbial systems. Ultimately, biomass re- petroleum yields 40 to 50 million Btu per ton. sources that minimize usurpation of food sources Thus, the energy yield per unit of weight is lower are sought (e.g., nonfeed crops grown on extant for biomass than for petroleum. Furthermore, the arable land). costs of transporting biomass to a factory may bean important economic consideration. Raw material and transportation costs are particularly im- “Agricultural residues left On the soil aid in the sustainahilit~ of portant in the production of commodity chemi- soil. ‘I-he emrironmental impact of the remo~’al of these residues must be studied more thoroughly in order to determine whether agri- cals, because of the low value added to the feed- cultural wastes are, in fart, true wastes, stock in the synthesis of final products. .—— ——.

240 ● Commercial Biotechnology: An International Analysis

Figure 24.—Polysaccharides of Biomass: Figure 25.– Trends in World Grains Production Starch and Cellulose (million metric tons)

67/68 69/70 71/72 73174 75/76 77178 79/80 81182 Years

SOURCE: Off Ice of Technology Assessment, adapted from CPC, Int., 1983.

and this trend is expected to continue through the end of the century as the result of yield improvement and an expansion of acreage planted (19). Furthermore, the price of corn has remained relatively constant over the past decade, especially when compared to the nearly tenfold increase in the price of oil over the same period of time. The utilization of U.S. corn has changed over the past 10 years. A decrease in U.S. meat consumption caused a concurrent decrease in the amount of corn used for animal feed, while at the same time, technological advances increased corn yields. Consequently, the export market for U.S. corn has risen from 15 percent of the crop to 35 percent. Since U.S. corn production is expected to increase and meat consumption is expected to decrease, U.S. farmers will need new markets for SOURCE Office of Technology Assessment. their corn. Commodity chemical production from a starch feedstock could provide a market for U.S. Starch corn. The potential for industrial use of starch from corn alone is large, and an increase in the Starch, a molecule composed of many hundreds industrial use of corn would probably aid in sup- of glucose units bound together in branched or porting farm prices. Currently, only about 7 per- unbranched chains, is the principal carbohydrate cent of the corn produced in the United States storage product of higher plants and is readily is processed into cornstarch (7,19). Figure 26 sug- available from such crops as corn and potatoes. gests that 14 percent of the 1990 corn crop could In 1979, the United States produced about 666 go to chemical production, and enough corn billion lb of grain from six major cereal crops, and would still be available for other uses. this grain contained 470 billion lb of starch. The Because of its high volubility in water and ease major grain produced, corn, contained 316 billion of hydrolysis into individual glucose units, starch lb of starch (10), which could provide 285 billion is highly amenable to bioprocessing and may be lb of glucose. an ideal feedstock for chemical production. The As shown in figure 25, world grain production use of starch for both chemical and fuel produc- has increased steadily over the past several years, tion, however, might be at the expense of its use Ch. 9—Commodity Chemicals and Energy Production ● 241

Figure 26.— Trends in U.S. Corn Utilization in food production. Starch may not be produced in large enough quantities to be used both as a source of food and a source of energy. *

Lignocellulose

Lignocellulose is composed of cellulose, an unbranched chain of glucose units, lignin, a linked mixture of aromatic molecules, and hemicellulose, a polymer composed mainly of 5-carbon sugars. This structure provides the rigidity necessary for cellulose’s primary function, the support of plants. Because of its wide availability, lignocellulose has the potential to be the most important of all the raw materials for use in bioprocessing. Current- ly, however, several problems impede the use of lignocellulose on a large scale. Lignocellulose is highly insoluble in water and its rigid structure makes cellulose much more difficult than starch to hydrolyze to individual sugars. Furthermore, most microaganisms cannot utilize lignocellulose 1980/81 7230 million bushels directly without its having been pretreated either chemically or physically. Despite the considerable Food industry, advances made in both chemical and enzymatic seed, alcohol hydrolysis techniques, the cost of glucose derived from cellulose is still much higher than that derived from starch. The inherently diffuse nature of lignocellulose resources means that very high collection costs, especially in energy and manpower, will be encountered in any attempt at large-scale utilization, These considerations have given rise to the concept that the utilization of lignocellulose for energy will be feasible only through a widespread network of smaller manufacturing facilities that draw on local resources and supply local needs. Indeed, this pattern has already been established for farm-scale alcohol production from corn. An alternative to multiple small-scale production units

*As detailed in OTA’S July 1980 report Energv From Bio]ogica/ Processes (30), starch could be used to produce approximately 1 1990 billion to 2 billion gal of ethanol in the United States each year (about 9760 million bushels 1 to 2 percent d U.S. gasoline consumption) before food prices might begin to rise. 242 Commercial Biotechnology: An International Analysis

is the concept of centralized, intensive lignocel- prospects for success, but the development with lulose production on so+-died “energy planta- biotechnology of more effective biological agents tions.” The potential ecological problems and high- for lignocellulose utilization could radically ly questionable economics have detracted from change this picture.

Conversion of biomass to commodity chemicals —

As noted above, there are numerous types of Figure 27.—Convers!on of Biomass to Commodity biomass resources, including lignocellulosic prod- Chemicals ucts and feed crops such as corn. Because of the varying compositions of these raw materials, dif- A. Starch biomass ferent methods are used in rendering them into Corn useful chemicals. Nevertheless, all microbial con- Oil version of biomass to marketable chemicals is a 1 * Fiber muhistep process that includes: Germ ● pretreatment (particularly with lignocellu- Gluten losic biomass), ● hydrolysis (saccharification) to produce hex- Starch I ose (6-carbon) and pentose (5-carbon) sugars, * ● bioprocessing of these sugars by specific * * micro-organisms to give commodity chemi- Dextrose Syrups Starch products cals, ● subsequent bioprocessing or chemical reactions to produce secondary commodity chem- B. Lignocellulosic biomass icals, and ● separation and purification of end products. Lignocellulose * Figure 27 is a schematic summary of the multistep 1 processes for the conversion of starch and lignocellulosic biomass to commodity chemicals. Al- though figure 27 emphasizes the microbial steps that could be used for these processes and appli- t # # Cellulose Hemicellulose Lignin cations of biotechnology to them, it should be noted that a variety of chemical syntheses can also *I *1 be used to convert the components of biomass into useful chemicals (9,10,17,18).

Pretreatment * = Possible microbiological step

Before either starch or lignocellulosic biomass SOURCE: Office of Technology Assessment can be used as feedstocks for bioprocesses, they must be pretreated in preparation for hydrolysis. Starch from corn requires little pretreatment. Lig- STARCH nocellulosic materials such as wood, however, de- The United States relies primarily on corn for mand extensive pretreatment to make cellulose starch feedstocks. About 500 million bushels are and hemicellulose available for hydrolysis. processed by corn refiners yearly to produce Ch. 9—Commodity Chemicals and Energy Production ● 243 cornstarch products. In the production of corn- fied, but efforts to use micro-organisms for de- starch, refiners employ a process known as “corn lignification are hampered by the fact that lignin wet milling” in which corn kernels are cleaned, metabolizes are toxic to these micro-organisms. soaked in warm, dilute acid, and ground to yield Thus, more work remains to be done before bio- a slurry composed of starch, protein, and oil. delignification and other methods of biological Much of the starch is further converted to sweet- pretreatment are competitive with the current- eners, such as glucose and high fructose corn ly used chemical or mechanical pretreatment syrup (7). Cornstarch is the milling product that methods. Were more information available on could be used to make commodity chemicals. these micro-organisms, biotechnology could be used to improve their efficiency. The pretreatment of starch requires minimum inputs of acid and heat. Energy requirements are Hydrolysis low compared with the potential energy gained, and almost all byproducts are marketable. Com- STARCH bined with starch thinning and saccharification costs (see below), corn wet milling is estimated Enzymes from microbial systems are widely to yield monomeric sugar at a cost of 12¢lb (at used industrially to catalyze hydrolysis of starch $3.40/bushel of corn) (21). into sugars. * Batch bioprocesses are used for hydrolysis. Three enzymes, alpha -amylase, beta- LIGNOCELLULOSE amylase, and glucoamylase, are used to hydrolyze the starch chains to yield complete hydrolysis and Methods used to pretreat lignocellulosic bio- the formation of glucose (15). The largest indus- mass include chemical pretreatment in acids and trial use of enzymes is in the corn wet milling bases, steam explosion, and mechanical grinding. industry. These methods, described in OTA’S July 1980 biomass report (30), add substantially to the costs in- The major U.S. corn refiners have ongoing ac- volved in using lignocellulosic biomass as a chem- tive research programs for the improvement of ical resource. enzymatic degradative processes, and these manufacturers have made major advances in the areas In the future, biodelignification (the biological of bioprocessing and enzyme immobilization. degradation of lignin) by micro-organisms may These manufacturers have continued their efforts prove useful in the pretreatment of lignocellulosic toward improvement of enzymes by using new biomass (8,24). Biodelignification results in remov- biotechnology (32). al of lignin, exposing the crystalline cellulose and lowering the costs of mechanical pretreatment. CELLULOSE At present, however, biodelignification is an inadequate, expensive means of pretreatment, and The well-ordered crystalline structure of cel- it is not used in the pilot projects for use of ligno- lulose necessitates harsher treatments than those cellulose currently underway. As yet, there are used for starch. Whereas hemicellulose is readi- no valuable uses for lignin. Uses must be found ly hydrolyzed into its 5-carbon sugars under mild for lignin derivatives before these processes will conditions, the hydrolysis of cellulose requires be commercially viable (2). strong acids, heat, and pressure. These conditions lead to the formation of byproducts which must Several groups are working toward obtaining be separated and utilized to minimize the overall faster biodelignification using mixed cultures of costs of lignocellulose use. In addition, the acid micro-organisms, but microbial reaction rates at used for the hydrolysis of cellulose must be neu- present do not approach those needed for eco- tralized before the mixture is used for bioprocess - nomic feasibility. With use of the best candidate, ing, a requirement that raises the cost of hydrol- the degradative mold Chysosporium pruinosum, ysis. 40 percent of lignin remains intact after 30 days of treatment (l). At least 20 strains of bacteria that ‘For further discussion of these enzymes, see Chapter 7: Specialtbv have Iignodegradative abilities have been identi- Chemicals and Food Additi\’es. 244 Commercial Biotechnology: An International Analysis

The use of enzymes known as cellulases (and Another possibility for a biotechnological im- microorganisms that produce cellulases) to hy- provement is to transfer the ability to utilize the drolyze cellulose, either alone or in conjunction 5-carbon sugars from hemicellulose into cellulose- with chemical treatment, offers an increasingly utilizing microorganisms. A third possibility is im- popular alternative to chemical methods of hy- proving the specificity of organisms that can uti- drolysis. Cellulose is the most abundant biological lize lignocellulose directly, e.g., Clostridium ther- compound on earth, and a myriad of micro- mocellum. The “wild types” of these micro- organisms employ cellulases to obtain energy for organisms produce a range of products, typical- growth from the resulting glucose molecules. Re- ly ethanol and several organic acids. This varied search efforts to improve cellulase activity by synthesis results in low yields for each product mutagenesis and selection of cellulolytic (cellulose- and great difficulties in subsequent recovery and degrading) microa-ganisms have yielded mutant purification. Genetic mechanisms could be used strains of microa-ganisms (particularly fungi) that to select for high production of any one of the produce cellulases with higher tolerance to glu- products. cose (the product of hydrolysis that inhibits cellulase activity), increased efficiency and reaction Microbial production of commodity rate, and better functioning at the elevated tem- chemicals peratures and high acidities used in industrial bioprocesses (l). Some commodity chemicals, including ethanol and acetic acid, are now produced in the United The enzymatic activity of cellulases has been States with microbial bioprocesses (9), while other improving over the past several years, and in chemicals, such as ethylene and propylene, will some cases, the time needed for saccharification probably continue to be made from petroleum and subsequent bioprocessing to produce ethanol feedstocks because of lower production costs. The from cellulose has been reduced several fold (11). commodity chemicals that are attractive targets Despite these improvements, however, the activi- for production from biomass include ethanol, ace- ty of cellulases does not begin to compare with tone, isopropanol, acetic acid, citric acid, pro- the activities of amylases, which are about 1,000 panoic acid, fumaric acid, butanol, 2,3-butanediol, times more catalytically efficient (5). methyl ethyl ketone, glycerin, tetrahydrofuran, and adipic acid (9,18). Additionally, some chemi- Although research into the molecular biology cals, such as lactic and levulinic acids, could be of cellulases is in its early stages, biotechnology used as intermediates in the synthesis of polymers is being used to improve the cellulase-catalyzed that might replace petrochemically derived poly- hydrolysis of cellulosic biomass in several ways. mers (18). Two challenges for biotechnological approaches to cellulase production are increasing the low ac- Because the chemical composition of biomass tivity of the cellulase and making sure the entire differs from that of petroleum and because micro- cellulase gene complex is expressed. Processes organisms are capable of a wide range of activi- that optimize cellulase activity and efficiency are ties, it maybe that the most important commodity prerequisite to the use of lignocellulosic biomass chemicals produced from biomass till be, not resources. chemicals that directly substitute for petrochemicals, but other chemicals that together define a Researchers at the National Research Council new structure for the chemical industry. Micro- of Ottawa, Canada, the University of British Co- organisms used to produce organic chemicals lumbia, the University of North Carolina, and Cor- could be used with micro-organisms that fix ni- nell are using recombinant DNA (rDNA) tech- trogen to produce nitrogenous chemicals, either niques to clone cellulase genes from several higher value-added compounds or ammonia, a micro-organisms into bacteria that may be in- high volume commodity chemical. Other micro- duced to produce cellulase in large quantities (20). organisms, such as the methanogens or the micro- Similarly, researchers at the U.S. Department of organisms that metabolize hydrogen sulfide, may Agriculture are cloning celhdase genes from the be used to produce sulfur-containing chemicals fungus Penicillium funiculosum (12). (14). Ch. 9—Commodity Chemicals and Energy Production ● 245

The aerobic and anaerobic microbial pathways responsible for these reactions are listed in table leading to a number of important compounds are 40. Knowledge of biochemical pathways for the shown in figure 28. Some of the micro-organisms synthesis of particular chemicals will lead to the

Figure 28.—Metabolic Pathways for Formation of Various Chemicals

? 6X)*

SOURCE T K Ng, R M Busche. C C. McDonald, et al “ProductIon of Feedstock Chemicals.” Science 219:733.740, 1983 246 “ Commercial Biotechnology: An International Analysis

Table 40.—Potentially Important Bioprocessing Systems for the Production of Commodity Chemicals

Micro-organism Carbon source(s) Major fermentation product(s) Saccharomyces cerevisiae...... Glucose Ethanol Saccharomyces cerevisiae...... Glucose GI ycerol Zymomonas mobilis ...... Glucose Ethanol C/ostridium thermocellum ...... Glucose, lactic acid Ethanol, acetic acid C/ostridium thermosaccharo/yticum...... Lactic acid Glucose, xylose, ethanol, acetic acid C/ostridium thermohydrosu/furicum...... Glucose, xylose Ethanol, acetic acid, lactic acid Schizosaccharomyces pombe ...... Xylulose Ethanol K/uyveromyces Iactis ...... Xylulose Ethanol Pachysolen tannophilus ...... Glucose, xylose Ethanol Thermobacteroides saccharolyticum ...... Xylose, glucose Ethanol Thermoanaerobacter ethano/icus ...... Glucose, xylose Ethanol, acetic acid, lactic acid C/ostridium acetobuty/icum...... Glucose, xylose, arabinose Acetone, butanol C/ostridium aurianticum ...... Glucose Isopropanol C/ostridium thermoaceticum ...... Glucose, fructose, xylose Acetic acid Clostridium propionicum ...... Alanine Propionic acid, acetic acid, acrylic acid Aeromonas hydrophilic. , ...... Xylose Ethanol, 2,3-butanediol Dunaliella sp...... Carbon dioxide Glycerol Aspergil/us niger ...... Glucose Citric acid Aerobacter aerogenes ...... Glucose 2,3-butanediol Bacillus polymyxa ...... Glucose 2,3-butanediol

SOURCE Office of Technology Assessment, from T. K. Ng, R. M. Busche, C. C. McDonaldt et al., “Production of Feedstock Chemicals,” Science 219:733.740, 1963; J C. Linden and A Moreira, “Anaerobic Production of Chemicals,” Bask Biology of New Deve/o~rnerrts In Blotec/mo/o~y (New York: Plenum Press, 1963); and D I C Wang, Massachusetts Institute of Technology, personal communication, 19S2.

identification of the genes that control the syn- cy of sugar utilization; faster rates of production; thesis of these chemicals. With such knowledge, tolerance to higher temperatures, so that separa- it will be possible in some instances to employ tion and purification methods (which often re- rDNA technology or cell fusion methodology to quire elevated temperatures) can be coupled with yield microorganisms with improved bioconver- bioprocesses; * * selected drug tolerance, so that sion efficiencies. Improvements of these micro- growth of contaminant bacteria can be inhibited organisms by genetic manipulation at present are by drug treatment; and better growth on a variety limited to a few cases. Examples include the de- of biomass sources (26). Another major need is velopment of a pseudomonas putida plasmid that the identification of plasmids that can be used as codes for proteins that hydroxylate chemicals and vectors for the transmission of useful genetic the development of rDNA plasmids in E3cherichia information. coli that provide the genes that code for enzymes that convert fumarate to succinate (21). In developing commercial bioprocesses, a major need is for micro-organisms with characteristics such as tolerance to increased levels of products during bioprocess reactions;* better efficien-

“The most commonly used micro+xganism for ethanol fermentation is yeast, which tolerates ethanol concentrations up to about ● ● A combination of bioprocmsing and purification could be imple- 12 percent. Since the purification of ethanol from such dilute solu - mented whereby products are continuously removed and coUected. tions is costly, a desirable goal is to develop organisms (and thus In this case, the high temperatures would minimize contamination emem=) whose to]era~e to end products is higher. Such organisms by other organisms and avoid product concentrations high enough could be used as hosts for cloned bioconversion genes. to kill the micm-organisms (13,37). Ch. 9—Commodity Chemicals and Energy Production ● 247

International research activities

Biomass-related research in the United States Differing emphasis is placed on the biological is conducted by the Department of Energy (DOE), production of chemicals and fuels by the govern- the National Science Foundation, and private comments of foreign countries. The United Kingdom panies. Programs within DOE include the Biomass funds biotechnological applications to chemical Energy Technology- program, which examines the production processes through several govern- technical feasibility of innovative biomass feed- mental departments. The Canadian Development stock production and conversion technology; the Corporation is pursuing technology develop- Alcohol Fuels program; and the Biological Ener- ment for producing ethanol from aspen wood gy Research program (within DOE’s Office of Ba- ($21 million over 5 years), and several other sic Energy Science), which funds research on ge- Canadian Government agencies are addressing netic manipulation of plants for increased biomass chemical and energy production from biomass. production and of micro-oganisms for improved Japan, France, and Sweden also have Govern- bioprocessing. DOE’s Energy Conversion and ment-funded programs pursuing the use of bio- Utilization Technologies (ECUT) group recently mass as a feedstock for chemicals and energy (33). started a program in biocatalysis specifically in Profiles of recent U.S. patent activity indicate response to the potential use of rDNA organisms widespread attention by private inventors and in chemical production processes. The goal of this companies in the United States and other coun- generic applied research program is to build “bio- tries to biomass conversion, particularly in areas catalysis technology to enable industry to displace related to hydrolysis of starch to sugar, the pro- a significant level of nonrenewable resource reduction of higher value-added chemicals such quirements by [the year] 2000” (33). The ECUT as amino acids from microbial systems, and im- program focuses on research on scale-up of bio- provements in bioprocess systems such as en- processes, monitoring continuous bioprocesses, zyme immobilization (32). Organizations with the bioreactor design, and downstream product sep- most U.S. patents in starch hydrolysis and related aration. bioprocesses include CPC International Inc. (U.S.), The Reagan administration’s proposed fiscal with 21; A. E. Staley Manufacturing Co. (LJ.S.), year 1984 budget is not generous to biomass con- with 18; A. J. Reynolds Tobacco Co. (U.S.), with version for energy programs. The budget re- 8; France’s National Agency for the Funding of quests $17.3 million to support ‘(fundamental Research (L’ Agence Nationale de lralorisation de R&D” in this area, a small increase of $1.3 million la Recherche); Anheuser-Busch, Inc. (U.S.), and Ha- (8.1 percent) from fiscal year 1983. Alcohol fuels yashibara Biochemical Laboratories, Inc. (Japan), R&D, formerly budgeted separately, would be with 7 each; and Novo Industri A/S (Denmark) and combined with biomass energy programs (25), Miles Laboratories Inc. (U.S.), with 5 each (32). Since some of this R&D relates to studies of mi- Even though patents in starch hydrolysis do not crobial chemical production, any change in Fed- give a conclusive view of future biotechnological eral support for R&D of biomass energy will ef- applications to the commodity chemical industry, fectively alter R&D for biological commodity they do indicate that U.S. companies are the pre- chemical production. The only DOE program spe- dominant developers of the bioprocess technology cifically directed toward the use of new biotech- underlying the utilization of starch biomass. nology, the ECUT program, received no funding for fiscal year 1984. _

248 ● Commercial Biotechnology: An International Analysis

Conclusion

The production of low-value-added, high-vol- products may foster other bioprocess develop- ume commodity chemicals demands the use of ment. In order for this transition to take place, the most economic production schemes available. however, either the costs of producing these The most economic schemes for chemical and products must be reduced (about 20 to 40 per- energy production at present favor the use of cent of their existing costs) or the price of petrochemical feedstocks. In the future, however, petroleum must rise. Reducing the costs of pro- decreasing petroleum supplies, increasing oil duction of chemicals from biomass is a prerequi- prices, and technological advances in biomass site to commercial success in all case studies thus utilization may foster a transition to the use of far. feedstocks derived from biomass. Such a transi- U.S. Government support for applications of tion is not expected to occur on an industrywide biotechnology to the conversion of biomass is de- scale in the near future, but bioprocesses are creasing, while high levels of government support being used to produce significant amounts of fuel- are provided in several competitor countries, par- grade ethanol from corn and other crops econom- ticularly Japan and the United Kingdom. U.S. com- ically. panies appear to be active in developing certain Because of the potential for disruption of the biotechnological applications, but most of this ac- existing industrial structure, the complex inter- tivity as reflected in patents is concentrated in relationships that characterize the production of applications to starch conversion, with primary commodity chemicals will affect the success of emphasis on higher value chemicals which are the introduction of particular compounds pro- expected to be produced before biomass-based duced by microbial bioprocesses. Projected bio- commodity chemicals are made. Some companies processing costs of commodity chemicals and the in the united States and other countries are ac- structure of the chemical industry have been in- tive in bioprocess development, but given the cur- vestigated by B. O. Palsson, et al, (23). These in- rent slow pace of R&D in microbial systems that vestigators concluded that the potential exists for perform the chemical conversions, these proc- a smooth introduction of four microbial products esses will not be applicable in the chemical in- (ethanol, isopropanol, n-butanol, and 2,3-butanoO dustry for some years. into the U.S. chemical industry, and that these

Priorities for future research *

Biotechnology will be a key factor in develop- production of commodity chemicals because ing economic processes for the conversion of bio- incremental improvements in bioprocess mass to commodity chemicals. A number of pri- technology will be readily reflected in the orities for research that will improve the efficien- price of these chemicals. cy of the conversion of biomass to useful chemi- ● screening programs to identify micro-orga- cals can be identified: nisms (and their biochemical pathways) useful to processes such as commodity chemical ● bioprocess improvements, including the use synthesis, cellulose hydrolysis, lignin degrada- of immobilized cell and enzyme systems and tion, and catalysis of reactions that utilize by- improved separation and recovery meth- products that are currently unmarketable; ods, * * an area especially important to the ● developing host/vector systems that facilitate “k!anj of these suggestions are from Rabson and Rogers (24), increased production of commodity chemi- ● ‘See Chapter 3: 7he Technologim for a more extensi~’e discus- cals by gene amplification and increased gene sion. expression of desired products and that allow Ch. 9—Commodity Chemicals and Energy Production ● 249 ——

the transfer of genes into industrially impor- ● understanding the genetics and biosynthetic tant micro-organisms; pathways for the production of commodity ● understanding the structure and function of chemicals, especially for the strict anaerobic the cellulase and ligninolytic activities of bacteria such as the methanogens and the micro-organisms; clostridia; ● understanding the mechanism of survival of ● understanding microbial interactions in micro-organisms in extreme environments, mixed cultures; and such as high temperature, high pressure, ● developing an efficient pretreatment system acid, or salt; for lignocellulose. ● understanding the mechanism of cell tolerance to alcohols, organic acids, and other organic chemicals;

Chapter 9 references*

*1.

-.‘2. 12.

3. 13. 4.

.5. 14. *b,.

1.5. 4.

8, 16.

17. :)

* 18. 10

19.

11 ~().

*21. 250 . Commercial Biotechnology: An lnternational Analysis

25< 33

26, 34

35.

27, 36

28. 37

29 chapter 10 Bioelectronics Contents

Introduction ...... 253 Biosensors...... 253 Biochips...... 254 Priorities for Future Research ...... 256 Chapter IO References ...... 256

Figure Figure No. Page 29.The Use of Proteins in Constructing Circuit ...... , ...... 255 —

Chapter 10 Bioelectronics .—— .—

Introduction --—----- ———

The potential for the use of proteins in elec- used for several years, but design problems have tronic dmices has received attention recently with limited their acceptance. Biotechnology is ex- the advent of recombinant DNA (rDNA) technol- pected to increase the variety, stability, and sen- ogy}’ and the potential for computer-aided design sitivity of these devices. Biochips (biologically of proteins (I ,2,3 5 ,6,7, 11, 13,14,15,19,2 1 ). Work based microchips) capable of logic and memory is focused in two areas: biosensors and biochips. are still only speculative, and their development Biosensors (biological}’ based sensors) have been is many years away.

Biosensors -——-- –—- —— .——.

A potential application of biotechnology is in the not only could obviate the need for enzymes but development of improved sensing devices. Be- also could substantially broaden the applications cause of their high specificity. for given sub- of biosensors. A longer term solution to the lack of stances, enzymes and monocIonal antibodies particular enzymes might be to have computers (hlAbs) are particularly suited for use as sensors. design enzymes with particular catalytic func- Sensors using these biological molecules have the tions. Finally, features of proteins that determine potential to be smaller and more sensitive than temperature stability could be incorporated into traditional sensors. the genes that code for important sensing enzymes. Biosensors using enzymes have been used to detect the presence of various organic compounds A new approach to fabrication is yielding bio- for many years (12). Most of them have used a sensors with greater speed, sensitivity, and ease free or immobilized enzyme and an ion-sensitive of operation [4). The new biosensors use a field- electrode that measures indirectly (e.g., by tem- effect transistor that translates a chemical reac- perature or color changes produced during an tion, such as that catalyzed by an enzyme, into enzymatic reaction) the presence of a product the an electronic signal. Because the electronic re- formation of which is catalyzed by the enzyme. sponse is a direct measure of the chemical reac- Because of the proximity of the enzyme and election, the sensitivity and speed of the device is in- trode, these biosensors are rapid and sensitive. creased. (It is postulated that these sensors could They have not had wide application, however, use MAbs as specific detection agents.) The British because of the high cost of many enzymes, lack Government has one of these new biosensors on of particular enzymes, and temperature instabil- the market; it detects a particular nerve gas (4). ity. There are many potential applications for im- The use of rDNA and MAb technology and com- proved biosensors in the medical, industrial, en- puter-aided design of enzymes and other proteins vironmental, and defense fields (2, 12). These are may allow the problems associated with existing discussed in turn, biosensors to be overcome. The cloning in bacteria of genes coding for useful enzymes, for ex- In medical diagnostics, many substances need ample, could allow the enzymes to be made in to be measured accurately and rapidly, but the large amounts cost effectively. The use of MAbs, sensors now available are often expensive, slow, which can be made for virtually any molecule, and insensitive. Improved biosensors could poten-

253 254* Commercial Biotechnology: An International Analysis —. -— —. — —— -——. — —— tially solve many or all of these problems. Such Better biosensors might circumvent these prob- biosensors could detect, for example: lems. other environmental biosensors could be developed to detect exposure of workers to haz- . antigens associated with infectious disease, ardous substances and to monitor indoor air pol- ● hormonal levels to examine endocrine func- lution in the office or at home. tion, and . serum protein levels indicative of disease. The U.S. Department of Defense (DOD), in the near future, will be the major supporter of bio- One particularly important medical application of sensing research in the United States ($8 million improved biosensors could be in the treatment over the next 4 years). DOD’s aim is to develop of diabetic patients for whom proper levels of in- biosensors for the detection of chemical and bio- sulin and glucose must be maintained. Small, im - logical warfare agents that are small, have high plantable devices that sample blood for glucose sensitivity, quick response times, and no false and regulate the delivery of insulin could be de- alarms (18). If such devices were developed, they veloped. would have broad civilian applications such as As mentioned in Chapter 3: The Technologies, those just mentioned. Companies funding re- one of the hindrances to effective bioprocess mon- search on biosensors for a number of uses include itoring and control is the need for a wide range IBM, IT&T, and Johnson & Johnson in the United of sterilizable sensors. Biosensors could be devel- States and Cambridge Life Sciences in the United oped to measure levels of key reaction substances, Kingdom (4,9,16). such as reactants, intermediates, nutrients, and Many technical barriers to developing highly products. Continuous monitoring of several sub- reliable biosensors remain (8,17). Operating limita- stances with biosensors interfaced to a computer tions (e.g., a narrow temperature range) and fab- would allow better control over the reaction proc- rication problems have yet to be overcome. Re- ess and thus increase productivity. The use of search is needed to identify which proteins are thermotolerant enzymes could potentially allow most appropriate for this technology. Moreover, these sensors to be sterilized in place. sensors implanted in animals or used to monitor A potential environmental application of im- bioprocesses must be sterilized prior to implan- proved biosensors would be to monitor water and tation or use, and research is needed to develop air quality. However, cost considerations limit the biosensors that are not destroyed by sterilization use of the extremely sensitive sensors now avail- methods. Over the next 5 to 10 years, many of able. Additionally, very few measuring systems these generic problems inherent in the develop- are portable enough for monitoring in the field. ment of biosensors will probably be solved (2,18).

Biochips

Probably the most novel potential application Two small entrepreneurial firms in the United of biotechnology is in the production of a bimol- States are doing research on biological micro- ecular electronic device. Such a device would chips, or biochips: Gentronix (Rockville, Md.) and contain a specially designed organic molecule that Ean-Tech (San Francisco, Calif.). Furthermore, would act as a semiconductor surrounded and DOD will be funding biochip research beginning stabilized by specially designed proteins, as shown in fiscal year 1984 at $3 million to $4 million for in figure 29. Researchers have studied the use of 5 years. A few large electronics companies in the proteins as a matrix for semiconductors since the United States (Westinghouse, General Electric, early 1970’s, but the possibility of designing pro- and IBM) have small inhouse programs in this teins aided by computers and producing the pro- area. Japan, France, the United Kingdom, and the teins with rDNA technology has sparked more in- U.S.S.R. have indicated interest in bimolecular tense interest. computers (10,20). Ch. 10—Bioelectronics 255 —— —.—

Figure 29.—The Use of Proteins in width of molecules, the resulting devices would Constructing a Circuit be very small and should find use in areas where A semiconducting small size is essential (e.g., in missile guidance). organic molecule Furthermore, because of the nonmetallic nature / Protein of biochips, it is thought that they would be im- ffl‘a me mune to ‘(electromagnetic pulse,” the extraordinary electrical charge that results from a nuclear explosion and renders useless all metallic devices in a large area. In spite of the potential uses, however, it is likely to be many years before any complex biochip wiIl be developed. A conventional silicon chip contains a set of optically imprinted circuits on a wafer of silicon. Four factors limit the number of circuits contained on a chip, First, the lower limit of the width of a circuit is determined by the wavelength of light used for imprinting. The current limit is 1 to 10 microns; it has been postulated that by 1990 the width could be 100 times narrower (2). Sec- ‘ monolayer lattice ond, the distance between circuits is limited by SOURCE Otflce of Technology Assessment the nature of the silicon circuit construction itself. When circuits are too close together, electrons can “tunnel” between circuits. This tunneling Bioelectronics research is in its infancy. Al- decreases the reliability of the electronic device. though most potential applications of proteins in The lower limit for the distance between circuits this field are only speculative, the successful is rapidly being approached for silicon chips. The development of these applications could have a third limiting factor for conventional chips is heat substantial effect on the electronics industry. dissipation. As circuits are packed more closely Computers using protein-based biochips, for ex- together, the chip becomes too hot to function ample, would be smaller, faster, more energy ef - effectively. Lastly, as the amount of information ficient, and possibly more reliable than computers processing ability per chip increases, the prob- using silicon chips. * The impact of such biochips lems with fabrication and quality control increase. would be as broad as that of present computers, from hand-held calculators to robotics. Biological and chemically synthesized molecules conceivably could solve these problems associated The biological nature of biochips also raises the with conventional silicon chips as well as provide possibility of some exciting medical applications– additional advantages in design. Because the mol- they could be implanted in the body to interface ecules themselves would be the conductors, the with the living system. Some possibilities include: lower limit of the circuit width would be the brain implants to circumvent damage that width of molecules, which is several orders of has caused blindness and deafness, magnitude narrower than silicon circuits used (or even postulated) at present. Molecular circuits ● cardiac implants to regulate heart beat, could be placed very close to one another without ● blood implants to regulate drug delivery (e.g., insulin for diabetics), and tunneling effects, because the proposed molecules ● implants to control artificial limbs. conduct current without losing electrons. Fur- thermore, since almost no energy is required for DOD considers biochip technology potentially molecules to conduct current, very little heat very useful. Because the circuits would be the would be generated even when the circuits were *Mutations that occur at a certain low level during growth of close together. The specificity of complex inter- micro-organisms could affect the reliability of the final product. actions among proteins and the self-assembling .

256 Commercial Biotechnology: An International Analysis — -— -— —.. . —.- .— —..

processes characteristic of biological systems There are many problems to be solved before would facilitate the fabrication of very reliable a threedimensional biochip will become available. biochips. Biological equivalents of capacitors, transistors, and resistors are yet to be developed. Switching The fabrication of complex three-dimensional devices, necessary for use with the computer bi- biochips with the fabrication technology now nary system, are only theorized. No one has deter- used in the electronics industry is probably im- mined how a three-dimensional biological struc- possible. An essential feature of the use of a pro- ture will do logic functions or store memory. The tein matrix is that the proteins direct their own problem of interfacing biochips so they can be assembly and the appropriate positioning of the programed or can assimilate other input has not semiconductor molecules. There are numerous been addressed. And, because the chips would examples of self-assembling protein structures, use complex molecules, research needs to be done including virus particles, and these are being on their environmental stability, studied intensely for potential applications to biochip technology. Biochips will not be possible without computer- designed proteins and rDNA technology. Yet it Several proteins, including MAbs, have been will probably be several years before rDNA tech- suggested for constructing a biochip in three di- nology will be able to contribute substantially to mensions. The movement of microelectronics biochip research, because it is first necessary to from two- to threedimensional structures would understand more about the relationship between allow not only for increased complexity but also protein structure and function, the biological self- for greatly reduced size. The use of a three-di- assembly processes, and the mechanisms by mensional protein matrix necessitates the design which molecules could do logic functions and of proteins that will interact with other proteins store memory. at correct and unique angles. The construction of these proteins will rely on computer-aided design and rDNA technology.

Priorities for future research

Increased funding for research in the follow- ● field-effect transistors, ing areas could speed the development of bioelec- ● miniaturization of sensors, tronics: ● biological self-assembly processes, and ● molecular-switching mechanisms for elec- ● computer-aided design of proteins, tronic signal propagation. ● temperature stability of proteins,

Chapter 10 references*

*1. Angier, N., “The Organic Computer, ” Discover, 4. Economist, “Sensing Devices: A New Breed)” June May 1982, pp. 76-79. 25, 1983, p. 92. 2. Clerman, R. J., “State-of-the-Art Survey: Biochips 5. Fox, J. L., “Molecular Electronic Devices Offer Technology” (McLean, Va.: MITRE Corp., 1982). Challenging Goal, ” Chem. & Eng. News, May 23, 3. Economist, “Putting Organic Molecules to Work,” 1983, PP. 27-29. June 4, 1983, pp. 87-88, 6. Freidman, S., “Molecular Electronics Promises ‘Biochips’, But Research Proceeds Behind ‘Silicon Wall’,” Genetic Engineering Ne~ts,September/C) c- ● References of general interest are marked with asterisks. tober 1982, p. 1. Ch. 10—Bioelectronics ● 257

*- (. * 14. Peterson, I., “The Incredible Shrinking Compu-

8. 15<

16 9.

17 10

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12,

13. PART IV Analysis of U.S. Competitiveness in Biotechnology Chapter 11 Framework for Analysis .

Contents

Page Factors Influencing Competitiveness in Biotechnology ...... 263 Firms Commercializing Biotechnology ...... 265 Results of the Analysis ...... 266 Chapter 11 Framework for Analysis

With the increasing importance of high-tech- commercialization of emerging technologies. If nology industries in the united States and the the country’s potential competitive position can decreasing competitiveness of U.S. goods in world be defined, policy analysis can suggest possible markets, U.S. policy makers need to be able to governmental steps to improve that position. assess the country’s future with respect to the

Factors influencing competitiveness in biotechnology

To analyze the future competitive position of The three factors that OTA believes to be most the United States in biotechnology, OTA identified important to a country’s success in commercializ- 10 factors believed to have potential influence on ing an emerging technology such as biotechnology the international competitiveness of products are financing and tax incentives for firms, govern- resulting from an emerging technology. * Many ment funding of basic and applied research, and of these factors relate to the legal system and the availability of trained personnel, various governmental policies, although societal The first of these factors encompasses the avail- and private sector factors were also identified. ability of capital both for starting new firms and The 10 factors are: for financing the growth of existing firms. It also ● financing and tax incentives for firms; includes tax policies that affect the formation and ● government funding for basic and applied availability of capital as well as the strategic research; decisionmaking in firms. ● personnel availability and training; Funding of basic, generic applied, * and applied ● health, safety, and environmental regulation; research is necessary both to maintain a science ● intellectual property law; ● base and to ensure the availability of the technical university/industry relationships; means to apply scientific knowledge industrial- ● antitrust law; ● ly. The distinction between basic, generic applied, international technology transfer, investment, and applied science research is an important one, and trade; because, in establishing a competitive position, a ● targeting policies in biotechnology; and ● comparative advantage in applied science may be public perception. more important than an advantage in basic re- These 10 factors are described in the chapters search. optimally, an analysis of funding for basic, that follow. The chapters are presented, more or generic applied, and applied research would in- less, in the order of the factors’ importance to clude funding from both government and indus- competitiveness in biotechnology, Each of these try. Industry figures are usually proprietary, how- factors was analyzed for the United States and ever, so the analysis in this report necessarily con- five countries identified as the major potential centrates on government funding, competitors of the united States in biotechnology: The third factor, availability of personnel Japan, the Federal Republic of Germany, the trained in essential disciplines in a new tech- United Kingdom, Switzerland, and France. “[;meric applied research is research whose objective is to gain “(l 1 \‘5 modf’1 for detf>rmining lhf; futurf, competitik’r position of the understanding necessary to solve a problem common to a par- (i it f (~rf~nt (ount rlf~s u ith respect to ttw (’on]nl(;r(;ializati[)Il of bio - ticular industr}’. Such research falls between basic research, the tf’(hnolog}” (x)uld i(’r~ M ell he useful in df~terrnining international ohjecti~’e of which is to gain understanding of the basic aspects of (’om[)f’tlt II crl{>>s t~ it h r’rspw’t to the conlr~]er-(’ializatiorl” of othrr phfmomena without goals tow’arcl the development of specific prwc- [’rnrrging trrhnologim F’or rmerging technologies other than bio - es.ws or produrts; and applied research, the objective of which is t(’(hnologj, hotf fn (~r the r[~lati~ e importance of specific factors to gain understanding necessarJr to meet a recognized and specific II ()~11(1 not rl(’(f>ssa rll~f I)(> t I](I same n(x>d, proress, or produrt.

263 264 Commercial Biotechnology: An International Analysis

nology, is important to firms considering the commercialization of that technology. Furthermore, the quality of science and engineering education is a major factor in determining the future availability of personnel. Three factors were identified as having moderate importance in the commercialization of biotechnology: health, safety, and environmental regulation, intellectual property law, and universi - ty/industry relationships. To determine the importance of health, safety, and environmental regulation, several issues had to be weighed. on the one hand, the more stringent the regulations protecting against potential risks of the technology, the more positive the public’s reaction to the development of the technology is likely to be. On the other hand, stringent regulations may discourage commercialization. Most companies will seek to enter domestic markets first, and for these companies, the domestic regulations will be of primary importance. Compa- nies interested in developing international markets, however, must also consider the regulations of other countries. Some countries’ regulations are effective nontariff trade barriers that discourage entry by foreign firms into domestic markets. The intellectual property laws of a country partially affect whether a company will pursue a line of inquiry. If one is unlikely to reap the benefits of the discovery of an invention, then one is less likely to work on such an invention. Furthermore, if a country’s patent laws are not sufficiently protective, then a company may choose to keep its inventions as trade secrets. Protection through trade secrets usually discourages technology transfer. Active interaction between industry and academia is a factor that could promote the compet - ititiveness of a country in an emerging technology. Usually when a technology is in the early experimental phase, most of the important research is carried out in universities. Ongoing dynamic university/industry. . relationships are an effective means of domestic technology transfer. Generally therefore, such interactions promote a country’s competitiveness. Three factors were determined not to be very important to the development of biotechnology Ch. 1 l—Framework for Analysis . 265 .—

In democratic countries in particular, public he an overriding factor in the commercialization pplTeption can promote or undermine the com of a new technology. In the case of biotechnology, mercialization of an emerging technology. De the public's perception of an accident or perceived pending on tlw natun~ and intensity of the public'S risk could significantly influence the development ('(~sponse to an (~nwrging !(~chnology, \vhich can of the technolog.\'. not be n~adily pn~dicted, public perception could

Firms commercializing biotechnology

In addition to analyzing the factors just dis financial and marketing resources to remain sol cussed, it is also necessar,v for this competitive \'(~nt. Furthermore, many estahlished companies asscssmcnt to anal,vzP the aggregate lev(~l of indus an' no\v beginning to make substantial contribu trial activity. OTA's industrial anal,vsis, presented tions to the comnwrcialization of biotechnolog~l ill Chaptor 4: Firms Comnwl'cializinK Biotechno/ in tlw llnited Statf~s through their increasing in ()f{\', \vas approached from the following perspec vpstnwnts in their o\\'n research and production il\'es: facilities. • the number and kinds of companies commer In European countries such as the Federal

cializing biotechnology, Republic of Germany I Switzerland I France I and • the commercial areas t()\vard which industrial the United Kingdom, biotechnology is being com biotechnology R&,D is heing directed, mercialized almost exclusively h,v large pharma • the interrelationship among the companies ceutica and chemical companies, many of \vhich applying biotechnology, and already have significant strength in biologically • the overall organization of the commercial produced product markets. Large estahlished effort. companies are critical to the development of hio technology in Europe, and they also establish the The anal,vsis focused on the United States and rate at \vhich biotechnological development takes then made comparisons with other countries. place. Although such companies have been sl()\v

l r .S. efforts to commercialize biotechnology are to invest in biotechnology R&,D, their inherent cUITently the strongest in the \vorld. The U.S. financial, production) and marketing strengths stn~ngth is in part derived from the unique \vill be important factors as the technology con complementarity that exists betvveen small entre tinues to emerge internationall.v. pn~lwurial firms founded specifically to develop In Japan, dozens of strong "old biotechnology" IW\\, hiotechnology and established companies in companies from several industrial sectors have a \'ariety of industrial sectors. \Vhile the entre extensive experience in bioprocess technology I PI'Plwul'ial new biotechnology firms (NBFs) and these large companies are using new biotech spp!'ializing in research -oriented phases of nology as a lever to enter profitable and expand d('v('lopllwnt have been the major force behind ing pharmaceutical markets. Japanese companies tl1(' comllwrcialization of biotechnology in the dominate biologically produced amino acid mar l fnited States to date, the role of established kets and are also major competitors in new anti companies is expanding. Established companies biotic markets. They could dominate ne\v special ha\'(' assumed a major share of the responsibilit,v t v chemical markets as \veII. for production and marketing of, and, \vhen necessary, obtaining regulatory approval for, Pharmaceutical Il1llrkets \vill he the first proving some of the earliest products developed by NBFs. ground for U.S. competitive strength in biotech Through equity investments and licensing and Ilology. International competition \vill be intense. contract agn~ements, these companies have also American pharmaceutical and chemical compa prm'id('d many of the i\BFs with the necessary nies \vill be competing not only against Japanese

25-561 0 - 84 - 18 266 ● Commercial Biotechnology: An International Analysis companies, but also against the pharmaceutical investments through extensive international mar and chemical companies of Western Europe, all ket penetration. of whom expect to recover their biotechnology

Results of the analysis

The results of the analysis of the relative im to biotechnology, but to high technology or in portance of the factors affecting the competitive dustry in general. These options are: position of the United States and other countries • to improve U.S. science and engineering ed in biotechnology both now and in the future is ucation and the retraining of industrial per presented in Chapter 1: Summary. Also discussed sonneL is the current U.S. competitive position with re • to ease U.S. antitrust law to promote more re spect to the other countries analyzed. search joint ventures among domestic firms, Congressional issues and options for improving • to regulate u.S. imports to protect domestic the competitive position of the United States in industries, biotechnology are discussed at the end of the fol • to regulate the transfer of technology from lowing chapters. To improve the competitive posi the United States to other countries, and tion of the United States, legislation could be di • to target specific industries or technologies for rected toward any of the factors discussed, al Federal assistance. though coordinated legislation directed toward There are many arguments for and against these all the factors might be more effective in pro options that are beyond the scope of this report. moting lJ.S. biotechnology. Because of their broad applicability to industry The chapters that follow discuss only those con in generaL these options are not discussed in the gressional options that are specific to the develop chapters that follow. It is important to note, how ment of biotechnology or were pointed out to eve~, that legislation in anyone of these areas OTA by U.S. firms commercializing biotechnolo could affect the development of biotechnology. gy. Policy options in some areas are not specific Chapter 12 Financing and Tax Incentives for Firms Contents

Page Introduction...... 269 Financing in Firms Commercializing Biotechnology ...... 269 Financial Needs of Firms Commercializing Biotechnology ...... 269 Sources and Availability of Financing for U.S. Firms ...... 273 Sources and Availability of Financing for Firms in Other Countries ...... 284 Tax Incentives Relevant to Firms Commercializing Biotechnology ...... 288 Tax Incentives Relevant to New Biotechnology Firms in the United States and Other Countries ...... 291 Tax Incentives Relevant to Established Companies in the United States and Other Countries ...... 295 Findings ...... 297 Issues and Policy Options ...... 300 Chapter 12 References...... 302

Tables

Table No. Page 41. Breakdown of Revenues and Net Income/Losses for 18 New Biotechnology Firms in the United States, Fiscal Year 1982 ...... 270 42. Capital Expenditures, R&D Budgets, and Operating Revenues of Nine New Biotechnology Firms in the United States, Fiscal Year 1982 ...... 271 43.Cash Drain Relative to Equity for Six New Biotechnology Firms in the United States, Fiscal Year 1982 ...... 271 44. Distribution of Venture Capital Disbursements in the United States by Industry, 1980 and 1981 ...... 275 45. Distribution of Venture Capital Disbursements in the United States by Stage of Investment, 1981 ...... 275 46.Cost of Venture Capital for Selected New Biotechnology Firms in the United States . . . . . 276 47. Comparison of Private and Public (Market) Valuations of Eight New Biotechnology Firms With Initial Public Offering in 1983 ...... 277 48.U.S, Venture Capital Pool, 1977 and 1982 ...... 278 49.R&D Limited Partnerships Used by 12 New Biotechnology Firms in the United States ...... 278 50. Initial Public Offering History and Market Valuations as of July 1983 for 19 New Biotechnology Firms in the United States ...... 282 51. Number of Initial Public Coffering sand Amount Raised in All Industrial Sectors in the United States, 1972-83 ...... 282 52. Amounts Raised in Recent Initial Public Offerings by Six New Biotechnology Firms . . . . . 283 53.Tax Treatment of Innovation Activities in the United States and Other Countries ...... 289 54. Estimated Relationship Between Tax Credit Earned and U.S. Firm Size ...... 296

Figure Figure No. Page 30. Comparative Market Performance: Companies Using Biotechnology vs. Standard and Poor’s 500 Companies, April 1982 through April 1983 ...... 281 Chapter 12 Financing and Tax Incentives for Firms

Introduction

Two of the most important factors in the de- The first section of this chapter examines finan- velopment of biotechnology in the United States cial needs of firms commercializing biotechnol- have been the supply of venture capital to finance ogy, emphasizing the needs of NBFs in the United the startup and growth of new biotechnology States. It also evaluates the sources and availability firms (NBFs)* and the tax incentives provided by of capital for firms in the United States and other the U.S. Government to encourage capital forma- countries. The second section examines tax incen- tion and stimulate research and development tives for firms. Tax incentives are an indirect (R&D) in the private sector. As noted in Chapter source of government funding.** Such incentives 4: Firms Commercializing Biotechnology, the can expand or contract the supply of funds avail- types of companies commercializing biotechnol- able to companies engaged in biotechnology and ogy in the United States include a large number can thereby affect the overall rate at which bio- of NBFs and a smaller yet growing number of technology develops. They also can affect the established companies from a variety of industrial financial decisionmaking and thus the methods sectors. In Japan and the European countries, by of financing used by companies applying biotech - contrast, it is predominantly established com- nology. panies that are commercializing biotechnology. A variety of reasons might explain the different nature of foreign commercialization efforts, but certainly of major importance is the fact that venture capital to fund the startup of new companies is not generally available outside the United States. ——..—— ● NBFs, as defined in Chapter 4: Firms Con]mercializing Biotech- nology’, are firms established around 1976 or later specificall~ to pursue applications of biotechnology

Financing in firms commercializing biotechnology

Starting a new company, expanding the product Financial needs of firms line of an existing company, and manufacturing commercializing biotechnology an existing product in a new way all require some form of financing. The discussion below outlines As discussed in chapter 4, a distinction can be the financial needs of US. companies applying made in the United States between two types of biotechnology. It also examines the sources and firms that are active in the commercialization of availability of private sector funds to meet these biotechnology: NBFs and established companies. needs. Brief comparisons are made with the five NBFs, as defined in this report, are firms estab- countries likely to be the major competitors of lished around 1976 or later specifically to pur- the United States in the commercialization of bio- sue applications of biotechnology. * Established technology—Japan, the Federal Republic of Ger- many, the United Kingdom, Switzerland, and France.

269 270 ● Commercial Biotechnology: An International Analysis

companies have considerably longer corporate Even the most mature NBFs at present have histories than NBFs and are generally much larg- only a few products to generate revenues that can er. In Japan, the Federal Republic of Germany, be used to cover operating expenses and provide the United Kingdom, Switzerland, and France, ef- capital for future growth. In order to generate forts to commercialize biotechnology are led by revenue, as described in chapter 4, NBFs in the established companies, although the United King- United States are currently relying heavily on dom and France do have a few NBFs. Because of research contracts. The reliance of entrepre- their large financial assets, established companies neurial firms on research contracts to generate generally do not need external sources of funds revenue is almost without parallel, except perhaps for R&D in new areas such as biotechnology. Fur- for the small firms that do defense contracts. thermore, if they do need such funds, established Table 41 shows profitfloss figures for 18 NBFs companies are generally able to obtain debt fi- in the United States, all of which are publicly held. nancing. Debt financing, a traditional means to Of these firms, only three, Cetus, Genentech, and fund corporate growth, is not available to NBFs, International Genetic Engineering (INGENE), have because they lack both collateral to secure a loan shown earnings in the most recent fiscal year for and sufficient means to repay the lender (27). The which data are available. The favorable financial discussion in this section, therefore, focuses on position of Cetus and Genentech is mostly due to the financial needs of NBFs. earned interest income from funds obtained in public offerings. However, revenues from sales (including contract research) fall far short of expenses for all three of these companies, and all three are losing money on an operating basis. As shown in table 42, NBFs’ investment in R&D is currently very large in comparison to their op -

Table 41 .—Breakdown of Revenues and Net lncome/Losses for 18 New Biotechnology Firms in the United States, Fiscal Year 1982 (millions of dollars)

Operating revenues Revenues Contract revenue Revenues from from as a percent of product sales Interest Total New biotechnology firm research total revenues or royalties Total income revenues Net income/lossa

b ~ OTIS - --- - .- ,-- -. Amgen ...... $ 0.13 9.4 ‘/0 $ 1.35 $ 1.5 ($/u) Biogen ...... 12.1 58,8 12.1 8.5 20.6 (3.9) Biotechnica International ...... 0.031 34 0.031 0.059 0.09 (1.6) Bio-Technology General ...... 0.15 93 0.15 0.16 0.011 (2.3) Centocor ...... 2.4 84.2 2.4 0.45 2.85 (2.76) Cetus ...... 15.2 46.5 $0.79 15.99 16.7 32.7 Chiron b. . . .0...... 1.58 92 1.58 0.14 1.72 (;:2) Damon Biotech ...... 0.81 48 0.81 1.7 (1 .38) Enzo Biochemc ...... 0.10 11.2 0.17 0.27 0.62 0.89 (1.25) Genentech c ...... 28.8 88.3 28.8 3.76 32.6 0.625 Genetic Systems ...... 2.2 71.66 2.2 0.87 3.70 (1.0) Genex...... 5.2 85.3 5.2 0.67 6.1 (5.6) Hybridoma Sciencesd ...... 0.07 73 0.07 0.024 0.095 (0.186) Hybritech ...... 1.3 27.4 1.8 3.1 1.6 4.75 (7.26) Integrated Genetics ...... 0.6 60 0.6 0.46 1.0 (1.76) International Genetic Engineering (Ingene) ...... 1.78 90 1.78 0.211 1.98 0.13 Molecular Genetics ...... 0.66 61 0.66 0.42 1.08 (3.75) Monoclinal Antibodiesb ...... 0.10 1.5 0.16 0.26 0.39 6.5 (2.7!., a ‘o~~e~ are shown in parentheses. b Fiscal year 1983. c Stock split d Units offered (one unit= three shares of common stock and three Class A Warrants). SOURCE Office of Technology Assessment, based on information from E F. Hutton & Co, comPany annual reports, and company prospectuses Ch. 12—Financing and Tax Incentives for Firms ● 271

Table 42.—Capital Expenditures, R&D Budgets, and Operating Revenues of Nine New Biotechnology Firms in the United States, Fiscal Year 1982 (miiiions of doiiars)

Capital R&D Operating R&D as a percent of New biotechnology firm expenditures budget revenues operating revenues Biogen ...... $8.7 $8,7 $12.1 720/o Cetus ...... 22.9 25.9 16.0 143 Enzo Biochem ...... 0.09 1,2 0.3 400 Genentech...... 31.8 31.9 28.8 111 Genetic Systems ...... 0.46 3.9 2.2 177 Genex ...... 1.8 8.3 5.2 160 Hybritech...... 1.44 5.0 3.1 161 Molecular Genetics . . . . 1.4 2.8 0.66 424 Monoclinal Antibodies . 0.57 1.1 0.26 423 SOURCE: Office of Technology Assessment based on information from company annual reports. crating revenues. Furthermore, NBFs that are in- Because of the emphasis on R&D in biotechnol- curring large R&D costs to develop products are ogy, skilled labor for firms applying biotechnology sustaining large losses relative to their earnings is relatively more important than labor for firms (see table 41). * These losses, which will likely con- in other areas, Such labor is also quite expensive. tinue for several years, are eroding the capital The average Ph. D., supported by two technicians, bases of many NBFs and increasing their need for costs on the order of $15 0 )00 0 to $175)000 per additional sources of funds. NBFs such as Biogen year with overhead (27). As a result, labor may N. V.* * do not expect operating revenues to meet initially constitute a large percentage of a new R&D expenses, and consequently do not expect firm’s operating expenses. to operate at a profit for at least several years (2). For the next several years, expenditures by NBFs The most revealing indicator of the NBFs’ poten- for R&D will probably equal 20 percent or more tial need for cash is the rate at which such firms of sales (27). are consuming funds. Table 43 shows decreases in working capital for six NBFs. Except for Cetus, ● The cumulative losses shown in table 41 understate the level of funding required to sustain these companies because they do not which raised an exceptional amount of money in fully reflect capital outlays. Only the depreciated portion of capital its initial public offering, the drop in working outlays shows up in a profit and loss statement and, hence, in capital for these firms is large compared to their cumulative loss (27), ● “Biogen N.L’., the parent company of the Biogen group, is regis- equity capital. In 1981, Genentech used up 21 per- tered in the Netherlands Antilles but is about 80-percent U.S. owned. cent of its ending equity capital, while Molecular Biogen’s principal executive offices are located in Switzerland. Bio- Genetics used up 10 percent, and Cetus 12 per- gen N t’. has four principal operating subsidiaries. Biogen Research Corp. (a Massachusetts corporation) and Biogen S.A. (a Swiss cor- cent (27). Hybritech increased its working capital poration) conduct research and development under contract with by 72 percent of beginning equity in 1981 by Biogen N.\’. Biogen B.\’. (a Dutch corporation) and Biogen Inc. (a means of a public stock offering; by October 1982, Delaware corporation) conduct marketing and licensing operations, Available figures pertaining to Biogen refer to Biogen N.V, and its however, Hybritech had returned to the public subsidiaries. markets to raise additional equity because its

Table 43.—Cash Drain Relative to Equity for Six New Biotechnology Firms in the United States, Fiscal Year 1982 (miiiions of doiiars)

Equity Cash Yearly change in Cumulative New biotechnology firm capital flowa working capital deficit Biogen ...... $61.9 ($3.0) ($12.1) $10.0 Cetus ...... 128.3 5.7 (15.7) (0.3) Genex ...... 13.3 0.6 (9.4) (2.3) Genentech...... 53.1 (1 1.4) (0.03) Hybritech...... 17.6 (i::) (12.8) Molecular Genetics . . . . 1.5 (3.6) (% (4.0) a cash flow is sum of net income or IOSS pIUS noncash expenses such as depreciation.

SOURCE’ Office of Technology Assessment, based on information from company annual reports 272 ● Commercial Biotechnology: An International Analysis ——.—— — working capital had dropped to 43 percent of fication) purposes and thus do not require FDA stockholder’s equity by the end of 1981 (27). Other approval. Several of these NBFs are within a few NBFs, including Monoclinal Antibodies, Genex, quarters of achieving operational profitability for and Molecular Genetics, have also had to return these product lines (27). to the public market not long after their initial Specialty Chemicals Market. * Specialty chemi- or second public offerings. cals are defined in this report as chemicals whose The financial needs of NBFs are largely depend- price exceeds $1 per pound (50¢ per kilogram). ent on which market they are trying to enter. To These include substances such as enzymes, amino enter each of the markets described below, in- acids, vitamins, fatty acids, and steroids. Most spe- creasing amounts of funds are necessary. cialty chemicals do not need regulatory approval. For specialty chemicals considered foods or food Contract Research and Development Market. additives, however, FDA approval is required, and The funding needed to support entry into the con- significant funds may be expended to meet FDA tract R&D market is generally less than that re- requirements. Thus, the amount needed to enter quired for entering product markets, because re- the specialty chemicals market varies depending search that a firm does for another company, union the product. In general, though, the amount versity, or government agency is funded by that of funds needed to enter the specialty chemicals organization, often through progress * or advance market is more than the amount required to enter payments. Most NBFs perform contract R&D to the contract research market but less than that generate revenues to fund their own proprietary needed to enter the commodity chemicals market. research, although the costs of proprietary research generally exceeds their contract research Agricultural Products Market. * * For the animal fees (27). agricultural market, the R&D cost are very similar to those for pharmaceuticals (in vitro and in In Vitro Monoclinal Antibody Diagnostic Prod- vivo products), because many of the products, ucts Market. * * The funding needed to support such as diagnostics, vaccines, and hormones, are entry into the market for in vitro (used outside the essentially the same. However, the regulatory re- body) monoclinal antibody (MAb) products is quirements promulgated by the U.S. Department more than funding needed to support entry into of Agriculture (USDA) and FDA for animal health the contract research market. Because of the products are much less stingent than the require- small amount of plant and equipment required ments for pharmaceuticals. Some animal agricul- to develop such products and because of the com- ture products (e.g., vaccine for colibacillosis) have paratively low cost of complying with the Food received approval and are already reaching the and Drug Administration’s (FDA’s) testing require- market. ments for in vitro diagnostic products for humans, the financial requirements are relatively The R&D costs for applications of biotechnology low. * * * A number of NBFs, including Hybritech, to plant agriculture vary over a broad range. The Monoclinal Antibodies, Molecular Genetics, Cen - genetic manipulation of microorganisms impor- tocor, and Genetic Systems, have developed in tant to plant agriculture, for the most part, is less vitro MAb diagnostic products for humans that costly than the genetic manipulation of the plants are “substantially equivalent” to products that themselves. Furthermore, the various traits be- FDA has already approved and thus do not re- ing investigated are at different stages of research. quire rigorous testing. Other MAb products being For instance, plants with traits conferring resist - developed by these firms are intended for re- ance to drought or saline stress are more near search or production (e.g., separation and puri- term than those with improved photosynthesis or nitrogen fixation. The financial requirements “ Progress pa~~nwnts ar(I receitd Ithm the rontr;wting ronlp;in} for developing the latter plants are much greater re~cheh r(?rtain nlileslOnm in ttw rww;~rch prOj(J(’t, ● ● In ii[rf) NIAI) prOdurtS ;irf, d isrussfxi i n f.’h:I/)lfII’ .;. “ ,Alq)li(ations 01 t)iot(~c.tlrlologtr” to speciallj chemicals art> discussed IJllitI’IlliJ[’ellti( ’;lls, in (;hiij][t”l’ 7. .9pe(>ialt. \’ [;h(:mi(’i]fs ~IId k’(d ..lddititres. ● ● * 1;()[’ ii discussio[l of t“L)A ‘S I’(]gUliltoI’}” ~)l’()(’(’!$st>s, S(>[> {~))il;)(ol” * ● ,,\})l)li(’iitiolls of l)iott’(’tlrlolog~’ to animal and pl:in[ agri(’ulturf’ 1;7: fi(’iilttj, Siitf’t.\’, iil)(l hlI)\ril’OIIIl) t>t)tiil Rt’gllliltiol). iil’(’ disrussed in (;)lii/)t(’l’ 6’ .-l~~rirll)turf~ Ch. 12—Financing and Tax Incentives for Firms 273

With the exception of firms developing in \itro MAb assays and diagnostic products, it will be some time before NBFs, most of which are U.S. companies, can be self-financing; some estimate that NBFs cannot be self-financing before the late 1980’s (27). The new firms must finance not only losses due to operating expenses but also expenditures needed for capital assets. For some NBFs, meeting FDA regulatory requirements wril] also require substantial funds. Because, as noted earlier, debt financing may not be a\railabIe to manv. NBFs, the financial needs of these firms must for the most part be met by additions to equity capital (27). Thus, in many cases, the receptivity of the public market to NBF stock issues and the use of R&Il limited partnershil)s is a nlalter of” great importance.

Sources and availability of financing for U.S. firms

NEW BIOTECHNOLOGY FIRMS

the following:

●

● Applications of biotechnology to in \i\’o diagnostic and therapeutic products intended for human use are discussed in Chapter S: Pharmaceuticals. ● “Applications of biotechnology to commodity chemical production are discussed in Chapter 9: Cmnmoditjr Chemicals and Enqqtr Production. — ——.

274 ● Commercial Biotechnology: An International Analysis

technology. Thus, such agreements usually pro- Each of these is discussed further below. vide for royalty payments to the NBF by the estab- From 1969 to 1977, the total venture capital lished company on the future sales of the prod- pool in the United States remained relatively un- uct that results from the R&D work; these royal- changed, at the level of about $2.5 billion to $3 ties may range from 2 to 10 percent of total sales, billion each year (27). Since then, however, the depending on the size of the product market. venture capital pool has increased sharply, reach- Table 41 breaks down total fiscal year 1982 rev- ing between $3.5 billion and $4 billion in 1979 enues for 18 NBFs into operating revenues re- (45), $5.8 billion in 1981 (46), and an estimated ceived from contract research or product sales $7.5 billion as of the end of 1982 (48). or royalties and interest income. In most NBFs, Variability in the amount of venture capital in no income or very limited income was obtained the United States is influenced by many factors. from the sale or licensing of products. Most rev- These include general macroeconomic variables enue, even for the larger NBFs such as Genentech, (e.g., interest rates and inflation), changes in cap- Cetus, and Biogen, was contract revenue and in- ital gains tax laws, and changes in pension fund terest on cash raised through public offerings and investment rules. In 1969, the U.S. capital gains private investment. Genentech reports, for exam- tax was increased from 29 to 49 percent. In ad- ple, that 88 percent of its total $32.6 miilion rev- dition, the U.S. inflation rate increased sharply enue in 1982 was derived from contracts and the in 1972, causing investors to seek a much higher balance derived from interest income. Cetus re- rate of return on their investments, In 1973-74, ports that, in fiscal year 1982 (which ended in the price index of the National Association of Se- June 1982), income from contracts accounted for curity Dealers Quotation of over-the-counter se- almost 47 percent of its total revenues and inter- curities, which represents smaller companies, de- est income for most of the remainder. Similarly, clined more than did the Dow-Jones industrial Biogen reports that 59 percent of its revenue price index, which represents larger companies comes from contract sales with the balance be- (27), indicating a decline in investor interest in ing interest income. newer, smaller firms relative to larger, more es- Biogen and Genentech are concentrating on tablished companies. product development using rDNA technology. Recent changes in U.S. laws and regulations af- Some NBFs, including Genetic Systems, Monocli- fecting the formation of venture capital have led nal Antibodies, Centocor, and Hybritech, are de- to a resurgence in the supply of venture capital veloping MAbs for in vitro assays, diagnostics, and in this country. In 1979, Employee Retirement In- research products. These firms will probably come Security Act pension fund regulations were achieve an income stream from product sales interpreted to allow some pension fund money more quickly. In fiscal year 1982, however, these to flow into venture capital investments. Around firms also show primarily interest income. Cur- the same time, the Securities and Exchange Com- rently, Hybritech has the greatest percentage of mission adopted Rule 144 allowing founders of total revenue coming from product sales, 38 per- companies to liquidate their “restricted” stock cent. In the near future, product sales should con- holdings sooner than previously allowed. The op- tribute more substantially to revenues for portunity to liquidate sooner provides investors Hybritech as well as other diagnostic product with a stronger incentive to invest. Especially im- companies. portant to the supply of venture capital in the Venture Capital. —In the United States, there United States have been decreases in the rate at are several sources of venture capital. These are: which long-term capital gains are taxed. The current long-term capital gains tax rate for individ- ● corporate venture capital, uals, established under the Economic Recovery ● R&.D limited partnerships, Act of 1981, is 20 percent (28 percent for corpora- ● venture capital funds, and tions), making venture investments even more at- ● Small Business Investment Corporations tractive than they were under the pre-1969 rate (SBICS). of 29 percent. Ch. 12—Financing and Tax Incentives for Firms ● 275

Table 44 shows the distribution of venture capitalists is generally combined to obtain enough tal disbursements in the United States by industry money for product development and initial mar- for 1980 and 1981. In 1980, investments in “ge- keting. Financing for biotechnology projects netic engineering”* accounted for 4.2 percent of averaged about $2.2 million per project in 1982 the total number of investments but 7.6 percent (27). As shown in table 45, seed money is a very of the dollars invested. In 1981, “genetic engineer- small percentage of total venture capital disburse- ing” accounted for 6.2 percent of the number of ments in the United States, In biotechnology, ven- investments but absorbed 11.2 percent of venture ture investments have tended to combine both dollars. The disproportionately large average size seed and startup financing, making the average of “genetic engineering” investments reflects the disbursement disproportionately high. fact that a large amount of funds must be dedi- The peak period for raising venture capital in cated to R&D before a concept is proven. In other biotechnology in the United States occurred in high-technology industries, “seed money” is usual- 1980. That year, the valuations of NBFs ranged ly sought to prove a concept and averages around from $5 million to $25 million for 25 percent of $1 million per project. But in biotechnology, seed the company (41). The stock market decline of money and startup financing from venture capi- 1981-82 was accompanied by changes in the ven- *A definition of “genetic engineering” was not given by the t’enture capital market with respect to biotechnology ture Capital Journal ventures. Valuations of NBFs ranging from $2 mil-

Table 44.—Distribution of Venture Capital Disbursements in the United States by Industry, 1980 and 1981

Percent of total Percent of number of investments dollar amount invested 1980 1981 1980 1981 Communications ...... 11 .5 ”/0 11 .4 ”/0 10.9 ”/0 11 .2 ”/0 Computer related ...... 27.4 30.0 25.7 34.3 Other electronics related ...... 9.6 14.5 9.6 13.1 Genetic engineering ...... 4.2 6.2 7.6 11.2 Medical/Health related ...... 10.5 7.0 9.3 5.8 Energy ...... 8.3 4.9 19.9 5.8 Consumer related...... 7,5 4.9 3.7 1.9 Industrial automation ...... 4.5 6.2 2.7 5.3 Industrial products...... 3.6 4.4 2.0 3.4 Other ...... 12.9 10.5 8.6 8.0 Total ...... 1OO.O”/O 100.0 ”/0 100.OYO 100.0 ”/0 SOURCE Venture Capital Journa/ 22(6)8, June 1982

Table 45.—Distribution of Venture Capital Disbursements in the United States by Stage of Investment, 1981

Percent of number Percent of dollar Average size of investments amount of investments of venture Venture Total Venture Total financing State of investment development activity development activity ($000) Seed ...... 4“/0 2“/0 $1,000 Startup ...... 26 31 2,200 Other early stage...... 19 19 2,000 Total early stage ...... 49 ”/0 39 ”/0 520/o 460/o $2,000 Expansion...... 51 40 48 41 $1,750 Total ...... 100%0 79 ”/0 100YO 87°/0 $1,900 Other ...... 10 ”/0 80/0 1,850 Stage unrecorded ...... 11 5 900 Total ...... 100”!0 100 ”/0 SOURCE Venture Capital Journal 22(6):9, June 1962 276 Commercial Biotechnology: An International Analysis lion to $4 million for 40 to 50 percent of the com- Perkins, Caulfield, and Byer held 29.3 percent of pany became more common. The following two Hybritech worth $1,7 million. For Genentech, a factors may have accounted for the decrease in $200,000 investment eventually equated to 14.3 the valuation of NBFs in 1981 and 1982: percent of the common stock ($0.21 share cost) worth around $33 million at the time of the public ● increased investor knowledge of the time that offering. Wilmington Securities, a later investor would be required for commercializing appli- in Genentech, purchased 6.2 percent of the com- cations of biotechnology, and pany for $500 000 or $2 per share of a stock that ● decreased investor interest in biotechnology ) went public at $35. Lubrizol, a still later investor because most venture capitalists who desired in Genentech, paid $10 million for 24 percent of to invest in an NBF had already done so. the company or $6.43 per share. At least one venture capitalist stated that the number of new proposals based on biotechnology Table 47 contrasts the private valuations and decreased substantially from 1981 to 1982 (27). public (market) valuations of some recently of- Possible reasons for the decrease in proposals in- fered NBF issues. Hybridoma Sciences exhibits the clude the following: greatest increase in valuation (and thus the highest rate of return to original investors) in the ● the existence of many competing companies shortest period of time-over 1,100 percent in just in each of the major application areas dis- over 2 years. couraged additional entrants, and ● the fact that many of the scientist/entrepre- The four sources of venture capital in the neurs who wanted to form a new firm had United States, which were mentioned at the be- already done so. ginning of this section, are discussed further Table 46 shows the cost of venture capital for below. Independent private venture capital funds selected NBFs in the United States, although it have accounted for an increasing share of total should be noted that few general rules can be de- venture capital relative to that provided by cor- termined from this table. Genentech and Hybri- porate investors and SBICS, as shown in table 48, tech, which the venture capital firm Kleiner, Per- kins, Caulfield, and Byer partly organized as well Corporate venture capital. A number of major as financed, turned out to be particularly good corporations provide revenue to NBFs through investments. For Hybritech, a $300,000 invest- R&D contracts as well as equity investments and ment initially purchased 72 percent of the com- joint ventures. Contractual relationships provide pany at a price of $0.20 per share. At the time benefits to the corporate investors as well as the of the public offering at $26.75 per share, Kleiner, NBF. Chapter 4: Firms Commercializing Biotech -

Table 46.—Cost of Venture Capital for Selected New Biotechnology Firms in the United States

Private venture capital Venture Percent capital of company Price Price per share New biotechnolocw firm invested purchased .per share in public offering Cetus: $23.00 1st stage...... $ 1,999,600 16.5°\o $0.91 SOCal—2d round ...... 5,000,000 10,4 3.60 Genentech: 35.00 Wilmington Securities, early stage ...... 500,000 6.2 2.00 Lubrizol ...... 10,000,000 24.0 6,43 Genetic Systems ...... 200,000 9.7 0,51 6.00 Hybritech ...... 300,000 72.0 0.20 26.75 Molecular Genetics: 9.00 Founders ...... 40,560 59.9 0.02 Sale of 632,366 shares to American Cyanamid . . 2,750,000 18.7 4.35 Monoclinal Antibodies ...... 825,116 29.2 0.52 10.00 SOURCE Off Ice of Technology Assessment, based on information from company prospectuses. -. . - -. .- . . . . -. ---

.c-

al z .-> ;

0 co 0) Y 278 “ Commercial Biotechnology: An International Analysis

Table 48.—U.S. Venture Capital Pool, 1977 and 1982 (millions of dollars)

Percent Percent 1977 of total 1982 of total Independent private funds and venture capital partnerships ...... $ 887 35 ”/0 $4,400 580/o SBICS (exclusive of nonventure capital related SBlcs) ...... 612 24 1,300 17 Corporate (financial and industrial subsidiaries and non-SBIC public funds) ...... 1,022 41 1,900 25 Total pool ...... $2,521 100 ”/0 $7,600 100 ”/0

SOURCE: Venture Capital Journal 22(10)”7, October 1982.

~o@,v provides a discussion of these joint ven- their costs of capital. They have also provided tures and the costs and benefits accruing to both many NBFs with a stable source of financing for parties. Table 13 in chapter 4, entitled “Equity In- the next 4 to s years—the time frame written into vestments in New Biotechnology Firms by U.S. Es- most of the partnerships. In other words, R&D tablished Companies, 1977-1983,’” summarizes es- limited partnerships are providing NBFs with the tablished U.S. firm equity investments in and joint financial ability to undertake their own proprie- equity ventures with NBFs. tary research and early product development and in some cases clinical testing without relying on R&D Iiznitedpartnerships. R&D limited partner- established companies and venture capital firms. ships, consisting of at least one general and one limited partner, are a financing mechanism that As shown in table 49, the total amount raised allows businesses to engage in research activities by 12 NBFs for R&D limited partnerships in bio- without paying for the activities out of retained technology exceeds $4OO million. The amount earnings or borrowed capital. * Most of the 300 raised for each partnership ranged from just to 400 R&D limited partnerships that exist in the under $1 million (Neogen) to $80 million (Cetus). United States have been formed since 1980 (29). The first NBF to raise a fairly large amount of money ($55 million) through an R&D limited part- From August 1982 to May 1983, over $200 mil- nership was Agrigenetics. Genentech, which is lion was raised through R&D limited partnerships using an R&D limited partnership as a novel ap- by NBFs alone (4). One analyst estimates that R&D proach to financing clinical trials of human limited partnerships will raise a total of $5OO growth hormone and gamma interferon, raised million in 1983 (3). In R&D limited partnerships in biotechnology, the NBF typically serves as the Table 49.—R&D Limited Partnerships Used by 12 general partner and assumes liability. The limited New Biotechnology Firms in the United States partners are the investors whose money buys a share of the partnership’s future profits or losses. Partnership formation Amount The liability of the limited partners is limited to New biotechnology firm date (millions of dollars) the loss of their investment. More than 10 R8LD Agrigenetics ...... 1981 $55.0 limited partnerships in biotechnology have been Genetic Systems ...... 1982 3.4 formed since 1980, and 10 to 20 more are now Cetus ...... 1982 80.0 California Biotechnology. 1982 27.5 being formed (40). Genentech ...... 1982 55.0 Molecular Genetics . . . . . 1982 11.1 Such partnerships have enabled NBFs to reduce Neogen ...... 1982 0.96 their reliance for financing on established com- Hybritech ...... 1982 7.5 panies and venture capital firms and to reduce Cetus ...... 1983 78.0 — Genentech ...... 1983 34.0 ● The U.S. Supreme Court decision in the 1974 precendent-setting Genetics Institute...... 1983a 25.0 29.0 Snow v. Commissioner (416 U.S. 500) held that limited partners could Serono Labs ...... 1983 offset their other income with partnership research or other ex- Total ...... $405.46 perimental expenditures. It also extended the reach of section 174 a AS of &83 not yet cIosed. (Title 26 U. SC. IRS f174) to include businesses that had not yet cf- SOURCE Office of Technology Assessment, based on information from the trade fered any products for sale. press and company reports Ch. 12—Financing and Tax Incentives for Firms 279

$34 million (27). R&D limited partnerships can to invest a significant percentage of their funds provide more financing than the average amount in biotechnology. One example is Plant Resources raised by NBFs in the most recent initial public Venture Fund, a $15 million to $20 million fund stock offerings (see below). that invests in companies doing plant-related R&D. In the first 18 months of its operation, this One advantage to the general partner in an fund invested in three companies, taking all the R&D limited partnership is the fact that partner- outside equity in each. Two of the companies are ship funds appear on the corporate balance sheet engaged in tissue culture research and the other as contract revenue rather than as debt or equi- is a plant genetics company. The strategy of the ty, thus enhancing future investment prospects. Plant Resources Venture Fund is to invest Another advantage for the general partner is that $5000,000 to $1.75 million in each company in sev- the limited partners do not participate in the eral stages. In first-stage financing, the fund ex- management of the partnership; in this respect, pects to assume the major share of investment. an R&D limited partnership is unlike other forms In subsequent financing, the fund will take proof equity financing where investors may sit on gressively smaller amounts as other investors are the board of directors and shareholders vote on brought in. Plant Resources Venture Fund antici- major management decisions. pates financing another seven to nine companies The limited partner (investor) in an R&D limited by 1984 (10). partnership is generally interested in investing in such a partnership because R&D limited partner- Small Business lnvestment Corporations. In ships, unlike corporations, are treated under the 1982, approximately 17 percent of the venture U.S. Internal Revenue Service (IRS) Code as non- capital funds in the United States were raised by taxable entities, meaning that partnership profits SBICS. SBICS are private companies licensed by and losses are “passed through” to the individual the Small Business Administration (SBA) that must partners who then combine them with their other invest their funds in U.S. small businesses. There items of income and expense. * Since an R&D proj- are three major groups of SBICS: 1) bank affiliates, ect typically generates tax losses in its initial years 2) subsidiaries of venture capital and other finan- (because of large R&D expenditures), limited part- cial companies, and 3) independent SBICS and ners can use those losses immediately to offset units of nonfinancial companies. Each SBIC must other income which might be taxable at rates as have paid-in equity capital contributed by share- high as 70 percent. Furthermore, partners can holders of at least $500,000. After the paid-in cap- deduct as much as 85 to 95 percent of their ini- ital requirement is met, SBA will loan up to three tial investment, immediately decreasing their times the paid-in amount of capital, thus extend- after-tax cost (and risk) and more than doubling ing the resources of the SBIC. In effect, SBICS le- the potential rate of return. verage their paid-in capital by four times with SBA’S assistance. SBICS obtain funds from SBA at Venture capital funds. Venture capital funds are very favorable interest rates, several points below professionally managed funds dedicated to invest- the prime rate. They then lend the money to small ment in one or more industries. Sources of capital businesses at a rate that is higher than the rate for these funds include pension funds (e.g., John at which they have obtained it but still less than Deere, General Electric, and Ohio Public Employ- the prevailing rate. ees Retirement Fund), insurance companies (e.g., Wausau Insurance, Prudential Life, and Metropol- An SBIC provides at least three kinds of tax ad- itan Life), trust departments of commercial banks vantages for shareholders (34). First, a loss on the such as Morgan Stanley or City Bank, and corpo- sale or exchange of the stock can be treated by rate investors interested in potential profit from stockholders as an ordinary loss, i.e., such loss discoveries arising from the fund’s support. does not have to be offset against gains from sales Of interest is the fact that a few independent of stock, and it can be regarded as a business loss private venture capital funds have been formed for net operating loss deduction purposes. Sec- ond, a loss on the sale or exchange of converti- “Corporate profits, by contrast, are taxed both at the corporate and the shareholder level, and deductions for losses incurred by ble debentures purchased from small businesses the corporation are not atailable to the indit’idual shareholders. (or stock obtained through conversion) can be 280 . Commercial Biotechnology: An International Analysis treated by the company as an ordinary lossreports. to shareholders and annual statements Third, rather than the normal 85-percent deduc-to the Securities and Exchange Commission (Form tion for dividends received from domestic cor-1O-K). Meeting the requirements for public ac- porations, the company gets a 100-percent divi-countability is expensive, both in time and money, dends received deduction. * and meeting the earnings expectations of the investors can inhibit long-term R&D. In confirma- For NBFs that might want to use funds from tion, Gabriel Schmergel of Genetics Institute in SBICS, there are two problems. First, because Boston says “reasons why companies haven't gone SBICS obtain much of their money as loans from public is because sometimes they are under great SBA and must repay the SBA in a prescribed pressure to produce earnings” (18). Thus, al- period of time, SBICS lend their money rather though a great deal of money can be raised in a than use it to buy stock in small businesses. HOW- public offering, its costs, both fiscal and other- ever, an increasing number of equity investments wise, must also be considered. are being made by SBIC bank affiliates such as First Capital Corp. of Chicago. Most NBFs do not seek money from SBICS, because such firms needThe amount that a firm can raise through a pub- to retain dollars internally rather than use themlic offering depends not only on the performance to pay interest on debt to an SBIC. Second, SBICSof the firm itself but also on the stock market and do not generally commit public funds guaranteedthe receptiveness of investors, In times of reces- by public institutions to high-risk ventures, whichsion, institutional investors tend to undervalue is exactly what NBFs are. However, in spite of thehigh-technology stocks because they are inter- interest risks associated with investments in newested in short-term gains (16). Yet, during the high-technology firms, some SBICS have investedearly 1980’s, despite the recession, high-tech- in NBFs. SBICS raised $4,108,197 in capital fornology issues were fairly successful, with the peak NBFs in 1981 and $3,383,333 in 1982 (50). ” Theyyears for biotechnology stocks being 1980 and invested in 15 NBFs in 1981 and 9 NBFs in 1982.1981. In 1982, some NBFs that made public offer- Thus, although the total amount of capital in-ings were not able to raise as much as they had vested by SBICS decreased from 1981 to 1982, theexpected. Until September of 1982, the performance of biotechnology stocks paraleled that of average e amount of capital invested per company increased. Standard and Poor stocks. After September, however, the biotechnology stocks outperformed the public Stock Offerings .—Public offerings canStandard and Poor stocks, Thus far, the 1983 bull be divided into initial public offerings, the first timemarket has been accompanied by a boom in new a firm attempts to raise money by offering sharesissues, greater in magnitude and scale than ever in itself to the public, and subsequent public offer-before. For biotechnology issues, 1983 is a ban- ings, when the firm returns to the market to raisener year. Between March and July of 1983, 23 additional funds. As a way to obtain funds, theJNBFs raised about $450 million (18). Figure 30 pro- initial public offering differs in an important wayvides a comparative market performance of some from the other methods for raising funds thaMAb,t rDNA, and biotechnology support com- have already been discussed. The initial publicpanies with the Standard and Poor 500 for the offering is the first time that the firm must public-period April 1982 through April 1983.. ly disclose its financial and product development status. Going public also requires registration with During the 1970’s, venture capitalists were ac- an oversight organization, the Securities and Ex- customed to waiting 5 to 7 years before seeing change Commission, and commits the firm to con- their investments achieve liquidity in the public tinued public scrutiny through publicly available markets. With the advent of the microprocessor, “ A corporation pays tax on dividends distributed. The dividend a number of electronic companies developed ap- is also taxed as part of income of the distribute. To partially compensate for this double taxation, if the distribute is a corporation, plications that became profitable quickly. In some 85 percent of dividends received is excluded from this second tax- cases, these companies were able to achieve prof- ation. However, if the corporation is an SBIC, 100 percent of di\’- itability in 18 months and a public offering within idends received is excluded. *The 1982 figures available from the SBA did not include 2 to 3 years from founding, in part because of November and December figures, better capital markets after 1978 (8). As a result, Ch. 12—Financing and Tax Incentives for Firms ● 281

Figure 30.—Comparative Market Performance: Companies Using Biotechnology vs. Standard and Poor’s 500 Companies, April 1982 through April 1983

aBlotech ,nde~ in~lude~ A B, F~rtla Bioresponse, CetUs, C)arnorl, Enzo.Blochem, Flow-General, Genentech, Genetic SYstems, Hybrltech Monoclinal Antibodies, ‘ovo Industrl A/S. OTA did not Include A. B. Fortia or Flow General as companies using biotechnology. bstandard and poor,s 5~ ,s an index of a broad cross section of companies traded on American stock ‘xChang es.

SOURCE. Off Ice of Technology Assessment, adapted from E F Hutton some venture capitalists may have shortened their The initial public offering history and market investment time horizons (41), a development that valuations as of July 1983 for 19 NBFs is shown now might be affecting the time taken to bring in table 50. No NBFs made offerings prior to 1980. NBFs to the public market. Table 50 shows the Two firms went public in 1980, five in 1981, and elapsed time between company founding date and three in 1982; as of August 1, nine had gone public initial public offering for 19 NBFs. in 1983. The drop in the number of biotechnology public offerings between 1981 and 1982 parallels The number of, and the amount of money the drop in initial public offerings in all sectors raised in, initial public offerings in all industrial during the same period (table 51). sectors in the United States over the past 10 years is shown in table 51. As can be seen, both the The first recognized “biotechnology firm” to go number of offerings and the amount raised first public, in October 1979, was BioResponse)* with decreased and then increased dramatically. The an offering of 1,320,000 units* * at $2.50 per years 1981 and 1982 were record years for new share. Thus, the total raised was $3.3 million. It stock offerings, both in the number of offerings is interesting to note that at the time of the in- and in the amount raised (though the total amount itial public offering, BioResponse had no revenues raised in 1982 was 25 percent less than the and a negative net worth of more than $600,000. amount raised in 1981). Not since the boom of the “BioResponse was founded in 1972 and is not included here as late 1960’s, however, has the new issues market an ,NBF’. been as active as in 1983. * “one unit = one shar-e of rommon stock plus onf’ l~arr’al)t

25-561 0 - 84 - 19 282 . Commercial Biotechnology: An International Analysis

Table 50.—lnitial Public Offering History and Market Valuations as of July 1983 for 19 New Biotechnology Firms in the United States

Market valuation as of July 1983 Date of Date initial Millions of Price per Market company public shares share as of value New biotechnology firm founded offering outstanding 7/15/83 (millions of dollars) Advanced Genetic Sciences...... 1979 7183 12.2 N/Aa NIA Amgen ...... 1980 7183 10.0 $133/8 133.75 BioCell Technology ...... 1980 8/81 NIA 1/2 NIA Biogen ...... 1978 3183 18.5 153/4 291.375 Cambridge Bioscience ...... 1981 4183 4.08 11314 48.175 Centocor ...... 1979 12/82 5.3 17 1/2 92.75 Cetus ...... 1971 3/81 22.0 17 1/4 379.5 Chiron a...... 1981 8183 7.28 12b 87.4 Damon Biotech...... 1983 6/83 19.5 16 312 Enzo Biochemc ...... 1976 6/80 5.8 30 174 Genentech c ...... 1976 10I8O 1.4 46314 65.45 Genetic Systems ...... 1980 6/81 1.8 14 25.2 Genex ...... 1977 9182 12.6 19 239.4 Hybritech ...... 1978 10I81 10.3 27 1/4 280.67 b d Hybridoma Sciences ...... 1981 8183 4.29 6 I 25.7 Immunex ...... 1981 7183 5.7 13 1/4 7.5 Integrated Genetics ...... 1981 6/83 8.3 13 107.9 Molecular Genetics ...... 1979 4/82 6.13 18314 114.94 Monoclinal Antibodies ...... 1979 8181 2.4 18314 45 aN,A—information not availabie. bAfterpubiic offering August 1983, cStock split. ‘One unit = 3 shares common stock + 3Ciass A Warrants. SOURCE Office of Technology Assessment, adapted from E,F. Hutton &Co. inc. Washington, D.C. personal communication, August 1983

Table51 .—Number of lnitial Public Offerings The history of the initial public offering of Bio- and Amount Raised in All Industrial Sectors in the Response illustrates the extraordinary investor in- United States, 1972.83 terest in firms commercializing biotechnology. ln- Number of deed, biotechnology has produced two’’firsts”on initial public Amount raiseda Wall Street. In 1980,Genentech set a new record Year offerings (millions of dollars) with a price rise from $35 to $89 per share in 1972 ...... 568 $2,700 the first 20 miqnutes of trading in its initial public 1973 ...... 100 330 1974 ...... 15 51 offering. In 1981, Cetus set anew high for an ini- 1975 ...... 15 265 tial public offering-$120 million (net amount was 1976 ...... 34 234 $107 million). Even in 1983, the best year ever 1977 ...... 40 153 1978 ...... 45 249 for raising money for biotechnology, few prod- 1979 ...... 81 506 ucts had been introduced. 1980 ...... 237 1,400 1981 ...... 448 3,200 1982 b ...... 222 1,470 Public offerings in 1982 were less successful 1983 a’b ...... 516 7,900 than had been hoped for, probably because of an a August 1983 ’ Through increasing realization by the public that the fruits b Howard ACo., Philadelphia, personal communication 1983. of biotechnology R&D might be more distant than SOURCE Office of TechnologyAssessment, adapted fromK Farrell, ’’Going Pub- bc 1982,” ~ent~re, April 1982, p 30 was first anticipated and also because the stock market was depressed in 1982. Thus, Collabora- No revenues had been recorded by September tive Research in February of 1982 raised less than 1982 (27), yet stock in BioResponse is trading in half of the $28.5 million it had hoped to raise in 1983 at about $13 per share. The successful ex- its initial public offering, while Molecular Genetics perience of BioResponse established a precedent obtained only $3.3 million, less than one-third of for bringing NBFs with similar financial charac- its goal. Genex, in a 2.5 million share initial of- teristics to the market. fering, sought to raise about $30 million to sup- Ch. 12—Financing and Tax Incentives for Firms 283 port scale-up of its research products, but first ESTABLISHED COMPANIES day over-the-counter sales totaled only about 1 Established U.S. companies like Eli Lilly, DuPont, million shares, and the closing price was $9 rather and Monsanto can finance their entry into bio- than the $10 to $12 initially predicted. technology using internal funds generated from The boom in the 1983 public offerings market a variety of sources, (e.g., the sale of products, has provided many new firms including NBFs, interest income on capital, and other sources). with capital. Venture capital for NBFs increasingly Such companies also have ready access to debt difficult to obtain, the result being that public of- financing (e.g., loans) or through debt offerings ferings in 1983 are supplying second- and third- and the sale of bonds. The cost of borrowing is round financing. NBFs that are either seeking or less for established companies than for new com- already have raised second- and third-round fi- panies, because financing is available to estab- nancing in 1983 include Cambridge Bioscience, lished companies at or near the prime rate. Those Damon Biotech, Molecular Genetics, Biotechnica, NBFs that are able to qualify for loans may pay 2 or 3 percentage points over the prime rate (27). Genetics Institute, Biogen, Integrated Genetics, Applied BioSystems, California Biotechnology/ In sum, for established US. companies consider- Synergen, DNA Plant Technology, Amgen, Hybri- ing commercial applications of biotechnology, the doma Sciences, INGENE, Advanced Genetic Sci- question is not whether financing is available, but ences, Biotechnology General, Immunex, and whether or not to spend their sizable resources Chiron. Table 52 lists some recent initial public (or those that they borrow) on the new commer- offerings by NBFs and the amounts raised. cial pursuits of biotechnology. The price/earnings ratios for NBFs appear high To illustrate the magnitude of established com- in 1983, given their negative or low earnings pany resources to enter biotechnology, a few ex- records. Continued reliance on the public market amples can be noted. In 1981, DuPont budgeted for funds will place increased pressure on public $120 million for biotechnology R&D out of a total NBFs to earn a profitable income stream quick- R&D budget of $570 million (19). In 1982, DuPont ly. If products are not manufactured and income began construction of a new $85 million life sci- generated within the time frame demanded by ences center, and it acquired New England Nu- investors in the stock market, NBFs will face ad- clear (U. S.) for $340 million, in part to expand its ditional financial constraints. If they have to rely capability in the life sciences. As another exam- on the stock market and R&D limited partner- p]e, in 1984, Eli Lilly expects to complete a $60 ships for funds, NBFs might face problems in million research center that will emphasize rDNA financing the long-term risky research in scale- and immunological applications of biotechnology up processes that is needed to commercialize bio- (13). The annual R&D budgets of established U.S. technology products. companies such as DuPont and Eli Lilly dwarf the

Table 52.—Amounts Raised in Recent Initial Public Offerings by Six New Biotechnology Firms

Date of initial Shares offered Offering price Amount raised New biotechnology firm public offering (in millions) per share (millions of dollars) Amgen ...... , . . . . 6/83 2.35 $ 18 $42.3 Biogen ...... 3183 2.5 23 57.5 Cambridge Biosciences 3/83 1.0 5 5.00 Chiron ...... 8183 1.5 12 18.0 Immunex ...... 7183 1.65 11 18.15 Integrated Genetics . . . . 7183 1.6 13 20.8 SOURCE Off Ice of Technology Assessment, adapted from E F Hutton & Co , Inc , Washington, D C , personal communication, July 18, 1983. 2&f ● Commercial Biotechnology: An International Analysis

amounts that have been raised by NBFs in the France, are not found in Japan because of the low United States in even the most successful public level of equity funds there (39). * Public offerings, stock offerings. In 1981, for example, the NBF venture capital, and other equity instruments are Cetus raised a record breaking $120 million in its of relatively minor importance there. The low initial public offering—a little more than 20 per- level of equity funding available in Japan is il- cent of DuPont’s annual R&D budget. lustrated by comparing the over-the-counter securities markets in Japan with those in the United Sources and availability of financing States. About 111 companies are traded on the for firms in other countries Japanese market, compared to 13,000 in the United States. Differences in venture capital in- The sources and availability of financing for vestments are also indicative of the relative im- companies commercializing biotechnology in portance of venture capital in the two countries. Japan, the Federal Republic of Germany, the In 1982, venture capital investments in Japan United Kingdom, Switzerland, and France—the amounted to about $84 million, whereas those in five countries considered the major competitors the United States amounted to $5.8 billion (6). The of the United States in the area of biotech- low level of interest by Japanese investors in ven- nology-are outlined in the discussion below. ture capital is further shown by the fact that a venture capital firm established in July 1982 by JAPAN the Daiwa Securities and Long Term Credit Bank As noted in Chapter 4: Firms Commercializing was the first venture capital company to be Biotechnology, predominantly large established started in 8 years (6). companies are developing biotechnology in Japan. The Japanese Government has made two efforts Established companies in Japan, like those in the to encourage the development of a venture capital United States, are able to rely on debt financing industry in Japan. One effort was made by the or revenues generated from the sale of products Ministry of International Trade and Industry and other internal sources of funds to finance (MITI) in the early 1970’s but yielded little in the their entry in the field of biotechnology. way of results (22). In a resurgence of interest The industrial and financial structures of Japan in this area, in 1982, MITI set up an Office of Ven- are very different from those of the United States ture Enterprise Promotion in parallel with the cre- and most European countries. In Japan, equity ation of the Office of Biotechnology Promotion markets are relatively unimportant for allocating (32). capital. Instead of raising capital by sharing equi- Japan’s private sector has recently taken some ty, Japanese companies continue to favor debt fi - initiative in developing a source of “venture cap- nancing. * The emphasis on personal savings by ital” by pooling corporate resources. The Japan Japanese families has produced a large pool of Associated Finance Corporation (JAFCO) is a pri- funds in banks and postal savings accounts, and vate venture capital fund that was organized by these funds are lent to Japanese corporations. Nomura Securities Company. One French, three Thus, private sector financing of biotechnology Hong Kong, and 10 Japanese firms are involved in Japan is usually mediated through the bank- in JAFCO, which plans to offer financial help to ing system. new businesses until they qualify for listing as a NBFs, especially prevalent in the United States, joint stock company. when the firm reaches this and to a lesser extent in the United Kingdom and stage of maturity, its income gains will be distributed among the partners of the fund accord-

● A majority of Japanese companies commercializing in biotech. nology have debt to equity ratios that exceed 3 (39), as compared “Other reasons for the scarcity of NBFs in Japan are cultural at- to U.S. ratios that are generally closer to 1. Although the Japanese titudes that discourage entrepreneurism, the rigid separation in figures are biased upwards because of differences in land values Japan between university basic research departments and industry, and because off-sheet financing is used more frequently in the United and Japan’s weak basic science base in molecular biolo~v (39), Some States than in Japan, the differences in debt to equity ratios are of these subjects are addressed in Chapter 17: llnit’ersitb~~dndustq~~ significant. Relationships. Ch. 12—Financing and Tax Incentives for firms . 285 ing to the ratio of the capital contribution of the cially with the Government financial institutions fund (22). (39). Certain funds within the JDB loan portfolio are targeted for technology promotion. For the These new sources of venture capital may or past 4 years, this fund has remained fairly con- may not succeed in increasing the supply of ven- stant at the level of $500 million ( Y 100 billion), ture capital in Japan. In any case, the amount of approximately 10 percent of the total loan port- venture capital these sources currently provide folio. Loans from the JDB are made at interest is very small when compared to the amount avail - rates between 7.5 and 8.4 percent. There is no able in the United States. indication that any of these funds are being chan- The one source of “venture capital” that has neled into biotechnology. been very important to the development of biotechnology in Japan is personal loans of sizable amounts by wealthy individuals who are the managers of progressive Japanese companies such as Hayashibara, Suntory, and Green Cross. As entre- FEDERAL REPUBLIC OF GERMANY preneurial managers, these individuals are very In the Federal Republic of Germany, nearly all unusual in Japanese history. A venture by Haya - private sector investment in biotechnology has shibara for producing interferon with hamsters been made by the established pharmaceutical and was possible only because the owner, who owns chemical companies. There is no parallel in the or controls 12 institutions (hotels, gas stations, and Federal Republic of Germany to the U.S. venture candy manufacturing firms) and does about $150 capital industry. Commercial banks provide most million worth of business a year, put his capital of the funds used for industrial expansion, and behind it (51). The diversification by Suntory (a it is common for such banks in Germany, unlike whiskey company) into rDNA research to produce those in the United States, to have equity partici- pharmaceuticals was similarly supported. Signifi- pation in companies in which they invest. The cantly, Japan’s giant pharmaceutical companies West German commercial banking sector is dom- were far slower and more bureaucratic in their inated by three banks, and the linkages between response to the potential of biotechnology than the banking and corporate structures are so close these newer Japanese more progressive firms. that the Monopoly Commission concluded in 1976 that the banks effectively utilize management In fiscal year 1981, a Government-related orga- functions to the detriment of competition (23). nization called the Center for Promoting R&D Type Corporations guaranteed approximately In 1975, a consortium of 28 banks recognized $3.7 million ( Y 750 million) in loans (a total of 24 loans). Beginning in 1982, the center was to that the German banking system is not conducive to high-risk, innovative, startup firms and formed begin making loans as well as guaranteeing other a venture capital concern called Risk Financing lender’s loans. Up until now, however, the Japa- Society (WFG, Deutsche Wagnisfinanzierungs- nese Government has not been a major source Gesellschaft) (7). The principal objective of this of financing for Japanese companies developing organization is to aid small and medium-sized biotechnology. firms in commercializing their products. So far, There is no indication that significant funds are the electronics industry has been the major recip- being channeled into biotechnology by financial ient of WGF funds; biotechnology firms have not institutions connected with the Japanese Govern- yet been of great interest to WFG. Since 1980, ment to make up for the shortage of venture capi- WFG has been looking for innovations that could tal. In the past, Government-funded banks like the achieve commercial success within 24 months. If Japan Development Bank (JDB) lent only to proj- this continues to be the criterion for any firm ects that fit into articulated Government policy receiving funds from WFG, then it would be sur- and were located in Japan. In the past decade, prising if many startup firms in biotechnology however, private bank loans have expanded to were established in the Federal Republic of Ger- such an extent that they are competitive commer- many with WFG funds (23). 286 . Commercial Biotechnology: An International Analysis

UNITED KINGDOM ment measure is to guarantee loans made by The present Government of the United King- banks and other financial institutions for quali- dom believes that the successful industrial devel- fying projects that are considered to be viable (in opment of biotechnology depends on private in- the institution’s judgment) but are not backed by dustry. The main source of funds will be the re- personal securities. This measure means that in- tained earnings of established companies and the dividuals need not have substantial income in capital provided by private financial institutions. order to form a company. The United Kingdom does not have a well-devel- Views on whether there is a shortage of funds oped venture capital market, and the tax struc- available for biotechnology firms in the United ture in the United Kingdom is not conducive to Kingdom vary depending on the source of infor- the formation of risk capital (the capital gains tax mation. Financial institutions say funds are not rate there is higher than in the United States, as in short supply; rather, the shortage is in well- are the marginal income tax rates for higher presented ideas with commercial value that are incomes). capable of earning the relatively high rates of Despite the little direct availability of venture return desired by investors with risk capital. En- capital, the United Kingdom is providing public trepreneurs say that there is a shortage of funds and institutional support to encourage the forma- because institutions demand more evidence than tion of small firms. The Unlisted Securities Market they can supply to prove that their products are (USM), for example, was formed in 1980 primarily capable of earning high profits. to raise capital for small companies. At the time Several institutions in the United Kingdom are of its opening, USM had 6 firms; 2 years later, supplying funds for the development of biotech- it had a membership of 115 firms and was capital- nology, including Biotechnology Investments Ltd., ized at a total of $2 billion. Most of the trading Prutec, Advent Eurofund, Cogent, and Technical volume in this market is accounted for by small Development Capital (43). Biotechnology Invest- investors. The value of the shares of USM’S 20 ments Ltd., a branch of N.M. Rothschild Asset largest companies has increased 45 percent over Management, is the largest, with an initial capital the past 2 years, excluding dividends (43). Before pool of $55 million (17). Although Rothschild has USM was established, companies could be listed invested mostly in U.S. NBFs and other foreign only on the London Stock Exchange, and listing companies, it recently purchased equity in Cell- there required profits of at least $1 million. In ad- tech (U. K.) and is considering several proposals dition, until 1977, the London Stock Exchange re- from other British firms. Another fund, Technical quired a company to sell off at least 35 percent Development Capital (TDC), provides equity fi- of its equity for listing (the requirement has since nancing in addition to loans and has a policy of been scaled down to 25 percent). becoming actively involved in management teams. The British Government has introduced two TDC has an annual budget of $5.7 million ( 10 new measures to encourage the formation of million) of which $1.4 million ( # 2.5 million) is small firms. The first measure is designed to en- devoted to biosciences, one of three priority areas. courage the private sector to make equity invest- The time scale of investments required depends ments in startup firms by offering tax relief at on the industrial sector (e.g., in the medical field, the top marginal rate to investors in new (up to the time horizon is 5 to 7 years; in agriculture, 5 years old) qualifying businesses. As a result of it is 15 to 20 years), TDC has investments in Cell- this measure, a number of professionally man- tech, Imperial Biotechnology, and three other aged funds have been established wherein indi- NBFs in the United Kingdom. Prutec, a wholly viduals have pooled their money allowing the pro- owned subsidiary of the Prudential Assurance fessional managers of the fund to make their in- Co., Ltd., was established in 1980 and makes investments. Cambridge Life Sciences, the first vestments in technology-based firms. Prutec has British biotechnology firm to go public, used this identified biotechnology as one of 10 strategic measure in April 1982 (43). The second Govern- areas for investment. Ch. 12—Financing and Tax Incentives for Firms ● 287

A public institution, the British Technology companies spend a substantial fraction of their Group (BTG), is sponsored by the Department of R&D costs abroad (this fraction varies among Industry and is the major public source of ven- companies). Ciba-Geigy, for example, traditional- ture capital in the United Kingdom. BTG invests ly spends about 60 percent of its research expend- a certain percentage of its funds in high-risk, long- itures in Switzerland and 40 percent in other term investments. The aim of BTG’s investment countries; in 1981, Ciba-Geigy’s expenditures on group is to invest on commercial terms in minori- R&D in the United States rose to 23 percent of ty partnership with private industry. The best its total research expenditures, and expenditures known example of this policy is BTG’s investment on R&D in Europe and in Asia accounted for 20 in Celltech. percent (24). Although the number of NBFs forming in the United Kingdom is increasing, the established firm FRANCE sector is largely responsible for the development The number of companies involved in commer- of biotechnology there. cializing biotechnology in France is fairly small, and the Government expects this situation to con- SWITZERLAND tinue. The French Government, which generally Funding for new, high-risk enterprises in Swit- believes that only large companies have the zerland is not readily available. Analysts attribute necessary resources to undertake biotechnology, this situation to many factors. The Swiss bank- has identified three centers of development in the ing industry is oriented to large-scale international private sector: Rhone Poulenc, Elf Aquitaine, and financial transactions in areas such as securities, Roussel Uclaf. Rhone Poulenc and Elf Aquitaine foreign exchange, and precious metals. The bank- are now nationalized, and Roussel Uclaf is ing expertise to evaluate and finance new tech- 40-percent Government owned (44). nologies is lacking. Some argue that the structure The venture capital market is poorly developed of the savings system is changing, with private in France. Banks are the major source of financ- savings declining and pension funds, traditional- ing. Banks in France, like their counterparts in ly more conservative in investment policies, in- the United Kingdom but unlike those in West Ger- creasing. Added to these factors is the national many, have always hesitated to take equity posi- reluctance to take risks. The NBF Biogen S. A., for tions in industry. The Government of France example, has relied heavily on U.S. venture capital would like to change this attitude (28). A mutual and the U.S. stock market to obtain needed capital guarantee company, INODEV, was established by to finance operations (24). the French Government to guarantee bank credit All of the established Swiss chemical and phar- for the purpose of innovation (33). Since French maceutical companies have substantial capital in- banks do provide long-term financing, French vestments in the United States. Because of the firms do not have to worry as much about second- small size of Switzerland’s domestic market, most and third-round financing as do firms in the Swiss companies are multinational. The Swiss United States (44). 288 . Commercial Biotechnology: An International Analysis

Tax incentives relevant to firms commercializing biotechnology

The various tax provisions in the United States, In a recent study of California biotechnology Japan, and Western Europe that are potentially companies, few participants in the survey stated important to companies commercializing biotech- that tax abatement programs would be useful to nology * are those pertaining to R&D expendi- their companies (16). Tax abatement programs tures, capital formation, corporate taxation, and were rated on a scale of possible utility to the com- tax treatment of small businesses. * * A summary pany; evaluations of these programs by the execu- of the tax provisions described for the United tives responding to the survey ranged from “possi- States, Japan, the Federal Republic of Germany, ble” (at best) to “unlikely.” This pattern may reflect the United Kingdom, and France is presented in the essentially entrepreneurial nature of the NBFs table 53. Switzerland is excluded from the table, included in the survey. The more established because Swiss tax rates vary among cantons, and firms with a diversity of product lines would be the Federal tax system is less important.*** more interested in tax incentives not primarily focused towards capital formation. It may hap- U.S. tax provisions affect NBFs and established pen that as established companies become more companies differentially. In order for corporate important in the field, tax incentive programs will tax rates to make a difference in the decisionmak- be viewed with more interest. ing process of firms, taxable income, the base on which taxes are figured, must be present. Since It is important to note that some countries rely the NBFs are not experiencing substantial profits, more on tax provisions to stimulate capital forma- and because there are loss carry-forward provi- tion or industrial development than others that sions in the tax code (for the United States, the use grants or subsidies to assist specific industrial period that a company can carry forward losses projects. The United States, Switzerland, and to is 7 years), most NBFs are not now focusing a lot a lesser extent the United Kingdom, for example, of attention on tax incentives, * Established com- tend to rely more on tax incentives to encourage panies earning taxable income from a number of overall capital formation than, for example, the product lines, by contrast, are interested in cur- Federal Republic of Germany or France, which rent tax benefits. use grants or subsidies for specific projects. Other countries (e.g., the United Kingdom, France, and “The tax codes of various countries change frequently. The discus- Japan) use tax incentives to encourage investment sion here is based on the latest information available in existing in R&D or plant and equipment required for sources. The intent of this section is to sketch the major provisions, not to detail specifics of each tax code. scale-up or scientific research, Furthermore, some “ *Local or regional taxes are not included, except in the case of countries (e.g., the United States and Japan) favor Switzerland, which taxes primarily on a cantonal level. Value-added formation of small businesses by tax provisions taxes are also not included, since not all countries have this tax. ● ● “In Switzerland, taxes are goi’erned by Federal law and the that are specifically aimed at smaller establish- tax laws of 26 cantons. }\’hile the Federal Government collects prac- ments. Japan targets particular industries and ticall~’ all indirect taxes, it receives only a small portion of direct uses both tax incentives and grants. taxes Ie\’ied. The 26 Swiss cantons have a number of obligations, which in other countries would be the responsibility of the Cen- Some analysts state that the tax incentives in tral Got’ernment, such as education, road construction, health, police, and justice expenses. To be able to meet these obligations, the United States, when compared to those in tax revenue is collected from taxes on income and net assets of in- Western Europe, are not a major factor in deci- dit,iduals and business entities by each canton. sions about the location of foreign subsidiaries ● For this analysis, OTA solicited the views of the following companies engaged in biotechnolo~v: Biogen, Cetus, Genex, Genentech, of biotechnology companies (26). However, others DuPont, l{ybritech, and Monoclinal Antibodies. Industrial Biotech- argue that sharp differences in the corporate tax nology Association and the U .S, Department of Commerce were rate between countries such as the Netherlands also contacted. ,Most stated that tax incentives are of secondary importance to other tax provisions (e.g., loss carry forward provisions, Antilles (whose nominal corporate tax rate is 3 R&D limited partnership, and capital gains treatment) given the stage percent) and the United States (whose nominal of the company’s development, corporate tax rate is 46 percent) have led some Table 53.—Tax Treatment of Innovation Activities in the United States and Other Countries . — Venture capital Capttal Current investments in new R&D tax expenditures expenditures technology-based Small business credltsl a for R&D for R&D firms tax treatment Investment grants .— —-. .— ——— United States: Treated in same manner as other Immediately expensed R&D limited tax partnerships allow SBIC treatment: 1) dividends-received Can deduct 25% of the difference depreciable assets investors to write off current ex- deduction of 100/0 is allowed to between the current year’s R&D expenses as losses and treat future SBICS for dividends received from penditures and the moving average gains as capital gains taxable domestic corporations; 2) of a 3-year period. Investors can pool funds in a loss on stock is treated as an or- regulated investment company of dinary loss and does not have to be which venture capital corporations offset against gains from sales of are a member, and the company stocks; 3) gains are treated as can avoid taxes if the company capital gains distributes all its income Subchapter S corporations: A sub S company gives owners of closely held corporations the advantage of limited liability for depts while tax- ing the corporation’s income at shareholder’s income rates. Number of shareholders permitted is 35 Japan: Firms that are members of Research Immediately expensed No special provisions The cort)orate tax rate for small-and Can deduct each year from its in- Association can take 100°/0 medium-sized corporations on the come tax 20°/0 of the difference depreciation allowance on all fixed first + 7 million ($28,107) is 22°/0 between the current year’s R&D ex- assets used in connection with (as opposed to regular rate of 300/0). penditures and the highest R&D ex- Research Association activities A small business can add each year penditures in a year before the cur- to the ordinary depreciation rent year if the difference is allowance up to 14Y0 of the original positive value of new equipment and machinery acquired between Apr. 1, 1972 and Mar. 31, 1983 Additional depreciation allowances are allowed for small businesses that are entering new industries. Federal Republic of Germany: Det)reciated in same way as other Immediately. expensed. No special corporate tax treatment There is no special corporate tax Investment grant of 200/0 of cost can assets. For expenditu~es of plant for” venture capital investments treatment apart from a provision ap- be claimed for the first DM500,000 and equipment embodying new plicable to foundations and associa (U.S. $206,049) of the costs of technology, the depreciation tions. For these organizations, assets used in R&D. The excess of allowance includes reasonable there is a deductible tax free cost DM500,000 qualifies for an in- allowance for obsolescence amount of DM5,000 (U.S. $2,060). If vestment grant of T.S”/ O corporate income exceeds DM1O,OOO ($4,120), the tax-free amount is reduced by half the United Kingdom: excess For scientific research assets, a Immediately expensed. No special tax provisions for venture A closely held company’s investment — 100°/0 tax allowance (or deduction) capital investments income is apportioned, provided it is given. Allowances are given for is surplus to the requirements of capital expenditures (e.g., labs) and the business. current expenditures (e.g., research Corporation tax rate is 400/0 if profits workers’ salaries) do not exceed ~’ 70,000 (U.S. $122,527) Table 53.—Tax Treatment of Innovation Activities in the United States and Other Countries (Continued)

Venture capital Capital Current investments in new Fi&D tax expenditures expenditures technology-based Small business creditsl for R&D for R&D firms tax treatment investment grantsa France: Can depreciate 50°/0 of the cost in Current expenditures Businesses which purchase shares Small and medium-sized businesses — first year with the balance are immediately in Qualified Research Companies (fewer than 2,000 employees, not depreciable over useful life expensed—carry- and shares in Innovation Finance legally dependent on a larger backs are not allowed Companies may deduct 500/. of the business and having less than 500/. cost of the shares in the year of of their shares held by quoted com- acquisition. If shares are sold, the panics) are entitled to an excep- additional gain attributable to this tlonal deduction of 50°/0 of the cost 50°/0 deduction is eligible for capi- of equipment and tools used for tal gains tax treatment. If shares R&D are held for 3 years or more, no Tax allowance amounting to one-third capital gains tax is assessed of the firm’s taxable profits in the fiscal years of its establishment and in the 3 subsequent tax years a Information on the tax rules of foreign countries obtained from tax serwces and other secondary sources, not from the foreign statutes themselves While efforts were made to obtain accurate and up-to-date Information, It should be noted that reliance on secondary sources does Increase the potential for error

SOURCE Off Ice of Technology Assessment, based on information from National Science Foundation, Corporaf/on Income Tax Treatment of /rrvestrnent and Innovation Act/v/f/es In SIX Counfr/es, Washington, D.C , 1981, Price Waterhouse & Co , Price Waterhouse Information Gwde” Do/rrg i3us/rress In Germany, September 1978, Price Waterhouse & Co , Price Waterhouse /n format/on Gwde Do/rrg Business In France, 1979, Price Waterhouse & Co , Price Waterhouse /rrforrrrat/on Gwde Do/rig Business In the Unlfed Kingdom, 1980; and Price Waterhouse & Co Pr/ce Waterhouse /n formation Guide Doing Bwness (n Switzerland. 1982 Ch.. 12—Financing and Tax Incentives for Firms ● 291 .—. . . . — biotechnology companies to incorporate in the benefit in that it permits a much faster recovery Netherlands Antilles and then form a subsidiary of the cost of an R&D asset; however, the imme- in the United States (20). Generally, tax incentives diate deduction of the total cost of the asset pro- aimed at capital formation, such as the R&D lim - vides an even faster recovery of costs. The Federal ited tax partnership or capital gains tax rate, are Republic of Germany allows accelerated deprecia- viewed with much more interest in the short term tion for R&D assets in the form of additional by LJ.S. NBFs than tax incentives because NBFS depreciation taken in the first few years the assets need taxable income to use them. are used. For investments of less than $234,750 (DM570,000), there is an investment grant of 20 Tax incentives relevant to new percent of the cost of the assets used in R&D biotechnology firms in the United (9,30). France allows 50 percent of the cost of States and other countries buildings used for scientific or technical research to be written off in the first year. Tax incentives beneficial to NBFs include R&D The United States, Japan, the Federal Republic tax incentives, capital formation tax incentives, of Germany, the United Kingdom, and France and tax treatment of small businesses. allow deductibility of current R&D expenditures, but only the United States and Japan give a tax R&D TAX INCENTIVES credit for incremental R&D. The Japanese tax The LJ.S. tax code offers no special incentives for credit allows a company to deduct each year from R&D beyond those available for investment general- its income tax 20 percent of the difference be- ly and for investment in depreciable structures or tween the current year’s R&D expenditures and equipment used for research and experimental the highest R&D expenditures in a base year design. The buildings used for R&D are not given before the current year. The U.S. tax credit allows preferential tax treatment in the United States as a company to deduct 25 percent of the difference they are in Western European nations. Thus, the between the current year’s R&D expenditures United States has no special tax incentive for con- and the moving average of a 3-year period’s R&D struction of plant or equipment used in biotech- expenditures. In order to qualify for the credit, nology. Such an incentive may be, depending on a company must be carrying on a trade or busi- the importance of the costs of depreciable assets ness. The U.S. Treasury was given leeway in de- in the total production costs, an important fac- fining the trade or business, and it was widely tor in determining cost competitiveness in bio- hoped that the newest proposed regulations technology products. As products move from re- would give small firms, primarily engaging in search to scale-up stages of production, these research but not yet selling products, an advan- costs become more important. tage. Some have stated that Treasury’s position Companies in the United Kingdom are entitled is inflexible towards the small firms not yet able to a 100-percent first year writeoff on capital ex- to produce products (5). penditures for scientific research, the most rapid Some analysts argue that the U.S. tax credit for allowance offered by any country (1). Tax provi- incremental R&D encourages more R&D than sions allowing the immediate deduction of capital Japan’s tax credit, because the base used in the expenditures for assets used in R&D provide a United States (the moving 3-year average) may be current tax benefit* rather than a deferred tax lower than the base used in Japan (the highest benefit, because the capital expenditures for R&D R&D expenditure in a previous year); the lower may be offset against income earned in the year base in the United States may allow a higher tax of the capital asset’s acquisition rather than off- credit given the same rate of increase in R&D set against income earned over the useful life of expenditures. The U.S. tax credit is currently the asset. Accelerated depreciation provides a tax scheduled to expire in 1985, and many are urg- ing an automatic extension of the credit, especially ● This current benefit is of immediate benefit only to firms with since the planning and implementation of R&D sufficient current taxable income to use the tax benefit. is a long-term process. Legislation introduced in 292 Commercial Biotechnology: An International Analysis the 98th Congress, H.R. 3031, sponsored by Rep- tax treatment of individual capital gains and R&D resentative Fortney Stark, and S. 738, sponsored limited partnerships are important. by Senator John Danforth, would amend the IRS Tax Treatment of Individual Capital Code by making the R&D credit permanent in the Gains.—The long-term capital gains tax rate for United States. France is considering a 25-percent individuals in the United States is 20 percent, tax credit for R&D expenditures, thus encourag- down from 49 percent in 1976. Industry analysts ing through the tax system an increase in R&D suggest that this decrease in the individual capital expenditures (49). Whether the implementation gains tax rate is the primary reason for the sub- of additional tax credits will affect the amount stantial increase in venture capital available in the of money devoted to R&.D expenditures will de- united States (27). pend in part upon the permanency of the tax provision in each country. In Japan, capital gains on the sale of securities are exempt from tax, unless the sales are habitual The treatment of income derived from the sale or in the course of business. For nonexempt gains, or license of technology differs among countries. the first $2,232 ( 500,000) is exempt, and the In the United States, proceeds from the sale of remainder of gain is either taxed as short-term cap- patents are treated as long-term capital gains ital gains (treated as ordinary income) or long- (taxed at the long-term corporate capital gains tax term gains (SO percent taxed at ordinary income rate of 28 percent). Royalties are taxed as ordinary tax rates) [42). income (30). In Japan, both proceeds and royalties are treated as ordinary income. Sales of patent In the Federal Republic of Germany, no capital rights, technical and manufacturing processes, gains tax is payable by individuals on assets held and know-how are taxable in France at the re- longer than 6 months, If an asset is held less than duced 15 percent long-term capital gains tax rate 6 months, the capital gains income is taxed as or- (l). Royalties are taxed at the standard 50-percent dinary income. Capital gains arising from the sale corporation tax rate unless industrial property of business assets by an individual are liable to rights have the characteristics of fixed assets or tax at normal rates where the assets form part the license is granted for 8 years and for exclusive of the business property. Extraordinary income use within a geographical area. In the latter in- arising as a result of a gain from the sale of an stances, royalties are taxed as long-term capital entire unincorporated business or from the sale gains. In the United Kingdom, any capital sum re- of shares by a substantial shareholder are taxed ceived on the sale of a patent by a U.K. resident at half the individual’s marginal tax rate, i.e., at is charged as if it were a corporation (at a tax rate a maximum of 28 percent (35). of 52 percent); the sum is generally spread over In the United Kingdom, capital gains income is 6 years, so that one-sixth of the sum is liable to subject to a tax rate of 30 percent (42). The tax tax in each year. Royahies received are treated treatment of capital gains in France depends on as ordinary income (30). Overall, the United King- the length of time the asset is held. Short-term dom has the most adverse tax treatment of in- capital gains (on assets held for less than 2 years) come resulting from the sale of technology are included in operating profit and are taxable (whether involving the sale of patents or licens- at a 50-percent tax rate (37). The taxpayer may ing). elect to spread the capital gains tax over 3 years. CAPITAL FORMATION TAX INCENTIVES Long-term capital gains (on assets held for 2 years or more) are taxable at a IS-percent tax rate. Tax incentives designed to stimulate capital for- Long-term capital gains and losses of the same fis- mation are of special importance to the forma- cal year are offset against each other. tion and growth of NBFs, because few NBFs have enough income derived from product sales or Tax Treatment of RdkD Limited Partner- contract revenue to sustain high costs for both ships. —As discussed in the section of this R&D and scale-up production. In affecting the chapter on “Financing in Firms Commercializing amount of capital available to smaller firms, the Biotechnology)” an important tax tool used for risk —

Ch. 12—Financing and Tax Incentives for Firms ● 293 capital formation in the smaller companies en- Upon successful completion of an R&D project gaged in biotechnology in the United States is the supported by an R&D limited partnership, the R&D limited partnership. Some NBFs using R&D limited partners may realize economic returns limited partnerships as a method of raising capital either through royalties or license fees derived have stated that they prefer the partnerships as from the sale or transfer of a patent or by sale a method of financing, because the revenues from of the product back to the general partner or to a partnership are treated as revenues and allow a third party. Both of these may qualify for favor- a company to show a profit even if it has few or able tax treatment. If the research results in a pat- no products to sell (27). By using R&D limited ent, the patent may be sold or transferred by the partnerships, NBFs have postponed issuing stock, limited partners to the general partner, general- selling equity to established firms, or searching ly in return for royalties or license fees, Under for venture capital, thereby keeping more con- section 1235 of the IRS Code (Title 26 U.S.C. IRS trol over their company. Neither Japan nor West ~1235), any royalties received as a result of European countries use a similar type of tax transfer of a patent qualify as long-term capital treatment. gain rather than ordinary income. The current tax rate on long-term capital gains for individuals An R&D limited partnership is formed to sup- is 20 percent, whereas the tax rate on ordinary port R&D that will result in something that is income can be as much as 50 percent. The usual marketable and patentable. As discussed below, l-year period necessary for the sale of a capital financial advantages accrue to the limited part- asset to qualify for capital gains treatment does ners (investors) at both the R&D phase and the not apply. marketing phase, provided certain conditions are met. Generally, section 1235 treatment applies to a transfer of property consisting of all substantial Turning attention first to advantages at the rights to a patent by any holder. A holder is de- R&D phase, the applicable part of the Internal fined as any individual whose efforts created the Revenue Service (IRS) Code is section 174 (Title patentable property or any other individual who 26 U.S.C. IRS f174). Section 174 allows each has acquired interest in the patentable property limited partner to deduct all expenses for re- in exchange for money paid to the creator prior search (generally, the amount the limited partner to the actual reduction to practice of the inven- invested in the partnership) from income in the tion. * This definition of holder makes it difficult year the expenses were incurred, provided the for R&D limited partnerships to acquire rights limited partners were at risk. * If the limited part- to a patent when a university has the rights to ners are not at risk, such deduction is not allowed, the patent through employment agreements with The challenge, therefore, is to write the agree- its university scientists. Universities that have ob- ment establishing the partnership so that the lim- tained patent rights through employment agree- ited partner is at risk, This is generally done by ments with university scientists are excluded structuring the agreement so that the general from the present definition of holder. As a result, partner does not automatically buy the results of relatively few universities have formed R&D lim- the research from the limited partners. An auto- ited partnerships as a means for helping to com- matic purchase provision in the agreement would mercialize their research results. presume the research would be successful and imply that there was no risk. Similarly, agree- If the research results in nonpatentable know- ments usually base any financial return to the how or technology, the sale of the property must limited partners that may arise from the partner- meet the requirements of sections 1221-1223 or ship on sales rather than profits, because the term section 1231 of the same IRS code for the pro- “profits” in the agreement implies success and ceeds to be taxed to the limited partners as capital hence a no-risk situation. gains rather than ordinary income. Under this —— *To ascertain whether the partners bear the required risk, one “Reduction to practice is a term used in patent Ia\\’ referring to asks, “Who loses if the research effort is a complete failure?” when the imwntion has been tested under operating conditions. -.

294 . Commercial Biotechnology: An International Analysis

section, capital assets must be held for at least will serve as a better indicator of a country’s com- 1 year before they are sold to qualify for long- petitiveness than the ability of firms to serve as term capital gains treatment. Another challenge a source of innovation. then is to write R&D limited partnerships so that they result in a patent. TAX TREATMENT OF SMALL BUSINESSES Two recent changes in the U.S. tax code have Some countries have special tax incentives to increased investor interest in economic return promote the growth of small businesses. Studies from tax shelters, rather than just a tax deduc- suggest that small businesses serve as an impor- tion. First, the maximum tax rate on unearned tant source of innovation as well as of the diffu- income has been reduced from 70 percent to 50 sion of technology. percent. This reduction in the maximum tax rate The most favorable tax treatment for smaller makes unearned income for individuals in high businesses is provided by the United States. Sub- tax brackets more valuable than it used to be and chapter S corporations* give the owners the ad- also reduces their need to shelter it. Second, in- vantage of limited liability for debts, while the cor- vestors may no longer deduct more than the poration’s income is taxed at the shareholder’s tax amount they are actually at risk; thus, they can rate rather than at the corporation’s tax rate. A no longer recoup more than their full cash invest- key advantage of subchapter S is that if a comment in tax savings. pany generates operating losses, these can be There are two potential disadvantages of R&D “passed through” to the individual shareholders. limited partnerships for the limited partner. The The shareholders can use the losses to offset first is low liquidity: the only way for a limited other taxable income. If the owners of a small partner to get out of the agreement is to convince company have incorporated as a “Sub-S” and they the general partner to buy his or her interest in are in the 50-percent tax bracket, then the effect the partnership. The second is that patents are is that the U.S. Treasury is financing 50 percent the only assets that qualify for tax treatment of the new company expansion. Most NBFs are under section 1235, other types of intellectual experiencing losses, so this form of corporation property, such as plant variety protection certif - is attractive. icates and trade secrets, do not qualify. * Japan also has special tax treatment for small R&D limited partnerships permit the partners businesses. A small business can add each year to deduct partnership expenses for R&D activities to the ordinary depreciation allowance up to 14 from their individual incomes and then allow any percent of the original value of new machines and income from the sale of the successfully devel- equipment. In addition, there is a special deprecia- oped invention to be treated as capital gains in- tion allowance for encouraging small businesses come, which is taxed at lower individual tax rates. to enter new industrial sectors. A small business that plans to change its business can treat its old Because the financial markets are so dissimilar machines and equipment as ones newly acquired amoung countries, it is difficult to compare the when it calculates depreciation allowance. Special effect on investments of different capital gains tax first-year depreciation credits are now allowed treatment. However, the United States has a more on this machinery (39). developed capital market than its competitors in biotechnology and also has more options for fi- A recent study by the Organisation for Econom- nancing smaller firms. If the NBFs continue to ic Co-Operation and Development (OECD) outlined serve as an important source of innovation, the member government policy towards small busi- expanded financing options for these firms will nesses and concluded that European countries help the competitive position of the United States. had fewer policies aimed at small firms than did The ability of firms to commercialize innovations either the United States or Japan (33).

* ,!nj (wrporation satist’~ing requirements desrribed in the Sut)- “Patent law’ and plant breeders’ rights statutes are discussed in rhapter S Art and Subchapter S Revision ,.4ct of 1 !38.2 is kno\in ~is Chapter 16: Intellectual Propert~’ Lawf. a Suhrhapter S corporation, Ch. 12—Financing and Tax Incentives for Firms ● 295

The French Government has been giving in- emption for certain companies which, although creasing attention to startup firms since 1976. closely controlled, have a 35-percent public share- Three problems for smaller businesses have been holding and are quoted on a recognized stock ex- addressed: self-financing, external capital financ- change. A close company is subject to special tax ing, and access to medium- and long-term bank provisions, of which the most important before credit (33). The first problem is being addressed March 26, 1980, was that all or part of the com- through a tax allowance for startup firms equal pany’s undistributed after-tax income, after allow- to one-third of the firm’s taxable profits in the ing for certain business requirements, could be fiscal year of their establishment and in the 3 sub- apportioned (i.e., attributed to its shareholders ac- sequent tax years. The usefulness of this incen- cording to their respective interests in the com- tive for the small firms using biotechnology in its pany and treated as their income). For account- present stage of development is questionable. Few ing periods ending after March 26, 1980, only a NBFs are experiencing profits, so few wouId be close company’s investment income can be appor- able to use the tax allowance. The second prob- tioned (37). Therefore, the income of a close com- lem, external capital financing, is addressed in pany is, to the extent attributed to shareholders France through the establishment of regional fi- under these provisions, subject to the progressive nancing companies (Societesde Financement Re- rates of personal income tax and investment in- gional) and incentives for these financing com- come surcharge. Companies whose pretax prof- panies to acquire holding in new firms. The last its do not exceed $40,000 (<22,900) pay a cor- problem, access to bank credit, has been and still porate tax rate of 40 percent instead of the usual continues to be a problem for smaller companies 52 percent (37). in France. As noted earlier, the Government of Various countries have national programs of France has established a mutual guarantee com- regional tax incentives to encourage industries to pany, INODEV, to guarantee bank credit for the develop in particular geographical locations. purposes of innovation (33). In addition, small and France is divided into four zones, Zones A medium-sized businesses (i.e., businesses that through D, for incentive purposes. Zone D is the have fewer than 2,000 employees, are not legal- Paris Basin area and the Lyon region, and for this ly dependent on a larger business, and have less area, there exist no incentives, The other areas than so percent of their shares held by quoted have varying amounts of grants and other incen- companies) are entitled to an additional deduc- tives available (33), In the United Kingdom, enter- tion of 50 percent of the cost of equipment and prise zones are to be designated to encourage the tools used in R&D. However, the small firm sec- creation of new businesses in economically declin- tor is not expected to play as innovative a role ing areas. Generous depreciation allowances will in France as it has in the United States. be granted in these areas on the cost of certain In the Federal Republic of Germany, there is new buildings in these zones. There also exist re- no special tax treatment of small businesses other gional tax incentives in the Federal Republic of than a provision applicable to research founda- Germany, but the incentives only apply to the tions and associations (30), West Berlin area. In the United States, there are no Federal programs to encourage industry de- The United Kingdom has few tax provisions velopment in certain sections of the country. In- available to investors or owners of small busi- creasingly, however, local and State governments nesses that would encourage the formation of are offering their own tax incentive programs. startup firms. To the extent that the NBFs are important in determining a country’s ability to cap- Tax incentives relevant to established ture world market share in biotechnology prod- companies in the United States and ucts, the United Kingdom would be at a disadvan- other countries tage. A U.K. resident company which is controlled by five or fewer persons (a person is defined as Tax incentives for established companies in- an individual and near relatives) or by its direc- clude R&D tax incentives, capital formation tax tors is known as a close company. There is ex- incentives, and corporate taxation. 296 ● Commercial Biotechnology: An International Analysis

R&D TAX INCENTIVES Japan allows companies that are members of The depreciation allowances that apply to the a Government Research Association* such as the capital assets used in R&D by established com- one formed for biotechnology research to take panies are the same as those discussed in the R&D a 100-percent depreciation allowance on all fixed tax incentives section for small firms above. Ad- assets used in connection with their Research As- ditional tax incentives for established companies sociation activities. Only established companies are noted below. are members of Research Associations. The Fed- eral Republic of Germany provides a 7.5 percent Large established companies in the United tax-free cash subsidy for investment in R&D States can utilize the same R&D tax credits as facilities for investments exceeding $206,050 those used by small firms. An early assessment (DM500,000). of the recent U.S. R&D tax credit suggests that it is not likely to induce significant increases in Some countries allow businesses to deduct pay- the growth rate of R&D in the short run, but the ments to research institutes for contract research. tax credit may have been one of a number of fac- The United Kingdom allows deduction for pay- tors helping to maintain R&D budgets in the tight ments made to research institutes approved by financial situation of 1980-82 (31). the Secretary of State or the Minister of Tech- nology (1). The United States allows corporations Table 54 shows initial calculations relating U.S. to deduct the cost of equipment given to univer- firm size to tax credits earned in 1981. The as- sities. Also, a manufacturer of new R&D equip- sumptions underlying this table are: 1) about 63 ment in the United States can donate equipment percent of total R&D budgets is actually eligible to universities and obtain a deduction of cost plus for inclusion as R&D expenses for the credit; and one-half the difference between price and cost, 2) half of 1981 eligible expenditures occurred in up to a limit of twice cost. Payments to univer- the second half of the year (because only the sec- sities for contract research or basic research by ond half of 1981 is covered by the credit). The firms may be included in eligible expenditures for tax credit as a percent of total 1981 R&D falls computing R&D tax credit. from about 2 percent on average for firms with fewer than 1)000 employees to about 1 percent CAPITAL FORMATION TAX INCENTIVES for firms with 25,000 employees or more. The The corporate capital gains tax rate and invest- inverse relationship between firm size and tax ment tax credits are discussed below as they re- credit as a percentage of R&D reflects the inverse late to capital formation for established compa- relationship between firm size and rate of growth of R&D. The initial results tend to suggest that ● Research Associations are government-sponsored groups of es- the tax credit for R&D is relatively more impor- tablished rompanies in Japan performing joint research in specified tant to small than large companies. fields

Table 54.—Estimated Relationship Between Tax Credit Earned and U.S. Firm Sizea

R&D expenditures (millions of dollars) Change Tax credit as a Number of employees Number of 1980 to percent of R&D in company companies 1980 1981 1981 expenditures Not available ...... 24 $ 102 $ 130 $ 28 1.460/o Under 1,000 ...... 113 185 240 55 1.91 1,000 to 4,999 ...... 286 1,260 1,563 302 1.56 5,000 to 9,999 ...... 99 872 1,031 158 1.28 10,000 to 24,999 ...... , ...... 108 2,781 3,282 500 1.25 25,000 and over ...... 147 22,686 25,862 3,176 0.99 Total...... 777 $27,886 $32,107 $4,221 1.060/0 a Based on figUr~~ Publlshed in Business Week’s “R&D scoreboard 1981”

SOURCE. National Science Foundation, An Ear/y Assessment of Three R&D Tax Incenhves Prowded by the Economic Recovery Act of 1981, PRA repod 83-7, Washington, D C., April 1983 Ch. 12—Financing and Tax Incentives for Firms . 297 nies. In a broader sense, all of the tax incentives States for established companies is 46 percent. discussed in this chapter have some influence on The corporate tax rate in Japan is 40 percent on companies’ decisions concerning investment. retained earnings and 30 percent on distributed earnings. In the Federal Republic of Germany, the Corporate long-term capital gains are taxed in corporate tax rate is 56 percent on retained earn- the United States at a maximum rate of 28 per- ings and 36 percent on distributed earnings. In cent. In the Federal Republic of Germany and United Kingdom, the corporate tax rate on retain- Japan, corporate capital gains are taxed at ordi- ed earnings is 52 percent. In France, the corporate nary corporate income tax rates. In the United tax rate is 50 percent (42). Kingdom, corporate long-term capital gains are effectively taxed at 30 percent (30)37). France For international comparisons, effective cor- allows long-term capital gains and losses of the porate tax rates should be used rather than the same fiscal year to be offset against each other. statutory rates just cited. The effective rates take Any remaining net after-tax gain (after off-setting) into account different definitions of taxable in- is credited to a special reserve, where it is allowed come and treatments of depreciation. Available to remain for an indefinite period of time. If studies suggest that effective corporate tax treat - capital gains in the special reserve are distributed ment in the Federal RepubIic of Germany, France, as cash dividends, a complementary tax equal to and the United States is relatively equal, with the difference between the long-term capital gains Japan and the United Kingdom having lower ef- tax and the corporate tax is assessed. If the fective corporate tax rates; however, these studies amount is a loss (after off-setting), it may be car- need to be updated. ried forward for 10 years to offset future long- In Switzerland, different cantons have different term capital gains (36). corporate tax rates: some allow taxes that are paid The United States and Japan have investment to other tax authorities as a deduction; others tax credits. In the United States, the credit is equal have different loss carry-forward provisions; still to 10 percent of qualified investment in depre- others will tax capital gains at a separate rate or ciable property up to 70 to 100 percent of the tax not tax the gains at all. The effective corporate liability for the year the equipment was placed tax rates (including Federal defense taxes) in Swit- in service; the excess may be carried over. In zerland range from 8.85 percent to 36.89 percent, Japan, the credit is equal to 10 percent of the pur- depending on the size of profits and the particular chase price up to 20 percent of total corporate canton (38). These tax rates are among the lowest tax liability in the year of purchase for certain in Europe, and Switzerland is favorable in its industries; the excess may be carried over for 3 treatment of established companies. Switzerland years. does not have any special treatment for small businesses, only for companies that invest in the CORPORATE TAXATION equity of other companies and derive most of The top-bracket corporate tax rate on retained their income from dividends. earnings or distributed earnings in the United

Findings

As a factor determining competitiveness in the ly now when the technology is new and its applica - commercial development of biotechnology, finan- tions are just being developed. Financial resources cial resources to support entry into this new field available to commercialize biotechnology are great - are of critical importance in all countries, especial- est in the United States and Japan and somewhat

25-561 0 - 84 - 20 298 . Commercial Biotechnology: An International Analysis less in the four other countries examined: the Fed- essential for economic production, and production eral Republic of Germany, United Kingdom, Swit- plants for commodity chemicals cost millions of dol- zerland, and France. lars. The commodity chemicals market is a risky one to select because it involves competition over a few In the United States, a variety of funding cents difference in price, Additionally, the biotech- sources are available to support the commercial- nology that would be used needs substantial basic ization of biotechnology in both NBFs and estab- research. lished companies. Most major U.S. corporations have sizable internal sources of funds and are The major sources of financing available to NBFs therefore less likely than NBFs to use external in the United States may be broadly categorized as: sources of funds to support R&D efforts in bio- . revenues from contract research and interest technology. If external funds are needed, however, they are most likely to be obtained through on cash previously obtained from public or debt financing. private offerings, . various sources of venture capital, and Funding needs of NBFs depend on the market ● public stock offerings. selected for entry. Funding needed to support entry into the contract research market is very low. Research and product development agreements Higher, but still quite low, are the funds needed between NBFs and established companies are gen- to manufacture in vitro MAb diagnostic products; erally cost reimbursement contracts with addi- indeed, such product lines should be profitable tional incentives for reaching agreed upon mile- within 2 to 3 years. Greater financial resources stones. Prepayments and advance payments may are required to enter the pharmaceutical market be obtained, and licensing agreements may bring involving products for internal human use be- royalties to the NBF from marketable products cause of the expense of testing and clinical trials of the research. The funding that NBFs receive to obtain FDA approval. Nevertheless, about 55 from research contracts is likely to diminish in percent of the NBFs in the United States plan to the future as large corporations establish greater enter this market. * The amount of financial re- in-house capabilities in biotechnology. The funds sources needed to enter the specialty chemicals available from corporate sponsors will increas- market varies depending on the product. Most ingly be for truly innovative research, which his- specialty chemicals do not require regulatory ap- torically has been done by small firms. As con- proval; however, FDA approval is required for tract research funds decrease, however, many specialty chemicals considered foods or food addi- NBFs may find themselves in financial jeopardy. tives. Because research is near term for many of the products, 3 to 5 years, and most do not re- Venture capital sources include venture capital quire approval, the financial costs of entering this from major corporations, R&D limited partner- market fall between those for the contract re- ships, venture capital funds, and SBICS. SBICS search and commodity chemicals markets. Very have provided relatively little venture capital to great financial resources are needed if an NBF NBFs, although recently an increasing number of wishes to enter the market for applications to equity investments in new firms including NBFs plant agriculture requiring the manipulation of have been made by SBIC bank affiliates. Many many genes, such as nitrogen fixation or photo- equity investments have also been made by ma- synthesis, because a great deal of basic science re- jor corporations in NBFs. Such investments ap- mains to be done before commercial applications pear to be motivated more by the corporations’ can be achieved, so a firm must plan on many years desire to gain “a window on the technology” than of research without financial return. Entry into the by the hope of financial gain from their invest- commodity chemicals market also requires major ments. financial resources, because economies of scale are Some venture capital firms are set up by major corporations to invest corporate funds in new ● The commercial applications of biotechnolo~v being pursued by NBFs are discussed in Chapter 4: Firms Commercializing Biotech - ventures. Because the firms are independent enti- Ilologv ties, the corporation is protected from loss. If suc- Ch. 12—Financing and Tax Incentives for Firms . 299 cessful, the venture firm returns some profits to lack of venture capital in these countries, the the parent corporation. Other venture firms have number of NBFs in Europe and Japan is tiny com- no connection to major corporations. Venture pared to the number of NBFs in the United States. capital firms can provide seed money (used to Some governments, such as those in France, Ja- write business plans for new firms), but most pan, and the United Kingdom, have attempted to often, they fund startups, underwrite public of- stimulate the formation of venture capital, but the ferings, and invest in R&D limited partnerships results have been disappointing. Outside the as limited partners. A few of these firms have in- United States, direct government funding of invested a significant amount of their money in dustry is proportionately a far more important NBFs. funding source for the commercial development of biotechnology than it is within the United R&D limited partnerships are a very important States. In Japan, corporate funds supply most of source of funds for NBFs; next to public offer- the financing for biotechnology’. ings, R&D limited partnerships have so far provided the most funds for NBFs. Although such partnerships have been available for some time, The United States tends to use tax incentives NBFs are responsible for popularizing their use. more than direct government funding to encour- Such partnerships have enabled NBFs to attract age industrial development. In the United States, the substantial funding needed to fund research the tax measures aimed at capital formation and and early product development and have also R&D are important to NBFs in their present stage been formed for novel purposes, such as support- of development, As scale-up proceeds, tax ing the cost of clinical trials. measures aimed at R&D capital assets will become The number of public stock offerings in biotech- more important. The United States tax code of- nology in 1982 declined to about half the number fers no special incentives, beyond those available in 1981, paralleling a similar decline in the num- for investment generally, for investment in ber of public offerings in all U.S. industrial sec- depreciable structures or for equipment used for tors. Furthermore, the amounts raised by NBFs research and experimental design. Currently, in 1982 public offerings were less than NBFs had France and the United Kingdom have accelerated hoped for. The disappointing return on public of- write-offs for R&D capital assets, and West Ger- ferings probably reflected increased public many has an investment grant allowing a com - knowledge about biotechnology and more realis- pany to recover up to 20 percent of the cost of tic appraisals of the time necessary before in- R&D capital expenditures. Japan also has ex- vestments in biotechnology are likely to pay off. tremely favorable depreciation allowances for Thus far in 1983, there is a boom in the new capital assets used in R&,D for members of Gov- issues market and a large number of NBFs are ernment Research Associations such as the one using the market as a means to finance expan- formed for biotechnology]. sion. Between March and July of 1983, 23 NBFs raised about $450 million (18). The stock market is also providing newly public NBFs with second- Available studies suggest that Switzerland, followed by Japan and the United Kingdom, have and third-round financing. Some of these firms, the lowest effective corporate tax rates. The ef- however, may encounter future financial con- fective rates in the United States, the Federal straints if they continue to rely on the stock Republic of Germany, and France are higher and market, because many investors are interested about equal. in relatively short-term returns. In European countries and Japan, there is significantly less venture capital available than there In most countries, proceeds from patents are is in the United States, and venture capital has treated as either capital gains income or ordinary therefore not been a major funding source for income. In the United Kingdom, however, pro- biotechnology R&D. Furthermore, because of a ceeds from patents are taxed as corporate income 300 ● Commercial Biotechnology: An International Analysis

(at a rate of 52 percent). Royahies are taxed as growth of startup and small expanding firms. The ordinary income, except in France under certain people contacted in NBFs agreed that this feature circumstances. From a tax viewpoint, the United of the U.S. tax system aided the formation of their Kingdom has the most adverse treatment of in- companies, especially compared to the tax treat- come derived from innovational activity, because ment abroad. Recently, OECD published a study proceeds from patents are taxed at corporation comparing the treatment of small businesses tax rates and the long-term capital gains tax rate among its members and concluded that the Euro- in the United Kingdom is the highest of the com- pean governments had few policies directly aimed petitor countries. at small businesses (33). The European governments are trying to develop policies to encourage The United States has the most favorable tax entrepreneurs, but there are cultural as well as treatment for raising capital for smaller firms. economic obstacles to be overcome. This is an important advantage in fostering the

Issues and policy options -—

ISSUE 1: How could Congress help new bio- expected, these sources of financing might be- technology firms obtain the financ- come less available. ing necessary for production scale- Up? It might be argued that sufficient investment capital is available to commercialize biotechnology Many NBFs in the United States are currently in the United States and that the Government sustaining large losses because of the very large need not intervene with specially targeted guaran- investment in R&D relative to operating revenues teed loans or special tax provisions to further required to develop a biotechnology product. stimulate the U.S. biotechnology effort. However, Most NBFs at present have few or no products the commercialization of biological technologies to generate revenues and will have difficulty fi- appears more costly both in time and investment nancing production scale-up. Furthermore, as than other high technologies. For this reason, more and more NBFs carrying large losses ap- Government support may be necessary to main- proach production stages in the future, financ- tain the current competitive status of the United ing difficulties are expected to increase. If NBFs States. To help NBFs obtain the financing neces- do not have the financing necessary for produc- sary for production scale-up, Congress could tion scale-up, the commercialization of biotech- adopt one or more of the following options. nology in the United States may be hindered. Although many NBFs are currently using public Option 1: Provide guaranteed loans for production stock offerings and R&D limited partnerships to scale-up. obtain funds for scale-up, it is not at all certain A guaranteed loan program, much the same as that these sources of financing will remain avail- the 1950 V-loan program that supplied working able to them, The public market is not generally capital for U.S. semiconductor firms, * could be considered a reliable source of funds for invest- formulated for biotechnology. Under a V-loan pro- ments characterized by long time horizons and gram for biotechnology, the Federal agency guar- high risk; and R&D limited partnerships may not anteeing a loan would be obliged to purchase a be a reliable source of funds given current legal stated percentage of the loan if the borrower de- uncertainties and uncertain IRS interpretations faulted. The loans would be granted at less than which affect the tax status of the partnership, If future returns on investments are lower than expected by current investors or if the time horizons for biotechnology scale-up are longer than Ch. 12—Financing and Tax Incentives for Firms 301 prevailing interest rates and would thus decrease capital expenditures in a 6-month period, could the cost of capital for the individual firm. Because be used as a model for new legislation that would the guarantees would not be tied to a particular similarly benefit firms using biotechnology. The loan but to a particular level of debt, they would new legislation could allow NBFs to write off 100 serve as a system of revolving credit, As periodic percent of their expenditures for pilot plant repayments reduce the outstanding debt, addi- equipment. tional loans could be taken out as long as repay- Currently, the United Kingdom and France have ment kept the debt within the face amount of the tax provisions applicable to scientific R&D equip- authorization. The V-loan program of 1950 au- ment, alIowing up to 100-percent write-offs in the thorized a total of $2.9 billion over its life, which first year. Congress could allow similar write-offs permitted loans totaling about $11.6 billion. It also or accelerated depreciation for equipment used returned a profit to the Federal Government of in biotechnology pilot plants. about $24.5 million, because the Federal guaranteeing agent was entitled to a portion of the in- Option 3: Refund the R&D tax credit to NBFs not terest paid on the loan. earning enough taxable income on which Funds for biotechnology earmarked for scale- to apply the R&D tax credit. up projects could be placed in a “Biotechnology The R&D tax credit legislation currently allows Development Bank” or allocated to an interested unused tax credits to be carried over to each of agency such as the National Institutes of Health, the 15 taxable years following the unused credit National Science Foundation, or the SBA. The year. For NBFs experiencing cash flow problems funds could be authorized for a specific amount while scaling-up production, a tax credit refund- and aimed at a particular level of debt, thus allowable in the year sustained would help alleviate ing successful biotechnology firms to pay back these financial constraints. In addition, in present the loans to the level of debt only. once the level value terms, a refundable tax credit would be of debt was paid back, the firms could obtain more valuable to NBFs in the year earned than additional funds from the agency/Bank. a tax credit carried forward to the years in which enough taxable income would be earned to take Option 2: Allow rapid depreciation for capital assets advantage of the credit. required for production scale-up. The major disadvantage of this option would The current depreciation schedule for plant and be the loss of revenue to the U.S. Treasury in equipment assets in the United States is a set of times of high deficits. In addition, political and statutorily provided depreciation periods: 15 years equity-related objections might be raised concern- for most structures, 5 years for most equipment, ing Government rebates to businesses. and 3 years for R&D equipment. This schedule is faster than earlier schedules and provides a ISSUE 2: How could Congress encourage greater incentive than was provided before for broader use of R&D limited partner the purchase of long-lived equipment such as bio- ships in biotechnology? reactors. A depreciation schedule that would R&D limited partnerships have been an impor- allow an even more rapid recovery of capital costs tant source of financing for NBFs. As noted above, incurred in production scale-up would help alle- NBFs incur high R&D costs relative to their rev- viate some of the financial constraints faced by enues and have few marketable products. NBFs NBFs in production scale-up. The increased write- have found R&D limited partnerships useful ve- offs could be made available to investors through hicles by which to attract the substantial funding equipment partnership agreements or leasing ar- needed to fund research, early product develop- rangements. Such agreements would allow NBFs ment, and in the case of some pharmaceutical to obtain additional money instead of relying on products, clinical trials required by FDA. Such tax provisions alone. partnerships may allow more NBFs to enter mar- The Defense Procurement Act of 1950, which kets such as that for pharmaceuticals, where ex- allowed participating firms to write off their tensive regulation makes the costs of entry high. 302 ● Commercial Biotechnology: An International Analysis

Given the very large amounts of capital which will be required to support the further commercial development of biotechnology and the variability of the stock market as a source of funds through public offerings, R&D limited partnerships are probably critical to the survival and growth of NBFs. To encourage broader use of R&D limited partnerships and increase their role in providing financing for NBFs, Congress might consider the following options.

Option 1A: Amend section 1235 of the IRS code so that it applies to plant variety protection certificates. The most favorable tax treatment of income for R&D limited partnerships is provided under section 1235 of the IRS Code. Section 1235 treatment applies to a transfer of property consisting of all substantial rights to a patent by any holder. Under section 1235, any royalties received as a result of transfer of a patent qualify as long-term capital gains rather than ordinary income. Because they are legally distinct from patents, plant variety protection certificates are currently excluded from section 1235 treatment. Their exclusion from section 1235 treatment may have limited the use of R&D limited partnerships for biotechnology research in plant agriculture—an area where some of the most important applications of biotechnology are likely to occur. Adopting this option would very likely encourage the formation of R&D limited partnerships for plant-related biotechnology.

Option IB: Amend section 1235 of the IRS code so that universities are included in the definition of holder. Under section 1235, a holder is defined as any individual whose efforts created the patentable

Chapter 12 references Ch. 12—Financing and Tax Incentives for Firms 303

.5.

lo.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20. 38.

21, 39.

22. 40.

23. 41

24. 304 Commercial Biotechnology: An International Analysis

42. U.S. Congress, Congressional Research Service, Growth of An Industry, Venture Capital 1977- Tax Rates in Major Industrial Countries: A Brief 1982," 22(10):7, October 1982. Comparison, No. 80-224E, Washington, D.C., De 48. Venture Capital Journal, "Capital Transfusion cember 1980. 1982," 23(1):6, January 1983. 43. Vaquin, M., "Biotechnology in Great Britain," con 49. Virolleaud, P., "Research Finally a Tax Break," tract report prepared for the Office of Technology L'usine Nouvelle, Oct. 21, 1982, p. 75. Translated Assessment, U.S. Congress, February 1983. by the Foreign Broadcast Information Service in 44. Vaquin, M., "Biotechnology in France," contract West Europe Report, Science and Technology report prepared for the Office of Technology As (Joint Publications Research Service, Arlington, sessment, U.S. Congress, February 1983. Va.). 45. Venture Capital Journal, "Evolution of an Industry: 50. Werner, J., Director, Program Policy and Evalua Venture Capital Redefined for the 1980's," January tion Staff, U.S. Small Business Administration, 1980. Washington, D.C., personal communication, 46. l'enture Capital Journal, "Venture Capital Dis January 1983. bursements 1981: A Statistical Overview," 22(6):7, 51 Yamamura, K., University of Washington, personal June 1982. communication, July 1982. 47. Venture Capital Journal, "Special Report -The Chapter 13 Government Funding of Basic and Applied Research Contents

Page Introduction ...... 307 U.S. Government Funding of Basic Research in Biotechnology ...... 310 National Institutes of Health ...... , ...... 31o National Science Foundation ...., ...... 31o U.S. Department of Agriculture ...... 311 Department of Energy...... 311 Department of Defense . . ; . ., .,...,...... 311 U.S. Government Funding of Generic Applied Research in Biotechnology ...... 312 U.S. Government Funding of Applied Research in Biotechnology ...... 313 Small Business Innovation Research Program ...... 313 Small Business Set Aside Program...... 316 U.S. Government Instrumentation Initiatives ...... 316 International Comparisons ...... 317 Government Funding of Biotechnology Research in Other Countries ...... 317 organization of Basic and Applied Research in Other Countries ...... 318 findings ...... 323 Issues and Options ...... 325 Chapter 13 References ...... 328

Tables

Table No. Page 56.U.S. Federally Funded Research in Biotechnology ...... 309 57.NIH Projects in Biotechnology, Fiscal Years 1978-82 ...... 310 58. NSF R&D Equipment and Instrumentation, Fiscal Year 1984 Request , ...... 317 59.Government Funding for Biotechnology Research in Japan, 1982 and 1983 ...... 317 60. Some Biotechnology Projects in Japan ...... 318 61. Government-Sponsored Applied Biotechnology Centers in the United Kingdom . . . . . 319

Figure -No. Page 31. British Technology Group Support for Biotechnology ...... 321 Chapter 13 Government Funding of Basic and Applied Research

Introduction —

Federally funded basic research in the United tures declined, and by 1976, the Federal Govern- States has been essential to the development of ment’s contribution had dropped to an estimated biotechnology. The United States currently has 53 percent of total national R&D expenditures a strong and diversified basic research capabili- (21). ty, the foundation for which was laid during National basic research expenditures by the World War 11 by the Office of Scientific Research Federal Government have decreased more sharp- and Development (OSRD). The National Institutes ly in constant dollars than in total R&D outlays. of Health (NIH) was established to succeed OSRD’S Between 1968 and 1976, basic research expendi- Committee on Medical Research in 1930. tures declined in constant dollars by an estimated Within a few years after World War H, several 15 percent. Since universities perform the great- patterns of U.S. Government funding for basic est share of basic research, they have suffered research had been established. First, funding of the most from constraints on Federal research scientific research would further the broad aims funding. In real dollars, fewer basic research and priorities of the U.S. Government as defined funds were spent in universities in 1976 than in by Congress and the President. Second, non- 1968 (21). In spite of this leveling off of Federal governmental laboratories (e.g., research univer- support, the basic research effort of the United sities) would perform much of the research of States is prodigious and led to the recent devel- interest to the Federal Government; in-house opments in biotechnology. Government laboratories would also perform one aspect of the development of biotechnology such research, Third, direct relationships be- demonstrates the unanticipated results of a long- tween Federal agencies and university research- term commitment by the U.S. Federal Govern- ers would be established; funds for university ment to basic research. The “war on cancer” research would be awarded to individual investi- stimulated investigators to study the properties gators or small teams of investigators rather than of viruses that cause tumors. * A great deal of to the institutions themselves (legally, funds are work was done to locate the genes in several administered through institutions in the name of tumor viruses, such as SV40 virus, that cause investigators). Fourth, university research and tumors in hamsters and mice. These viruses are graduate training in the United States would be particularly recalcitrant to classical genetic pro- closely related functions. These patterns, with cedures for mapping genes. This problem led to elaboration, have persisted until the present (21). the use of bacterial restriction enzymes-enzymes The launching of Sputnik in 1957 triggered a that cut DNA at specific locations—to construct spectacular increase in the U.S. research effort. physical maps of genes. Physical mapping of an From 1953 to 1967, national expenditures in cur- entire genome (a complete set of genes of an or- rent dollars for research and development (R&D) ganism) using restriction enzymes was first ac- increased by more than 350 percent, and current complished on SV40 DNA. It was the knowledge dollar R&D expenditures by the Federal Govern- of the mechanism of action of these restriction ment increased almost 425 percent, In 1967, Fed- enzymes, generated originally from cancer re- eral Government expenditures represented 62 search, that led to the cloning of genes. percent of total national expenditures for R&D. “W? Appendix [;:,4 Comparison of the 1‘.S. Semiconductor lndus- After 1967, the rate of growth in R&D expendi- 11:}’ and Biotechnology\’.

307 308 ● Commercial Biotechnology: An International Analysis

As biotechnology is commercialized, different Phase Three (Applied Research). Innovative emphases will be placed on various aspects of the emphasis on products, the development continuum that stretches from basic to applied stage, attention given to practical application. research. The objective of basic research is to gain Funding by private risk capital, environment a better understanding of the fundamental as- tends to be closed for proprietary reasons, pects of phenomena without goals toward the de- essentially all work takes place in private lab- velopment of specific processes or products, The oratories. objective of applied research is to gain the under- Biotechnology is moving rapidly along the trajec- standing necessary to meet a recognized and spe- tory of innovation. The role of Federal funding cific need, process, or product (13). Bridging the in the process has been and will continue to be gap between basic and applied research is “ge- critical to the U.S. competitive position in biotech- neric applied” research, which is more specific nology. than basic research, but longer term and more risky than most applied research. * The Federal Assessing the US. competitive position in bio- commitment to basic and generic applied research technology research is difficult for several in the United States will be a necessary element reasons, First, the definition of biotechnology in the commercialization of biotechnology in the used in this report is a definition specific to the coming years. commercialization of biotechnology, and thus is more likely to fit traditional definitions of applied Donald Kennedy has characterized the process research. Second, basic or fundamental research that moves from basic, to generic applied, to ap- in biotechnology can include research on topics plied research as the “trajectory of innovation” as diverse as cancer, developing new vectors to (10). Within this trajectory, particular kinds of in- improve recombinant DNA (rDNA) techniques, institutional sponsors play defined roles: creasing oxygen volubility in aqueous systems, ● Phase One (Basic Research). Characterized by understanding immune function, and neurobiol- loose, informal organization, open communi- ogy. Basic research by its very nature is wide cation, quick publication of all the details of ranging; many elements drawn from basic re- an experiment. Usually takes place in uni- search of various kinds go into the innovation and versity departments or laboratories such as development of a particular patentable product. those at NIH, or sometimes in a special or- Third, the use of rDNA techniques or rDNA re- ganization such as Bell Laboratories. Most search may be but a small component of a par- often publicly funded, oriented toward the ticular research project, or the description of the discovery and explanation of phenomena. particular research may not have contained key ● Phase Two (Generic Applied Research). Fo- words that warranted its inclusion in an agency cused on processes, the application phase. classification of biotechnology research. In addi- Takes place in various settings: applied insti- tion, as rDNA techniques are more widely used, tutes, some university departments, nonprof- much of basic research at the cellular and subcel- it organizations (e.g., Stanford Research In- lular level will use these techniques; thus, much stitute, Battelle). Mixed public and private of basic biomedical research will use the tech- funding. Environments variable with respect niques of biotechnology, Fourth, even in the to proprietary secrecy. United States, biotechnology is defined differently among funding agencies. Added to problems of ● Generic applied research is a part of the continuum between definitions are differences in granting procedures the two poles of basic and applied. This research may be character- by various agencies, as well as different account- ized as follows: 1) it is not committed to open-ended expansion of knowledge as university basic research typicaUy is, but is less specific ing procedures for indirect costs (indirect costs (more widely applicable or “generic”) than the typical industrial prod- are part of the cost of doing research and there- UCI or process development effort; 2) it has more welldefined ob- fore must be included). And, finally, overall fund- jectives than basic research, but is longer term than typical product and process development efforts; and 3) it is high risk, in the ing levels give some indication of the total re- sense that the stated objectives may fail and the resources committed search effort but do not reveal the quality of the may be lost for practi~al purposes. research. Nevertheless, most experts would agree Ch. 13—Government Funding of Basic and Applied Research 309 that the two are closely correlated and that the can Association for the Advancement of Science United States leads the world both in its invest- and National Science Foundation (NSF) documents ment in science and in the quality of its science. listed in the references (1,13). The totals for Federal funding for biotechnology The three sections of this chapter that follow research are shown in table 56 and will be dis- are intended to provide a perspective on the U.S. cussed in the sections to follow. commitment to biotechnology research by discussing basic, generic applied, and applied bio- Since the focus of this chapter is an assessment technology research, respectively, within individ- of the relative strengths of basic, generic applied, ual U.S. Government agencies. A separate section and applied research in biotechnology in the considers instrumentation initiatives by the U.S. United States, Japan, the Federal Republic of Ger- Government that have bearing on biotechnology many, the United Kingdom, Switzerland and research. Near the end of the chapter, research France, the estimates of government funding for expenditures in biotechnology and channels of biotechnology research in other countries that are research funding in Japan, the Federal Republic available have been included in this chapter. Given of Germany, the United Kingdom, Switzerland, problems with respect to definitions, currency ex- and France are presented in a comparative over- change fluctuations, and lack of complete data, view. The final section of the chapter identifies these figures must be interpreted with caution. issues and congressional policy options pertain- For detailed analysis of agency budgets within the ing to U.S. Government funding of biotechnology United States, the reader is referred to the Ameri- research and instrumentation initiatives.

Table 56.—U.S. Federally Funded Research in Biotechnologya

Amount of funding (millions of dollars) Basic Generic applied Applied NIH: Molecular biology, generic manipulation, hybridoma, monoclinal antibodies...... FY 1982 $378.0 — Immobilized enzymes ...... FY 1982 — $;0 — NSF: rDNA research ...... FY 1982 12.8 — — Bioprocess engineering ...... FY 1982 — 1.7 — Other biotechnology-related research (broadly defined) ...... 38.6 — — USDA: ARS plant biotechnology ...... FY 1983 7.2b — — ARS animal biotechnology ...... FY 1983 6.4b — — CSRS competitive grants (CRGO) ...... , . FY 1982 5.0 — — SAES ...... 1981-82 15.6b — — DOD: DARPA ., ...... FY1983 2.2 — Army/Navy/Air Force rDNA research ...... FY 1983 3; — — Other biotechnology ...... FY 1983 2,0 — — DOE: Photosynthesis, stress mechanisms of plants and micro-organisms, genetic mechanisms, methanogenesis, etc. c ...... FY 1983 9.9b — — Conservation & Renewable Energy Program . . FY 1983 23.7b — — Other ...... FY 1983 2.0b — — Biocatalysis research ...... FY 1983 — 0.5 — Total ...... $510.9 $6.4 $5. O(SBIR) aUnless otherwise speclfled, see text for explanation of figures bsome of this research may be generic applled research cBlotech nol ogy, broadly defined

SOURCE Office of Technology Assessment 310 “ Commercial Biotechnology: An International Analysis

U.S. Government funding of basic research in biotechnology

U.S Government agencies funding basic re- Table 57.—NIH Projects in Biotechnology, search in biotechnology are NIH, NSF, the U.S. Fiscal Years 1978=82

Department of Agriculture (USDA), the Depart- Number Dollars awarded ment of Energy (DOE), and the Department of Fiscal year of projects (millions of dollars) Defense (DOD). Genetic manlpulatlon: 1978 ...... 546 $61 1979 ...... 847 103 National Institutes of Health 1980 ...... 1,061 131 1981 ...... 1,400 164 In November 1983, the fiscal year 1984 budget 1982 ...... 1,588 185 of NIH was appropriated at $4.3 billion with some Hybr!domas (term not created until 19/?0): of the unauthorized programs still under conti- 1980 ...... 256 $ 22’ 1981 ...... 479 49 nuing resolution. The number of new and com- 1982 ...... 654 64 peting project grants will be maintained at 5,000. * Monoclinal antibodies (term not created until 1980): The 16)560 research project grants—5)000 com- 1980 ...... 268 $22 peting and 11,560 noncompeting-will be the larg- 1981 ...... 768 78 1982 ...... 1,274 129 est number of research project grants supported Immoblllzed enzymes: in the history of NIH. Budget estimates indicate 1978 ...... 25 $1 that direct costs for noncompeting continuation 1979 ...... ! . . 33 2 grants will be reduced by about 1 to 2 percent 1980 ...... 26 2 1981 ...... 27 2 and those for competing grants by 2 to 4 percent. 1982 .., ...... 25 2

A 4-percent reduction in average costs was ap- a~ata are probably not COm Plete. plied to these grants in both 1982 and 1983, SOURCE: U.S. Department of Health and Human Services, National Institutes of Health, Office of Recombinant DNA Activities, 1983. Most of the basic research that has been and is done in biotechnology is NIH-funded research. fort. With the exception of generic applied re- Despite the budget pressures on NIH funding as search on immobilized enzymes, the work is pri- a whole, the number of extramural projects using marily basic research, so many of the industrial rDNA techniques has increased, Funding figures applications associated with new biotechnology for NIH projects in biotechnology for the fiscal may be in the distant future. Despite these clas- years 1978 to 1982 are shown in table 57. Since sification problems, it is evident from the figures data are cataloged by NIH staff on the basis of in table 57 that research using rDNA techniques grant applications or progress reports and in- is becoming more widespread and comprises a dexed by staff who looked for key words such larger proportion of the total grants awarded as “genetic manipulation,” “hybridoma)” “mono- each year. clinal antibodies,” and “immobilized enzymes, ” Funding figures for biotechnology research in the figures may be slightly misleading. For example, the term “genetic manipulation” includes NIH intramural programs are unavailable; however, this research is a much smaller portion of some projects that do not involve rDNA tech- all NIH-sponsored research. niques. Also, the figures are the total costs associated with the awards, including direct and indirect costs, and are not related to the propor- National Science Foundation tion of rDNA research in the total research ef- The total fiscal year 1984 budget request for NSF is $1.2 million, a 17.4-percent increase over “ ~e~~ proj~ds are ~~ose Competing for first time; competing projects are those that are competing but hai’e been funded before by fiscal year 1983. Research instrumentation and NIli (a competitii’e renewal); and noncompeting projects are ongoing support for graduate students are high priorities. projects awarded for more than 1 year, Within NSF’s Biological, Behavioral, and Social Sci- Ch. 13—Government Funding of Basic and Applied Research ● 311 ences program, the physiology, cellular, and mo- grants, approximately $5 million was spent on bio- lecular biology program is increased 20 percent technology research (17). over fiscal year 1983. The Chemical and Process The Agriculture Committee on Biotechnology Engineering Division budget in NSF’s Engineer- of the National Association of State Universities ing program is also up 21.5 percent; this may have and Land-Grant Colleges (12) has estimated that some effect on biotechnology (4). during 1981-82, $34.7 million was committed to The total NSF expenditure for grants having biotechnological research by State Agricultural some rDNA component from 1975 through Octo- Experiment Stations (SAES). (This estimate was ber 1982 was just over $57 million. From fiscal derived from a survey of SAES that totaled the year 1975 through fiscal year 1980, about $35.3 number of persons plus full-time equivalents million was spent. Funding for grants having some working on biotechnological research. ) The dis- rDNA component in fisca] year 1981 was $9.8 mil- tribution of this total is 42 percent State, 45 per- lion and in fiscal year 1982, $12.8 million. cent Federal, and 14 percent private funding. ARS has funded a total of $13.6 million in bio- U.S. Department of Agriculture technology research in fiscal year 1983; $7.2 mi]- The fiscal year 1984 budget proposal calls for lion of this was devoted to plant biotechnology USDA’s agricultural research programs to get and $6.4 million to animal biotechnology (27). along with essentially the same amount of money in 1984 as in 1983 (19). Department of Energy

The division of funds among USDA’s bureaus— DOE has several programs involved in biotech- the Agricultural Research Service (ARS), the nology research. DOE’s Office of Basic Energy Sci- Cooperative State Research Service (CSRS), and ences, which funds fundamental research in plant the Forest Service—and the USDA research agen- sciences and microbiology (photosynthesis, stress da have been the subject of several reports and mechanisms of plants and micromganisms, ge- studies, The latest, from the White House Office netic mechanisms, methanogenesis, genetics of of Science and Technology Policy (5), has caused anaerobic micro-organisms, and regulatory as- considerable debate. The findings from that re- pects of metabolic pathways), had a budget of $9.9 port indicate that research at the land-grant col- million in fiscal year 1983 and will have $11.0 mil- leges and universities lags far behind current lion in fiscal year 1984. work on anaerobic diges- developments in plant biology, that agricultural tion, algal production, and genetic manipulation research funds should be more widely distrib- is funded through DOE’s Conservation and Re- uted, that much of the research conducted by newable Energy programs (including DOE’s Solar ARS is duplicative, and that the agriculture system Energy Research Institute); the budget for these overall is no longer energy- nor resource-efficient. programs is $23.7 million. Other programs sup- In addition, this and other reports have suggested port biotechnology research relating to pollutant that the competitive grants program within CSRS control, beneficiation of coal, and microbial en- funds high-quality basic research within USDA hanced oil recovery. The aggregate of these lat- and should be expanded in order to create a criti- ter activities totaled between $1.5 million and $2.0 cal mass of long-term high-quality research. Hear- million in fiscal year 1983 (14). ings on this issue are expected in the next year. In fiscal year 1984, there will bean increase of Department of Defense $4.6 million for the competitive research grants within CSRS in order to initiate a program in ani- The Federal agency with the greatest increase mal science. Some of these grants may include in the fiscal year 1984 budget proposal for R&D biotechnology research. In fiscal year 1981 (latest funding is DOD—up 29.7 percent over fiscal year year for which data are available), of the $15.8 1983 in current dollars. Although most of this in- million total being spent for competitive research crease will fall in the development areas of re- 312 ● Commercial Biotechnology: An International Analysis —..—. -

search, a 9-percent increase in basic research is cell culture, monoclonal antibodies, etc.). DOD es- also proposed (18). Within this framework, there timates that in-house research is probably at a are some data available on biotechnology R&D. level of $1 million per year and that contract research in biotechnology is at least as great as that. The total funding for rDNA basic research over More accurate figures should be available in fiscal all three military services for fiscal year 1983 is year 1984 (2). These figures represent a very small $3.3 million; $2.9 million of this is funded with proportion of the total military basic research $0.4 million obligated but not yet funded (2). DOD budget ($787.5 million for basic research in fiscal is currently amassing data on fiscal year 1983 year 1983) (19). funding for biotechnology- activities (research on

U.S. Government funding of generic applied research in biotechnology —

NSF, DOE, DOD, and NIH are the only U.S. Gov- to build the technical and engineering base of ernment agencies funding generic applied re- biocatalysis technology to enable U.S. industry to search in bioprocess engineering. Because of lim- displace a significant level of nonrenewable re- ited Federal support, bioprocess engineering source requirements by the year 2000. The proj- could prove to be a critical bottleneck in the ect supported applied research and exploratory United States as biotechnology moves toward pro- development to help establish the technology base duction scale-up. Not only is bioprocess engineer- that the chemical process industry will need to ing research underfunded relative to other types develop cost-competitive products from genetical- of engineering research, but trained bioprocess ly manipulated organisms based on renewable engineers are in short supply. * energy feedstocks. Unfortunately, this beginning The major U.S. Government funding group for toward a federally funded generic applied research base in bioprocess engineering has been generic applied research in bioprocess engineer- terminated. Currently, however, discussions are ing is NSF’s Chemical and Process Engineering Di- vision. In fiscal year 1983, $1.7 million of its $4.5 underway in DOE’s Office of Energy Research to begin a broader bioengineering initiative. million budget was used to fund projects in bioprocess engineering. In fiscal year 1984, there is DOD’s Defense Advanced Research Projects no increase in its budget, but more of the budget, Agency (DARPA), with an overall budget for fiscal $2.7 million, is being allocated to bioprocess en- year 1983 of $719.5 million (projected to increase gineering (25). 9.7 percent in fiscal year 1984), has two program DOE has a Biocatalysis Research Activity within areas in biotechnology, one underway and one beginning in fiscal year 1984. Thie first program, its Energy Conversion and Utilization Technolo- a research effort in chemical and biological ultra- gies Program. Although this activity was funded sensors, began in fiscal year 1982 with a budget up to $525,000 through fiscal year 1983, the ad- of $888,000. Funding for this program is expected ministration’s fiscal year 1984 budget request im- to increase to $2.2 million in fiscal year 1983, stay plies that biocatalysis research activities will be level at about $2,2 million in fiscal year 1984, and terminated. This research project, begun in 1981 increase to $2.9 million in fiscal year 1985. The at $130 000 was a generic applied research proj- ) research is being done through contracts with ect designed specifically to capitalize on basic four universities, two private companies, and research conducted at universities. Its goal was three Federal laboratories. The purpose of the “See Chapter 14: Personnel A~’ailabili[\’ and Training for a discus- second initiative, which is to begin in fiscal year sion of the shortage of bioprocess engineers. 1984, is to study the mechanical properties of bio- Ch. 13—Government Funding of Basic and Applied Research . 313 — polymers. Funding in fiscal year 1984 will be $1.4 area. Programs are viewed as successful if the million, rising to $2 million in fiscal year 1985 and technology is transferred to secondary agencies 1986, $2.7 million in fiscal year 1987, and decreas- within 5 years. Thus, most research initiatives are ing to $1 million for phaseout in fiscal year 1988. for 5 years, at which time they are phased out. New initiatives are continually being phased in Projects are undertaken in DARPA if there is as projects demonstrate merit (20). a perception that there will be downstream applications of interest to the military. Thus, the re- Although most NIH research is basic research, search DARPA funds is generic applied. If a par- NIH research on immobilized enzymes, which ticular initiative appears to be fruitful, additional totaled about $2 million in 1982, could be charac- funding will he targeted to basic research in the terized as generic applied.

U.S. Government funding of applied research in biotechnology

U.S. Government funding of applied research in When the program is fully phased in, nearly $430 biotechnology is provided principally through the million annually will be set aside for small high- Small Business Innovation Research (SBIR) pro- technology firms, including many new biotech- gram, a program that was established to promote nology firms (NBFs). * research by small businesses because only about On July 22, the Small Business Innovation Devel- 1 to 2 percent of the total research budgets of opment Act of 1982 was signed into law by Presi- Federal funding agencies were set aside for dent Reagan. The purposes of this act are to: 1) research by small businesses. The Small Business stimulate technological innovation from Govern- Innovation Development Act establishing this pro- ment-funded R&D, 2) use small businesses to meet gram was passed in 1982, so it is too early to Federal R&D needs, and 3) increase private sec- evaluate it. Furthermore, each Federal agency is tor innovation derived from Federal R&D by implementing the program slightly differently. In coupling the SBIR to venture capital. In the first several of the agencies, however, there is poten- NSF SBIR solicitation, NSF awards totaled $5.3 mil- tial for some funding of applied biotechnology re- lion. Approximately $42 million in follow-on fund- search. The status of the SBIR program with re- ing was awarded to the first recipients. gard to biotechnology in specific Federal agencies is detailed below. Also discussed is the Small Busi- In order to accomplish the three objectives of ness Set Aside program. the law, the SBIR program is structured in three phases. Phase I is a screening phase to evaluate Small Business Innovation Research the technical and commercial feasibility of pro- program posals. Usually, the period of performance is months. The awards given in phase I are up to The findings of both Government and private $50,000. This money is most effectively used for studies on technological innovation in small firms either out-of-pocket expenses and the salary of convinced the U.S. Congress of the need to in- a technician or for financial sustenance while crease the share of Federal R&D dollars going to developing a business plan and looking for ven- small businesses. The new Federal SBIR program ture capital. Only winners of Phase I awards can was created to meet this objective, The SBIR pro- compete for Phase II awards, and only about so gram provides a source of nonequity capital to small businesses in the United States. The SBIR * NBFs, as defined in Chapter 4: Firms Commercializing Biotech- program is designed as an expanded version of nology’, are small firms that ha~’e been started-up in recent years continuing smaller programs in DOD and NSF. specifica]l}’ to capitalize on new biotechnology.

25-561 0 - 84 - 21 314 ● Commercial Biotechnology: An International Analysis —.—— —

percent of the Phase I winners receive Phase II U.S. DEPARTMENT OF AGRICULTURE awards. USDA has reserved almost $550,000 for its SBIR Phase II provides funds for the projects found program in fiscal year 1983. There are five proj- most promising after Phase I. These awards are ect areas. The two most likely to initiate bio- generally used for the principal research effort. technology proposals are animal production and The period of performance is up to 2 years and protection and plant production and protection. the awards given are up to $500,000. In Phase Solicitations were sent May 1, 1983. USDA antic- II, the law requests (but does not require) the pro- ipates making 10 to 14 awards. poser to obtain a follow-on funding commitment from a third party, usually a large corporation DEPARTMENT OF ENERGY or a venture capital firm. The third party is used DOE has set aside $5.5 million for the SBIR pro- not only because the small firms tend to be under- gram for fiscal year 1983. One topic of the 25 in capitalized but also to provide an objective look the solicitation schedule deals with bioprocess at the management, market, technology, and long- technology and applied microbiology. of the 1,700 term financial requirements. proposals DOE received, 100 were on this topic. Traditionally, DOE’s relationships with small busi- Phase III consists of private investments to stim- nesses have been through subcontracting of ulate commercial production. This phase is not funds allocated to the National Laboratories and funded by the Federal Government. contractors in universities and elsewhere. The The SBIR law requires that each Federal agen- work has usually involved procurement of macy for the next 6 years set aside a specific percent- terials, construction, and fabrication rather than age of its R&D budget for awards to small busi- research. The SBIR program will provide DOE nesses. Federal agencies with external R&D budg- with another means of supporting applied re- ets exceeding $100 million-i.e., the National Aero- search in small R&D firms (14). nautics and Space Administration (NASA), the De- partment of Health and Human Services (of which DEPARTMENT OF DEFENSE NIH is a part), NSF, DOE, USDA, the Department For fiscal year 1983, DOD has almost $17 million of Transportation, the Department of the Interior, set aside in its SBIR program. Unlike all other Fed- the Environmental Protection Agency, and the eral agencies, with the exception of NSF, DOD al- Nuclear Regulatory Commission—must set aside ready relies on the small business sector for R&D 0.2 percent of their external R&D budget for contracts. In fiscal year 1981, DOD awarded 7.4 small businesses in fiscal year 1983, 0.6 percent percent ($679 million) of its external budget to in 1984, 1 percent in 1985, and 1.25 percent in small businesses—almost twice the small business 1986-88. In those agencies with external R&D share of total Federal R&D. Because DOD does budgets exceeding $10 billion (DOD), the set aside not classify R&D projects by industrial applica- begins at 0.1 percent and increases to 1.25 per- tion or research area, the amount awarded to cent in the fifth year. Each agency sets its own small businesses for biotechnology R&D is guidelines for implementation and its own R&D unknown. * areas for solicitations. Because of the important contribution small Because the SBIR law is so new, it is difficult firms have made to DOD’s R&D effort, the De- to determine the extent to which it might affect partment designed its own SBIR program in technological innovation and the overall competi- 1981—the Defense Business Advanced Technol- tiveness of N13Fs. Nevertheless, it is clear that the ogy (DESAT) program —and has made awards to SBIR program gives the U.S. Federal Government small businesses through that program as well as an opportunity to influence technological innova- through regular procurement channels. In fiscal tion in the U.S. private sector. If biotechnology research areas are given adequate support by Fed- ● DOD’s classification system is as follows: 6.1-Basic Research, 6,2- Exploratory Research, 6.3-Advanced Research, 6.4-Engineering, eral agencies, innovations in biotechnology might 6.5-Support, 6.6-Major Systems. These headings are not immediately very well be fostered. recognizable as biotechnology. Ch. 13—Government Funding of Basic and Applied Research ● 315 -.. —. year 1982, 1,103 proposals were received from are unsolicited. Earlier in fiscal year 1983, the first solicitation under the DESAT program when the schedule for solicitations was be- and 100 awards were made. The DESAT program ing formulated, biotechnology R&D was will in all likelihood be replaced by the SBIR given the highest ranking for research areas program. to be pursued. As the schedule went through the review process, however, the specificity All three military services plus DARPA partici- of the proposals was changed and the propos- pate in DESAT. als were broadened. A biotechnology effort ● Air Force. The Air Force is not pursuing any will, however, be funded in DARPA, in the biotechnology-related R&D with small busi- area of biopolymers. Some of the contract ness or otherwise. awards will no doubt go to NBFs. . Navy. In fiscal Year 1982, the Navy granted 36 awards under the DESAT program; few DEPARMENT OF HEALTH AND HUMAN SERVICES if any of which were in biotechnology-related The fiscal year 1983 SBIR budget for the Public areas. Other awards were made to small busi- Health Service, of which NIH is a part, is $5.6 ness, but no agency or service is able to break million. Within NIH, it is difficult to speculate down biotechnology-related contracts for about the amount of R&D money to go to NBFs. small businesses only, unless they fall under NIH uses what it refers to as an omnibus solicita- a specific small business program. Most con- tion. This approach is designed to generate new tract research carried out by the Office of business. NIH has little experience awarding ap- Naval Research and the Naval Research Lab- plied research contracts to small for-profit com- oratory in the past has been unsolicited. Of panies. In fiscal year 1981, contracts totaling $40 the unsolicited business in the past, 48 per- million went to small businesses, mostly for recent was done by small business and 50 per- search support (e.g., building animal cages). In cent was done by universities. fiscal year 1982, the amount increased to $70 mil- Army. Under the SBIR program, biotechnolo- lion. However, only since January 1982 has NIH gy and chemical defense “correspond to the been making awards to other types of profitmak - U.S. Army’s ‘New Thrust’ program designed ing organizations. Most of the forthcoming NIH to take advantage of U.S. technology un- research solicitations under the SBIR program are matched by Soviet capabilities that can pro- in the field of biotechnology. vide the leverage technologies needed for the future battlefield” (23). The Army’s R&D ef- NATIONAL AERONAUTICS AND SPACE forts under the SBIR program will emphasize ADMINISTRATION the application of novel technologies such as NASA’s fiscal year 1983 SBIR program has a rDNA and hybridoma technology in the de- budget of $11 miliion. However, biotechnology velopment of vaccines, antidotes, analgesics, as defined in this report does not fall within the and blood substitutes (mostly for casualties). mission of NASA and is therefore not a NASA re- About 3,000 proposals are expected to be research area. ceived for this topic aIone. NATIONAL SCIENCE FOUNDATION ● Defense Advanced Research Projects Agen - cy. In fiscal year 1983, DARPA has set aside NSF’s SBIR budget for fiscal year 1983 is $5.5 $750,000 for its SBIR program. It is unlikely million, approximately the same as the SBIR budg- that more than one biotechnology-related et for the Public Health Service. In fiscal year contract will be awarded under the program 1982, NSF did not give any awards in biotechnol- this year, because there are 14 research areas ogy, and few good proposals were received by to be covered and the average contract price NIH. Congressman Don Fuqua sent a letter to NSF is about $50,000. In fiscal year 1982, about and NIH asking why so few proposals for biotech- 12 percent of all awards went to small busi- nology research topics were received (6), The nesses. Most proposals that come into DARPA response given was that many of the NBFs had 316 ● Commercial Biotechnology: An International Analysis

received funding from private sources for their competitive awards to small businesses. The set first-round financing needs (6). Such firms were aside contracts (not grants) reserve an entire pro- ineligible to receive Phase II funding without hav- curement or a portion of a procurement for the ing participated in Phase I. exclusive bidding of small business concerns. The program was designed to give small businesses Small Business Set Aside program equal opportunity to compete for Government contracts and subcontracts. It was not designed The Small Business Set Aside program was cre- specifically with R&D contracts in mind and has ated to help small businesses obtain Federal had limited significance in stimulating technologi- Government contracts and subcontracts by set- cal innovation in small businesses (22). ting aside “suitable” Government purchases or

U.S. Government instrumentation initiatives

The obsolescence of analytical instruments is for evaluating proposals is the relevance of the an increasingly severe problem for U.S. univer- proposed research to DOD’s interests. The second sities. As instrumentation becomes more sophis- criterion is the scientific merit of the research to ticated, it also becomes more costly; furthermore, be performed with the equipment. By the clos- obsolescence occurs more rapidly. DOD has esti- ing date of November 30, 1982, 2,478 proposals mated that upgrading all qualified laboratories to totaling $645 million had been received. The an- “world class” status in instrumentation would take nouncement of 204 awards was made in late April an infusion of $1.5 billion to $2 billion. Instrumen- 1983, with awards averaging $148,000. The large tation is needed not only to carry out research response to the DOD initiative is one index of the but also to teach the next generation of research- need for updating instrumentation in universities ers and industrial personnel. (15). Since reduced funding levels have caused uni- For fiscal year 1984, major increases in NSF’s versities to cut back purchases of necessary tech- R&D equipment and instrumentation initiative are nical equipment, a special fund totaling $150 mil- proposed (see table 58). Rather than taking the lion over 5 years for the purchase of equipment form of a single dedicated line-item, the funding has been set up in DOD. The purpose of the spe- is distributed among the regular disciplinary ele- cial DOD fund is to upgrade the equipment of uni- ments of the budget. NSF stresses that a few man- versities. Each of the three military services con- ufacturers of equipment recently have agreed to tributes equally to DOD’s special fund, and the provide substantial discounts for equipment pur- Office of Naval Research coordinates its adminis- chased by NSF grantees. Efforts to broaden par- tration. The solicitations sent out by DOD stipu- ticipation by manufacturers in this program are late that the requests are to be for major pieces continuing. of equipment that cannot be purchased with other funding. One goal of DOD’s fund is to stimu- DOE has a $4 million university equipment ini- late program projects, i.e., to encourage several tiative in fiscal year 1984 for IJOE contractors researchers to work together. The research they who need equipment costing more than that al- would undertake would necessitate the purchase lowed in the DOD instrumentation initiative; these of equipment costing a minimum of $50,000 (this requests can have a minimum of about $100,000 may be raised to $100,000). The primary criterion (14). Ch. 13—Government Funding of Basic and Applied Research ● 317

Table 58.—NSF R&D Equipment and Instrumentation, Fiscal Year 1984 Request (obligations in millions of dollars)

Actual Estimate Estimate Increase (percent) FY 1982 FY 1983 FY 1984 F’f 84182 FY84183 Mathematical and Physical Sciences ...... $41.7 $ 56.4 $ 86.3 107.0 0/0 53.0 ”/0 Engineering ...... 6.4 8.7 18.3 184,4 109.2 Biological, Behavioral, and Social Sciences ...... 14.3 16.2 24.6 72,0 51.9 Astronomical, Atmospheric, Earth and Ocean Sciences . . . . . 19.6 22.1 36.7 87.2 66.1 U.S. Antarctic Program ...... 6.0 6.6 12.1 101.7 83.3 Scientific, Technological and International Affairs...... 2.1 2.3 2.3 9.5 0.0 Total, NSF ...... $90.1 $112.3 $180.2 100.00/0 60.50/o SOURCE American Association for the Advancement of Science, /?&D In the FY 1982 Budget A Pre//rn/nary Ana/ys~s. Washington D C March 1983

International comparisons

A brief overview of Government research fund- Science and Technology Agency, the Ministry ing in the foreign countries expected to be the of Agriculture, Forestry and Fisheries, and major competitors of the United States in biotech- three other Government agencies. This re- nology-Japan, the Federal Republic of Germany, search is a mix of basic, generic applied, and the United Kingdom, Switzerland, and France— applied. The figures are shown in table 59. is presented below. ● Federal Republic of Germany. Estimates of spending for projects funded by the Federal Government funding of biotechnology Ministry for Research and Technology research in other countries (BMFT, Bundesministerium fur Forschung and Technologies) range from $49 million to The amounts spent by foreign governments on $70 million (DM120 million to DM170 million). biotechnology research (including basic, generic A large proportion of this research is generic applied, and applied) are extremely difficult to es- applied. timate. Any estimate is at best a guess, and, ex- ● United Kingdom. The British Government is cept where indicated, breakdowns by basic or ge- spending about $43.8 million to $52.5 million neric applied cannot be made. Currently available (<25 million to <30 million) per year on ge- estimates for the countries identified as the ma- neric applied and applied research in biotech- jor competitors of the United States in the area nology. If basic research is included, the fig- of biotechnology are as follows: ure probably ranges upward toward $60 mil- ● Japan. Funding for biotechnology research lion. in Japan is divided among the Ministry of In- ● France. Estimates for Government expendi- ternational Trade and Industry (MITI), the tures for biotechnology range from $35 mil-

Table 59.—Government Funding for Biotechnology Research in Japan, 1982 and 1983 (in miliions)

1982 1983 Yen Dollars Yen Dollars Ministry of International Trade and Industry ...... + 2,381 $9.56 + 2,503 $10.04 Science and Technology Agency ...... 2,172 8.72 2,338 9.40 Ministry of Agriculture, Forestry, and Fisheries ...... 1,874 7.53 2,017 8.10 Ministry of Education, Ministry of Welfare, and Environmental Protection Agency ...... 7,557 30.35 7,906 31.75 Total ...... # 13,984 $56.16 + 14,761 $59.29 SOURCE G Saxonhowe, “Biotechnology !n Japan” contract report prepared for the Of f!ce of Technology Assessment, U S Congress, June 1983 318 Commercial Biotechnology: An International Analysis

lion to $60 million (F230 million to F395 mil- cal year 1982 budget was $4.4 million ( 1.1 billion). lion), FRI and other institutes in Japan meet many of industry’s needs for generic applied research Organization of basic and applied in biotechnology. Their equivalent does not ex- research in other countries ist in the United States (16). *

The organization of basic research in the United FEDERAL REPUBLIC OF GERMANY States and other countries competing in biotech- The Society for Biotechnological Research (GBF, nology is described in Chapter 17: University/In- Gesellschaft fur Biotechnologische Forschung) is dustry Relationships and in Appendix B: Country without doubt the most important of the federally Summaries. The organization of generic applied owned research centers for biotechnology in and applied research efforts in countries likely West Germany and perhaps the most ambitious to compete with the United States in biotechnol- governmentally operated institution of its kind in ogy is outlined below. the world. In 1982, GBF’s operating expenses were $13.1 million (DM32 million). Generously funded JAPAN by the West German Government, GBF is one of Because of Japan’s continuing interest in bio- the best equipped facilities of its kind in Europe. process engineering and because MITI has iden- Its bioprocess laboratory, for example, permits tified biotechnology as a “next-generation” proj- considerable experimentation with bioprocess ect, there is a great deal of activity in biotech- technology as well as scale-up of biotechnologi- nology research in Japan, Much of the research cal processes to the pilot-plant stage. is carried out by MITI’s Agency for Industrial Sci- GBF was set up to perform a variety of substan- ence and Technology. Some biotechnology proj- tive research tasks as well as to cooperate with ects that MITI is sponsoring are listed in table 60. other researchers working in the field of biotech- This agency oversees several research institutes, nology. GBF’s major functions include the follow- including the Fermentation Research Institute ing (9): (FRI). FRI was founded in 1940 to develop fermentation technology and has expanded to include ● to develop environmentally sound biotech - any microbial application in industry and en- nological processes in order to assure a suf - vironmental protection. Additionally, FRI has a ● For further details, see Chapter 17: llni\’eI’sit.\Bndust[\’ Relation- depository for patented micro-organisms. Its fis - ships

Table 60.—Some Biotechnology Projects in Japan

Project Title of R&D project Ministry with jurisdiction Institutions conducting projects period Utilization of biomass Ministry of Agriculture, Business Office, Agriculture, Fishery and Forestry 1980-90 Forestry, and Fisheries Technology Council National Institute of Agricultural Sciences Forestry Experiment Station National Agricultural Experiment Station National Research Institute of Agriculture University and private research institutes Enzymatic reactors MITI National Chemical Laboratory 1979-83 Agency for Industrial Science and Technology Industrial enzyme use MITI Fermentation Research Institute 1980-84 Agency for Industrial Science and Technology Physiologically active MITI Research Institute for Polymers and Textiles 1978-82 macromolecules and Agency for Industrial Science and Technology production processes Biochemical pulp MITI Government Industrial Research Institute, Shikoku 1980-83 technology Agency for Industrial Science and Technology

SOURCE: G Saxonhouse, “Biotechnology in Japan, ” contract report prepared for the Office of Technology Assessment, U.S. Congress, June 19S3 Ch. 13—Government Funding of Basic and Applied Research “ 319 —.— —.——.

ficient supply of chemicals, pharmaceuticals, testing of new products. GBF is also engaged in and foodstuffs; joint activities with academic and international ● to scale-up biotechnological processes from research centers. GBF fosters international scien- the laboratory to the pilot-plant stage, this be- tific exchanges by receiving temporary visitors ing the basis for the development of full-scale from other countries. An acknowledged objective industrial processes; of BMFT is to strengthen existing ties between ● to make new sources of raw materials avail- GBF and private industry in order to facilitate able for the manufacturing of natural prod- technology transfer in the field of biotechnology ucts by micro-organisms and to make plant (9). and tissue cultures available; Since 1979, the German Collection of Micro- s to make new pharmacologically significant organisms (DSM, Deutsche Sammlung von Mikro- natural products available and to investigate organismen) has been incorporated into GBF. their modes of action; DSM has served since October 1981 as an in- ● to make its scientific facilities available to non- ternational depository of patented or patent- GBF research groups, provided that their related micro-organisms pursuant to the Budapest projects fit within the R&D program of GBF; Treaty. * More generally, DSM’S mission is to col- ● to support other research groups in the fields lect micro-organisms of scientific and technolog- of biology, chemistry, and medicine by sup- ical significance, to conserve them unchanged, plying noncommercial natural products; and to make them available for R&D and teaching ● to participate in joint projects, provided they purposes. The proposed budget for operating are within the framework of BMFT's Biotech - DSM in 1982 was $833,000 (DM2 million). nology Program; and ● to provide advanced interdisciplinary train- UNITED KINGDOM ing for scientists, engineers, and technicians. The United Kingdom has several Government- In keeping with its overall mission, GBF is in- sponsored research centers that are involved in volved in a number of cooperative arrangements biotechnology development projects (see table 61). with industry and with academic institutions. Some of the centers are entirely Government GBF’s resources and expertise are used by indus- owned, whereas others have significant industrial trial and academic researchers, and GBF relies on commitments. other institutions, usually private industry, for services such as toxicological and pharmacological “See Chapter 16: Intellectual Propert>r La\$r,

Table 61.— Government-Sponsored Applied Biotechnology Centers in the United Kingdom

Name of center Funding (in millions) Source of funds Center for Applied Microbiology and Research (CAMR) ...... 4’ 2 ($3.5) Department of Health and Social Security, sales of products, industry contracts British Technology Group (BTG) ...... ~’13 ($22.8) Government Celltech ...... # 12 ($20) BTG (44°\o)a Technical Development Capital (14VO) Prudential Assurance (14°/0) Midland Bank (140A) British & Commonwealth Shipping Co. (14°/0) Agricultural Genetics ...... about ~’40 ($70) BTG (about one-third), Ultramar, Advent Eurofund Biotechnology Institute and Studies Centre Trust ., ...... N.A.b Government through: Polytechnic of Central London, University of College London, University of Kent at Canterbury No committed industries %TG recently released 1A percent Of its equity to the Rothschild Biotechnology Investments Group and BoO~S co. bN,A, = information not available. SOURCE M Vaquin, “Biotechnology in Great Brltaln, ”contract report prepared for the Office of Technology Assessment, US. Congress, December 1982, 320 ● Commercial Biotechnology: An International Analysis

One Government-sponsored center is the Center Government to involve industry in commercializ- for Applied Microbiology and Research (CAMR). ing the results of research in public sector As shown in table 61, CAMR is financed in part laboratories. While the company was being through the Department of Health and Social formed, it successfully negotiated exclusive access Security and in part from sales of products and to all work in the Medical Research Council, contract research. Its current operating budget where monoclinal antibodies (MAbs) were dis. is $3.5 million (&’2 million), and there are plans covered in 1975. Although the firm, which intends for expansion. CAMR has been singled out by the to concentrate on the development of MAbs for British Government to play a special role in the human diagnostic and therapeutic applications, development of biotechnology. It has well-devel- has yet to make a profit on its limited product oped and established contacts with both univer- sales, it has extensive plans for the future, includ- sities and industry and sees itself as an inter- ing the development of a continuous cell culture mediary between basic university research and bioreactor that would produce MAbs in higher production on an industrial scale. CAMR’S major volumes than current bioprocessing technologies commercial contract in biotechnology is with permit. KabiVitrum (Sweden) to scale-up and develop a Agricultural Genetics is a company similar in process for manufacture of human growth hor- design to Celltech that will commercialize re- mone using rDNA bacteria developed for Kabi by search of the Agricultural Research Council. BTG the U.S. firm Genentech. CAMR also has contracts will provide about one-third of the capital ($8.6 with Cadbury Schweppes (U.K.), Unilever (U.K.), million; -L’5 million). The industry sponsors are Technofirm Development, Ltd. (U.K.), and Cell- Ultramar and Advent Eurofund. tech (U.K.). The Biotechnology Institute and Studies Centre The British Technology Group (BTG) is a public Trust (BISCT) is a recently established organiza- corporation sponsored by the Department of In- tion that draws on the expertise of some of United dustry with the aim of supporting the develop- Kingdom’s foremost biotechnologists. Currently, ment of biotechnology by facilitating the transfer BISCT is offering continuing education in the form of technology from the laboratory to the market- of a l-year postgraduate degree in biotechnology, place (see fig. 31). BTG has committed about $22.8 short courses, and an advisory service for indus- million (1’13 million) for biotechnology projects try. It hopes to undertake research programs to date, with annual increases of $6.5 million pro- sponsored by industry in bioprocess engineering jected. BTG has four major investment areas: re- and applied microbiology (26). search support, joint venture funding, startup financing of small firms, and equity and loan fi- SWITZERLAND nancing. It is not clear what portion, if any, of Switzerland has no publicly owned research in- BTG’s funds is being used for scale-up and devel- stitute specifically for biotechnology comparable opment processes, In addition to and separate to GBF in West Germany. outside industry, re- from BTG activities, the Department of Industry ( search related to biotechnology, both basic and has initiated a 3-year $30 million ‘ Biotechnology applied, is carried out primarily in the universi- in Industry” program. ty system, which at present includes 10 institutions of higher learning. Celltech was founded in 1980 by the National Enterprise Board (now BTG), Technical Develop- The leading Swiss center for research on the ment Capital, Prudential Assurance, Midland generic applied and applied aspects of biotech- Bank, and British and Commonwealth Shipping nology is at the Federal Institute of Technology Co., with an initial outlay of $20 million (1’ 12). (ETH, Eidgenossiche Technische Hoschschule) in Recently, the BTG and Technical Development Zurich, one of the two polytechnic universities Capital released 14 percent of their equity to the managed by the Federal Government through the Rothschild Biotechnology Investments Group and Swiss School Council (Schweizerischer Schulrat). Boots Co. The establishment of Celltech repre- Headed by a former research director of the sented one of the first steps initiated by the British Swiss pharmaceutical company Hoffmann-La Ch. 13—Government Funding of Basic and Applied Research ● 321

Figure 31 .—British Technology Group Support for Biotechnology BTG Support for Biotechnology

Support research ● Joint venture funding . Minimum-fuss finance for small firms ● Equity and loan finance

Total funds committed by BTG: f13 million British Technology Group I w I

. m Technology r 1 Transfer I Small Companies I Investments Research at universities, MInimum fuss” Catalytlc Weatments with other Government, funding financial and Industrial partners and other laboratories (up to 60,000 I ! Genetic engineering Floranova Celltech Application of enzymes Cambridge Research Speywood Laboratories and micro-organisms Biochemical Dytes (RHM) Antibiotics Vaccines t Biotechnology Subject Areas Being Supported Agricultural applications 8 projects Industrial applications 8 projects Medicinal applications 17 projects Veterinary applications 4 projects Enabling technology 2 projects

Strategy for Further Investment Seek out and promote:

● Opportunities for industrial investment in downstream applications of genetic engineering and cell fusion — Low volume, high margin products — Healthcare, food production and fine chemicals Respond positively to: c Technology transfer opportunities from universities and public sector laboratories — Back a lot of starters — Involve potential industrial partners as early as possible s Opportunities for industrial investments in “biotechnology infrastructure”: — Laboratory reagents and equipment — Fermentation hardware Avoid: c Early investment in “big biotechnology” projects — e.g., heavy organic chemicals, bioenergy, and waste recovery

SOURCE Brltlsh Technology Group, Prutec Ltd., and Technical Development Capital, “Minutes of Evidence to Education, Science, and Arts Committee on Biotechnology,” H. M, Stationery Office 289iil, April 26, 1982 322 “ Commercial Biotechnology: An International Analysis

Roche, ETH proved receptive to the idea of cent), industrial contracts (33 percent), and dona- biotechnology at a fairly early date, and its depart- tions collected by the Association for the Develop- ment of biotechnology was established in 1976. ment of Institut Pasteur (7 percent). Although the One of the department’s achievements to date is Institut Pasteur is mostly concerned with basic the development of a new bioreactor design, research (e.g., projects on vaccines and mono- which is being tested along with more conven- clinal antibodies), it does support the develop- tional models in the ETH bioprocessing facility. ment aspects of biotechnology (e.g., projects on the use of cellulose for alcohol production and The channels for transfer of knowledge from biological insecticides) with industrial contracts. the universities to industry appear well established in the area of biotechnology, although the The Institut Pasteur has plans to open a new large pharmaceutical companies may not yet be biotechnology building in 1985 or 1986. This major beneficiaries of this exchange. The presi- building, which will have 3,000 square meters of dent of ETH, for example, has endorsed the prac- new laboratory space, will be used partly to re- tice of industrial contracts with professors in the house existing projects and partly for new proj- biotechnology department. Joint funding by in- ects. It will also contain bioprocess scale-up fa- dustry and the Commission for the Encourage- cilities (at present, the Institut Pasteur cannot do ment of Scientific Research provides another any scale-up work itself). The new biotechnology avenue for collaboration with the private sector, building is to be financed by the Government, but one that has been actively utilized by the ETH the Institut Pasteur will have to cover the operat- biotechnology group. The Swiss firm Biogen S.A. * ing costs, probably by increased industrial con- is not only closely linked to the Swiss university tracts, research system, but has built an important share An organization within the Institut Pasteur, G3, of its competitive strength on the productivity of was started several years ago to encourage ap- these ties (8). plied research in rDNA technology. G3 is funded FRANCE by a set of Government groups: Institut Pasteur, the National Center for Scientific Research (CNRS, France has no Government-sponsored applied Centre National de la Recherche Scientifique), the research centers like GBF in West Germany and National Institute for Agricultural Research (Insti- the ETH-Zurich in Switzerland. The Institut Pas- tut National de la Recherche Agronomique), and teur, a nonprofit organization jointly sponsored the National Institute of Health and Medical Re- by the Government and industry, is the single search (INSERM, Institut National de la Sant6 et most important facility in biotechnological de la Recherche M6dicale). G3 has no capital, can- research in France, but is primarily concerned not employ directly, and does not own any labora- with basic research. The Institut Pasteur receives tory space. It only has an operating budget. Now 47 percent of its income from the French Govern- working with a staff of only 10, G3 plans to ex- ment (Directorate General for Research). The rest pand into the new biotechnology building. The of its income comes from the sale of services: roy- work program is proposed in part by the Govern- alties from Institut Pasteur Production (13 per- ment partners and in part undertaken at the re- ● quest of industries. It is too early to predict Biogen N .1’., the parent compan~ of the Biogen group, is regis. whether G3 will contribute significantly to a tered in the Netherlands Antilles, Biogen S.A , one of Biogen N.\’. ’s four principal operating subsidiaries, is located in %vitzerland, along generic applied research program in bioprocess with Biogen N’ .\’. ’s principal executi~’e offices. technology (25). Ch. 13—Government Funding of Basic and Applied Research ● 323

Findings ——.

U.S. Government expenditures for basic research in biotechnology-the largest in the world —amount to approximately $511 million per year (mix of data from fiscal years 1982 and 1983). U.S. Government expenditures for generic applied research in bioprocess engineering and applied microbiology are estimated to be approximately $6.4 million (see table 56), although the amount could possibly range as high as $20 million or $30 million if the portions of USDA and DOE expenditures devoted to generic applied biotechnology research were known. U.S. Government funded applied research in biotechnology is virtually nonexistent, except for the SBIR program and some work being done in the National Labora- tories. Most of NIH’s solicitations for the SBIR program and about 5 percent of DOE’s are for biotechnology; if all solicitations are funded, this could total about $5 million plus. The U.S. Army has also included a major initiative for biotechnology under its SBIR program. Since none of these grants has been funded, it is too early to estimate the amounts that will be devoted to applied biotechnology research.

Data on Government expenditures on biotechnology research in Japan are the best for purposes of international comparisons. The total amount being spent by the Japanese Government for biotechnology research in Japan is about $60 million, but Japan’s definition of biotechnology is a broad one. A significant proportion of the Japanese Government’s funding is for generic applied research in bioprocess engineering. The Fed- eral Republic of Germany, United Kingdom, and France are probably spending similar amounts for biotechnology research (approximately $60 million to $100 million each), probably with relatively equal portions of basic and generic applied research.

The current pattern of U.S. Government funding for basic and generic applied research in biotechnology in the United States may compromise the U.S. competitive position in the commercialization of biotechnology. There is no doubt that past Federal support for basic research has produced a scientific infrastructure and knowledge 324 ● Commercial Biotechnology: An International Analysis ———

ment funds its own laboratories through CNRS or INSERM. These laboratories are attached to several universities. The most important center for biotechnology research is the Institut Pasteur which is funded jointly by the Government and industry and carries out primarily basic research. G3, an organization established several years ago within the Institut Pasteur, was specifically man- dated to encourage applied research in rDNA technology. It is too early to predict whether G3 will contribute significantly to the development of the field. The major lack in French biotechnology is a supply of trained researchers, because the biological disciplines have not traditionally been favored in France.

Basic, generic applied, and applied research are necessary for any country’s competitive position in biotechnology. In terms of funding of basic research, the United States is clearly the leader with the largest and most extensive basic research enterprise in the world. The United Kingdom, West Germany, and Switzerland follow, and Ja- pan is slightly behind them. France is sixth because it only now is beginning to exert a concerted effort to study molecular biology.

In contrast, the Japanese Government leads all countries in its commitment to generic applied and applied research. The West German Govern- ment also has an extensive commitment to generic applied research with the best equipped generic applied research laboratory in Europe. The United Kingdom and Switzerland follow. The United Kingdom is beginning to fund applied efforts with its support, for instance, of Celltech and Agricultural Genetics, and Switzerland, with ETH, has had a biotechnology effort since 1976. The United States ranks behind these four countries in its relative commitment to generic applied research as opposed to basic research, and is followed by France, which ranks sixth in all three categories of research. Ch. 13—Government Funding of Basic and Applied Research 325 —

Issues and options

ISSUE 1: How could Congress improve U.S. campuses of biotechnology institutes, in which competitiveness in biotechnology faculty in both biology and engineering could be by promoting generic applied re- located in the same physical structure and work search? on common research projects, could facilitate this With its continua] support of basic research, interaction. These institutes could carry out basic Congress has endorsed a Federal commitment to and generic applied research. Funding could come long-term funding of basic research that is essen- from Federal and State Governments and from tial to technological development and innovation industrial sources. Several States have already in this country. It is crucial to the U.S. competitive begun development of biotechnology centers; position in biotechnology that this commitment Federal funding might help leverage State funding to basic research continue. to bring in more industrial support. Industrialists as well as academicians could work in the insti- Over the last three decades, the Federal com- tutes; this arrangement would foster domestic mitment to generic applied research in biology technology transfer. In addition, students could and Bioprocess engineering has declined relative be trained in both academic and industrial envi- to the commitment to basic research. Researchers ronments and industry personnel could be re- in the United States have not been attracted to trained at the institutes. fields such as applied microbiology or bioprocess engineering because only small amounts of Fed- Option Z: Increase funding for university -industry co- eral funding have been available. Two critical fac- operative programs within NSF. tors underlie this decline: 1) there is no flexible, broad-based Federal system for carrying out such NSF currently has two university/industry work; and 2) there has been a steady erosion of cooperative programs. One, the Industry/Univer- these generic applied science efforts in U.S. uni- sity Cooperative Research Projects program, en- versities. courages industry/university cooperation for basic research because it will fund up to half of the The governments of the major industrial coun- cost of a grant for basic research projects involv- tries of Western Europe and Japan all possess ing the cooperation of investigators from industry generally effective and sometimes extensive and universities. The program is advantageous to mechanisms for funding generic applied R&D. industry, because it allows industry to leverage Furthermore, the university systems of these its research funding effort, and, through coopera- countries have not become as unaware of the tion, to gain a competitive edge in the innovation needs of industrial technology as have the univer- process. University researchers benefit from the sities in the United States (7). To improve U.S. program as well, because they improve their competitiveness in biotechnology by promoting awareness of industrial problems and applications generic applied research, Congress could adopt of basic research work. one or more of the following options. * The other NSF program, the Industry/Universi- Option 1: Fund one or more biotechnology institutes ty Cooperative Centers program, provides seed within universities. money for a university to set up a center in cooperation with industrial partners. Federal The interdisciplinary nature of biotechnology funding is phased out after 3 to 5 years. This pro- requires interaction among people with back- gram allows the establishment of settings that en- grounds in biology and engineering, but most courage university/industry cooperative research, American universities are not structured to fa- while market demand helps to determine the type cilitate this interaction. The creation at selected of research to be undertaken. Government fund- ● S(IIJ (’hapff~r 12 F’i:uincir]g :irld ‘1’a,l Inrf’ntitf>s for I’irms for indi- ing adds incentive for industry to fund long-term, rect funding options for R&.[1, generic applied research. The infrastructure for 326 ● Commercial Biotechnology: An International Analysis the continued implementation of the program The National Laboratories are an existing re- already exists within NSF. source, both in terms of physical plant and personnel, that would be expensive to duplicate. Cur- The peer review system for reviewing univer- rently, the National Laboratories do not have a sity/industry cooperative research projects at NSF great deal of expertise in biotechnology, Never- is separate from the system for reviewing other theless, there would be several advantages to de- research projects. Thus, the generic applied na- veloping their generic applied research capabili- ture of these cooperative research projects is ty. These laboratories have a commitment to re- taken into consideration, while high standards of search, facilities to conduct research, an objec- research are assured. tive attitude towards industrial development, an Although increased Federal funding for univer- array of personnel trained in relevant disciplines, sity/industry cooperative programs within NSF and unique instrumentation development capabil- could promote generic applied research, if the ities that could have a major impact on biotech- funding is not supplemental to needed increases nology development. DOE’s Energy Research Ad- in basic research in bioprocess engineering, the visory Board has just assessed the laboratories, cooperative program could be damaging to the and the White House Office of Science and Tech- extension of fundamental knowledge in bioproc- nology Policy is currently reviewing them. An ess engineering and applied microbiology. assessment of the capability of the National Lab- oratory system to carry out generic applied re- Option 3: Establish special grants for interdepartmen- search in biotechnology has not been a part of tal cooperative research in biotechnology. this report. This is an option for further study Currently, there is little communication be- by Congress. tween bioprocess or chemical engineers and basic biologists in universities. Special grants stipulating Option 5: Increase funding for the SBIR program. that a bioprocess engineer and a biologist be co- Increased funding for the SBIR program would principle investigators on a cooperative research foster applied research not only in biotechnology project could make researchers in these disci- but also in other high-technology areas. Further- plines more likely to conduct research on bioen - more, this program maintains the traditional phi- gineering or applied microbiology research rele - losophy of keeping much of applied research in vant the commercial development of biotech- industry and fostering entrepreneurship. nology. The grants could be administered by NSF, Two counterarguments to this option should since it has the technical personnel to administer be mentioned. First, although DOD and NSF have such a program. had programs similar to the SBIR program, the One potential problem with special grants, given SBIR program has not been in existence long current difficulties in obtaining funding, is that enough in other agencies to be evaluated. Second, the researchers might cooperate in order to write because SBIR-funded research must have com- the proposal then do essentially separate pieces mercial potential within 3 years, it is too short of research once funding is obtained. Thus, the term for problems that are generic applied, i.e., research conducted might not be truly coopera- studies that fall between fundamental research tive. Avoiding this problem would necessitate and applied research. The SBIR program, as it is carefully stated requests for proposals and careful structured, is funding research that is further on monitoring of research. the continuum toward product development than generic applied research. Although the program Option 4: Develop generic applied research capabili- is important for biotechnology because it could ty for biotechnology in the National Labora- help support small businesses that are doing bio- tories. technological research, it may not be a viable op- Ch. 13—Government Funding of Basic and Applied Research ● 327 tion for increasing support of generic applied Option 1: Increase the special DOD fund for research in biotechnology. upgrading university equipment. The purpose of DOD's fund, obligated in fiscal ISSUE 2: Should the U.S. Government fund a year 1982 and totaling $150 million over 5 years, germplasm screening program? is to upgrade university equipnlent. The solicita USDA (undpr ARS) has a network of centers for tions stipulated that the equipment nlust be for accession, storage, screening, and research on basic research, must be nlultiuser, and must cost germplasm. The \\lork at most of the centers is more than $50,000. By the closing date, proposals devoted to study of plants (the center at Fort Col totaling $645 million had been received from U.S. lins, Colo., being the largest). The center in Peoria, universities. An increase in funding \vould help Ill., however, also includes micro-organisms in its to alleviate the huge need manifested by the $645 collection. The Peoria center currently houses million in proposals. about 80,000 accessions of micro-organisms (path ogens are not included in the program) of poten One disadvantage of relying exclusively on the tial interest to bioprocesses, especially for foods instrumentation fund in DOD is that DOD a\vards and drugs. It also houses 15,000 accessions of wild are granted only to projects that are of interest plant species and is screening these for industrial to DOD. A second problenl is that DOD's fund and medical potential. Of these, 8,000 vvild species does not address equipment needs in the $10,000 have been analyzed. Since the Peoria center is a to $50,000 range. repository for patented and industrially impor tant nlicro-organisms, there is no specific program Option 2: increase the instrumentation fund within to screen these or other micro-organisms for po NSF. tentially useful genes. The National Academy of The NSF research instrumentation initiative is Sciences is currently revie\Ning the USDA germ slated for major increases in fiscal year 1984, with plasm storage program in order to evaluate the the biological sciences component up 51.9 per relative efforts spent on accession and storage cent and engineering up 109 percent (some por versus screening and analysis for potentially' use tion of which will be spent on bioprocess engi ful genes. A germplasm screening program might neering). The NSF funds \viII concentrate on multi be an oversight issue for Congress as biotechnol user equipment. Various manufacturers of equip ogy develops. ment have agreed to give NSF grantees reduced prices for purchase of this equipnlent. ISSlJE 3: How could Congress help U.S. academic institutions meet their The NSF research instrumentation initiative, needs for modern equipment and although it moves in the right direction to\vard instrumentation? reducing instrumentation needs, is a part of the There is an enormous need for modern equip awards process. That is, more money will be avail ment and instrumentation at universities, colleges, able only for NSF grantees to use for instrumen and secondary schools. Instrumentation is needed tation needs for NSF -funded research projects. In for teaching as well as research purposes, because strumentation initiatives similar in amount to teaching and research institutions have not been DOD's but without the defense-related restrictions able to meet the needs for rapidly changing tech do not exist in the United States. An instrumen nology in instrumentation. In addition, as re tation initiative within NSF or some other agen search grows more sophisticated and specialized, cy could be steadily increased over the next sev the instrumentation also grows more costly. To eral years to begin addressing the instrumenta enable academic institutions to meet their needs tion needs of teaching and research institutions, for equipment and instrumentation, Congress Some funds could be earmarked for instrumen could adopt one or more of the follo\ving options. tation l1f~eds primarily for teaching purposes. 328 ● Commercial Biotechnology: An International Analysis

. . change in the tax law to stipulate that installation

Chapter 13 references

19.

20. 6. 21. 7, 22. 8, 23.

9, 24.

25. 10.

11. 26.

1~ 27.

28.

13. 29.

14. Chapter 14 Personnel Availability and Training Contents

Page Introduction. , ...... 331 Size and Future Growth of the Biotechnology Labor Force ...... 332 Availability of Biotechnology Personnel ...... 333 Categories of Technical Expertise ...... 333 Availability of Biotechnology Personnel in the United States...... , . . . 33s Availability of Biotechnology Personnel in Other Countries ...... 336 Personnel Training ...... 339 Secondary School Education in the United States and Other Countries ...... 339 Undergraduate and Graduate Education in the United States and Other Countries ...... 340 Translational Training in the United States and Other Countries ...... 343 Midcareer Retraining in the United States and Other Countries ...... 344 Findings ..., . . . , ...... 345 Issues and Options ...... 347 Chapter 14 References...... 350

Tables Table No. Page 62. Major Categories of Biotechnology R&D Personnel in Firms in the United States ...... 334 63. Shortages in Major Categories of Ph. D. Biotechnology R&D Personnel in Firms in the United States ...... 336 64. Number of Scientists and Engineers Engaged in R&D by Country, 1977 ...... 337 65. Sources of New Ph. D. Biotechnology R&,D Personnel in Selected Categories in Firms in the United States ...... , ...... 340 Chapter 14 Personnel Availability and Training

Introduction

Adequately trained scientific and technical per personnel is the fact that companies are offering sonnel are vital to industrial competitiveness in special inducements to highly qualified person biotechnology. Countries lacking highly skilled nel. Many companies have given their scientists personnel cannot have companies that compete and engineers considerable freedom with respect internationally in highly technical operations such to the pace and direction of their work. U.S. firms as the design and manufacture of a computer~on using biotechnology stress the independence and troiied hioreactor, the discovery of a ne\v hio flexibility of the work environment in order to chemical path\vay for the production of a special attract qualified personnel from academic envi ty chemical, OJ' the development of a micro ronments (11). In Japan, companies that persuade organism ihai produces a desired proiein. Japanese doing academic research abroad to re turn promise them a flexible research environ An important factor in the success of companies ment (35). attempting to commerci~lize hiotechnology is the degree of sophistication of their research and de As background for the analysis that fo11o\vs, the velopment m&,D) personnel \ivith respect to state first section of this chapter discusses the quanti of-the-art developments in the field. Despite the ty and types of scientific and technical person fact that there is no "typical" firm or organiza nel needed for the commercial development of tional structure among the firms using biotech biotechnology. The second section compares and nology, most corporate activity in ne\,\' biotech contrasts the availability of especially important nology at present is dedicated to R&D. * Thus, for categories of personnel in the United States and example, a July 1982 report on a survey of Califor four other countries commercializing biotechnol nia firms using new biotechnology estimated that ogy-Japan, the Federal Republic of Germany, 63 percent of the employees in these companies United Kingdom, and France-\Nhile the third sec \vere professional and technical personnel in tion compares the training systems in biotechnol volved in R&D (1). * * The other employees were ogy-related areas in these countries. Also pre clericai workers (17 percen!), managers (15 per sented is the information that is available on cent), and floor-level production and maintenance Switzerland. In the concluding section, congres workers (5 percent). sional issues and policy options \vith respect to the training and retraining of U.S. personnel in An indication that the commercial developrnent biotechnology are outlined. Because the amount of biotechnology is highly dependent on skilled of government funding of specific research areas ·Spp (Jlajj!i:r 4: f'jrins {~DjnnU;rcjaJjzjijg BioleclliJoJogJ; for a can attract or discourage students from entering description of the firms involved in the development of biotech· those areas, the reader may wish to review nology in the llnited States and other countries. Chap • 'This survey identified 50 companies and interviewed a simple ter 13: Governnwnt Funding of Basic and Applied rand0!11 5an1p!e of 10 firTns (20 percent). .~n \\Jere ne\v bioter~hnology Research. firms. as defirwd in Chapter 4: Firms Commercializing Biotechno}o!{\·. The survey's definition of biotechnology \vas "the use of living organisms or thpir ('omporH'nts in industrial processes."

331 332 Commercial Biotechnology: An International Analysis

Size and future growth of the biotechnology labor force

It is very difficult to estimate the size of the technology activities from their answers to the biotechnology labor force, Theoretically, the num- questionnaire. To estimate the total number of ber of personnel in supply and technological sup- firms engaged in biotechnology in the United port firms, which is approximately four to five States, OTA determined which of the 153 nonre- times that of firms commercializing biotechnology sponding companies were engaged in biotechnol- (11), should be included in the estimate. This chap- ogy by telephoning the companies, examining an- ter, however, focuses exclusively on the person- nual reports, reading newspaper reports, etc. nel requirements for professional and technical OTA's estimate of the total number of companies personnel of firms commercializing biotechnol- engaged in biotechnology activities in the United ogy. It does not consider the requirements of sup- States is 219. * ply and technological support firms, the vast ma- As of April 1983, the 95 companies that re- jority of which market products not only to com- sponded to the OTA/NAS survey employed 2,591 panies commercializing biotechnology but to individuals in industrial biotechnology R&I). other companies as well. These 95 firms represent 43 percent of the 219 A July 1982 report estimated total U.S. private firms in the United States estimated to be engaged sector employment in “synthetic genetics” to be in biotechnology activity. Extrapolation of this

3,278, * including about 2)000 “professional and number suggests that the number of individuals technical” employees (1 1). The same report esti- employed in biotechnology R&D in all 219 com- mated that U.S. private sector employment in panies using biotechnology could be about 5,000. “synthetic genetics” had grown at a rate of 54 per- The 95 firms that responded to the survey indi- cent annually since 1976 and projected that total cated plans to hire an additional 1,167 technical- employment would reach about 40,000 in 1992. ly trained employees over the next 18 months.** OTA estimates that about 5,000 employees are No company indicated plans to reduce the num- employed by companies in the United States in ber of technically trained employees in the next biotechnology R&D. In April 1983, OTA and the 18 months, so this figure represents an annual National Academy of Sciences (NAS)* * conducted employment growth rate approaching 30 percent a survey to determine the personnel needs in bio- (not including any new companies formed in the technology of companies in the United States. The next 18 months). A 30-percent annual growth rate questionnaire, reproduced in Appendix E: OTA/ in the number of R&D personnel probably will NAS Survey of Personnel Needs of Firms in the not be sustained over any length of time, so it is United States, was sent to 286 companies. of the unlikely that the commercialization of biotechnol- 133 that responded, 18 indicated that they were ogy will lead directly to large increases in employ- not engaged in biotechnology activities, and 20 ment in the R&D sector. The need for marketing others were determined not to be engaged in bio- and sales personnel and the potential for spinoff industries are difficult to assess at this time. “This numher wirs irrrived at h~ taking estimates of total \\orld- However, these sectors could be high-growth sec- wide shipment of I)iotechnologv produrts estimated for the targrt tors for biotechnology. .vcar from (YI’A’s 1981 report lrnjxrcts of Applied (A)eli(w: ,} firro- (~rgani.srns, P/drItLS, and Animals (40). “1’his w+timat(~ was con~’(:rted to en]ploynwnt of production wwrkw-s t)~’ using cirse stud: (Litir from the sirrnc ()’I’A report, Next, this rwtimatc was (vn~erte(i into total ———— employment, including nonproduct ion workers, t)} utilizing dat;i *k’or” ii list 01 rompanies (~llgaged in t)iot(~(hnolog~” in the [ Tnitwl for established industrim h’i[~iill}’, total ~torldwid(’ tvl~pk)~nwnt \\iis States, see .4ppf’ndi,l D: [r]df~.1 of k’irms {~[}rl]f]]fll’(>i;ilixjll~ suhdii’idmi and ii wf~ightrd illlOCatiO1l ma(if~ to thf> [ Initmi Stilt(>S Biote(’htmlogl in the [ lnitf~d St,7tf~s

* “NAS (k)n)nlitt(w on National Needs for Bionledi(’i]l and Ik’hii\’101’al “ ● F’or i) tabulation of the numbers iin(l t~”prs of enlplo~wtjs tht?st> Researrh i+rsonnet; Rohert Barker, (k)rnel] L{nii(’rsit:’, (:halr of (’orllpi]rli(>s indicatfxi they pianrmi to hir(l, set> question 4 in ,4ppwx/i.\ P{lrl(l] orl ~asi(. Bionledi(.al P(>rsonnel 1,; [1’1;4 51,4.% .Sunqb of Per-somjel ,i’(w].s [)t” [lIW)L% it] tjjt~ [ ‘I]it(yj ,St;)tf~,~ Ch. 14—Personnel Availability and Training ● 333

- ● F’[’l(llllcill (’11(’S ii 1 !)8(1 l-(’~)ol’t t))’ 11)(’ Niillollill IIlstitl]tt’ to]” ()(’(’ll~)ii t loIliil Silf(’t}’ ;111(1 ti(>iiltl~ (NI( )S1 I ) in it’hl(’!l NI()S11 1’(’~X)l’t(>(i 011 d S(’tl(”l’lllg-IJlol] $tl ([ ‘ S ) pl’(}(’f%s for” prm(iucing h~llllii!l hwkoc}’1(” 1rltf>r’- t(’rx)r) onl) \rx p(’oplc werxl ,issrgnfd to production, iirl(l prxhbl} all irk m (11’(’ rl{)t rlewll’(1 to rnorlitor-” tllc t)rol)rwcf’st I 11 I

Availability of biotechnology personnel 334 . Commercial Biotechnology: An International Analysis —

Table 62.—Major Categories of Biotechnology R&D Personnel in Firms in the United States (OTA/NAS Survey) — Employees to be hired Present employees in the next 18 months Area of technical expertise Number Percent of totala Number Percent of totala Areas related to genetic manipulation: rDNA/molecular genetics ...... 586 230/o 302 250/o Hybridoma/monoclinal antibodies ...... 247 10 146 12 Plant molecular biology...... 76 3 63 5 Areas reiated to scale. upldownstream processing: Microbiology b ...... 334 13 160 13 Biochemistry c ...... 326 13 125 10 Bioprocess engineering ...... 186 7 100 8 Areas related to all aspects of biotechnology: Enzymology/immobilized systems ...... 219 9 59 5 Cell culture ...... 187 7 66 5 aThe total “umber of ,nd”~trial ~er~onnel (currently engaged ,n FI&D in new biotechnology) identified in the OTAINAS survey was 2,591, The total number Of perSOnnel bto be hired in the next 18 months, according to the survey responses, was 1,167 (see app. E) Mlcroblology, as used In this table, combtnes the OTAINAS survey responses to industrial microbiology and general microbiology (categories g and s of the survey questionnaire reproduced In app E) cBlochemlst W as used ,n this table combines the OTA/NAS survey responses to analytical biochemistry and general biochemistry (categories j and k of su~ey ques- Ilonnalre reproduced In app E) SOURCE Off Ice of Technology Assessment of products will become increasingly important microbiology are generally considered to be more as companies developing commercial applications applied science disciplines than are molecular of biotechnology move into production. Although biology and immunology. few companies have reached the scale-up stage As shown in table 62, the OTA/NAS survey of for new biotechnology products to date, * a firms in the United States found that bioprocess substantial amount of R&D in companies develop- engineers constitute approximately 7 percent of ing commercial applications of biotechnology is the current biotechnology R&D work force and related to scale-up, will constitute 8 percent of all new hirees over As shown in table 62, about one-third of the bio- the next 18 months. Specialists in microbiology technology R&D technical personnel at the 95 constitute 13 percent of current employees and companies responding to the OTA/NAS survey are 13 percent of the employees to be hired in the specialists in areas related primarily to scale-up next 18 months. Biochemists constitute 13 per- and downstream processing: bioprocess engineer- cent of current employees and will constitute 10 ing, biochemistry, and microbiology. Bioprocess percent of new hirees in the next 18 months. engineers are needed to design, construct, and maintain scale-up equipment and bioprocesses. SPECIALISTS IN ALL ASPECTS OF Biochemists (apart from enzymologists, discussed BIOTECHNOLOGY: ENZYMOLOGISTS AND CELL below) are involved in the recovery, purification, CULTURE SPECIALISTS and quality control of protein products. Microbiol- Enzymologists and cell culture specialists are ogists are needed for the isolation, screening, and important for many aspects of biotechnology. Ad- selection of micro-organisms having particular vances in the understanding of enzyme structure catalytic properties. Such specialists are also and function are important in developing the po- needed to determine the optimal growth and pro- tential of biocatalyst for product formation. Cell duction conditions for micro-organisms in order culture is used at early R&D stages, but it is be- to facilitate the design of environments that max- coming increasingly important for the large-scale imize the micro-organisms’ productivity, In the growth of higher organism cells, especially hy - context of the commercialization of biotechnol- bridomas. As shown in table 62, according to the ogy, bioprocess engineering, biochemistry, and OTA/NAS survey, enzymologists constitute 9 per-

“In 1982, about 2 percent of all biotechnology workers in Califor- cent of current biotechnology employment in nia were production workers [1 1). R&D; cell culture specialists constitute 7 percent Ch. 14—Personnel Availability and Training ● 335 of current biotechnology employment. Both cat Despite the abundance of personnel in the basic egories of specialists constitute a smaller fraction biological sciences in the United States, partici of future biotechnology hirees (.5 percent each) pants at tvvo recent National Science Foundation than they do of current employees. (NSF) workshops * expressed concern that the United States currently may not have enough A vailability of biotechnology well-trained bioprocess engineers necessary for personnel in the United States design and monitoring of biological scale-up proc esses (27). A shortage of highly trained bioproc Of the countries studied, the United States has ess engineers in the United States, \vorkshop par the largest number of specialists in genetic ticipants suggested, could be a bottleneck to the manipulation. The large supply of \vell-trained rapid commercialization of biotechnology in the molecular biologists and immunologists in the United States. The NSF workshop participants also United States is one reason for the rush of small pointed to an insufficient supply of industrial company startups and the initial American lead microbiologists. Between 1979 and 1981, the num in biotechnology. A primary reason for the large ber of industrial microbiology positions listed in number of basic life science specialists in the the United States nearly doubled, while the num United States is that for the past three decades, ber of doctorates in "microbiology and bacteriol there has been substantial support from the U.S. ogy" has remained constant for the past 15 years Governnlent, primarily from the ~ational Insti (4). As shovvn in table 63, the results of the OTAI tutes of Health (~IH), of basic research in the life NAS survey also suggest that the United States sciences (26). In 1978, for instance, while the may be experiencing shortages of bioprocess engi governments of most other developed countries neers: 11 of the 26 U.S. companies planning to \""ere putting 2 to 4 percent of their R&D expend hire Ph. D. bioprocess engineers in the next 18 itures into health-related basic research, the months are experiencing shortages. The OTAINAS United States \vas putting 11 percent of a much survey results \vith respect to shortages of micro larger R&D base into health research (26). U.S. biologists are more equivocal. * * Government funds have strengthened the foun Shortages in bioprocess engineers, and possibly, dation of basic life science research, produced industrial microbiologists, may be due in part to trained graduates, and generated an infrastruc the fact that in the past three decades, there has ture for U.S. industrial grovvth in molecular been relatively less Federal support for applied biology (12). The dominance of the United States microbiology! applied biochemistry, and bioproc in the life sciences is supported by scientific and ess engineering research than for basic research technical article publishing data. In 1979, U.S. in molecular biology, biochemistry, and immunol authors published 40 percent of the \vorld's arti ogy. Thus, university research activities have been cles in biology and 43 percent of the world's ar guided by Federal funding t(J\vard basic biological ticles in biomedicine (26). research and away from these applied disciplines. The results of the OTA/NAS survey of U.S. in The shortages may also reflect the fact that U.S. dustrial biotechnology personnel needs reflect, industrial support for university R&D in applied \vith fevv exceptions, the United States' abundance biology and bioprocess engineering has declined of personnel trained in basic biological science. in the past three decades (12). After \Vorld \Var Relatively few of the 95 companies responding to the survey indicated that they were experienc '''Pl'Ospects for Biotechnology ," llni\'el'sit~' of \'irginia, Apr. 5·(), ing shortages of biochemists, pharmacologists, 1982; "Developing the Biotechnology Component of Engineering," and toxicologists, who will be needed for the pur North Cal'Olina Biotechnolog,v Center, Apr. 24·2;', l~HU, '"Results concerning p('rsoI1Iwl shortages froIll tlw OT:\':\:\S sur ification, recovery, and testing of biotechnology vey al'e equivocal bec

Table 63.—Shortages in Major Categories of Ph. D. Biotechnology R&D Personnel in Firms in the United States (OTAINAS Survey) Number of firms Experiencing shortages Experiencing shortages Not experiencing shortages Area of technical and plan to hire in and do not plan to hire in but plan to hire in expertise (Ph. D.) the next 18 months the next 18 months the next 18 months Bioprocess engineering , ., . . . 11 1 15 Recombinant DNA ...... 10 1 29 Gene synthesis ...... 7 3 7 Plant molecular biology...... 4 4 15 Industrial microbiology ...... 3 4 14 SOURCE Office of Technology Assessment

II, U.S. chemical companies switched from bio- The shortages in biotechnology personnel in the mass to petroleum feedstocks and consequently United States may be partially counteracted by decreased their demand for bioprocess engineer- a flow of skilled foreign personnel into the United ing and applied biology programs. Conditions in States. * A representative of one U.S. company Japan, the Federal Republic of Germany, and the stated that of the company’s R&D staff of 130, United Kingdom have differed markedly from 13 were foreign nationals (9 Ph. D.s). The foreign those in the United States; in these countries, both nationals were from Taiwan, India, Canada, and public and industrial support have helped main- Hong Kong, and had expertise in nucleotide chem- tain a strong academic base for the microbial and istry, applied microbiology, and bioprocess engi- bioprocess industries over the past several years neering. U.S. companies using biotechnology (12). might be hiring an even greater percentage of foreign technical personnel if cumbersome and The late David Perlmann wrote in 1973 (8): strict immigration regulations did not exist. The interest in the U.S. has shifted in the past 20 .Years toward molecular biology. Few students Availability of biotechnology are being trained for the fermentation industries. In the long run, this has worked to the disadvan- personnel in other countries tage of the industries. Unless present trends in The number of scientists and engineers engaged the U.S. are reversed, we can expect that in the in R&D activities in the United States, Japan, the future it will be desirable to send our students to Japan to learn the techniques that will assure Federal Republic of Germany, the United King- the continuation of the fermentation industries dom, and France is shown in table 64. As can be in the United States. seen from that table, in 1977, the United States had more R&D scientists and engineers than any This situation does not appear to have changed of its principal competitors in biotechnology. much in the last 10 years. Japan had the second largest number, with half The OTA/NAS survey also showed that 10 of that of the United States. The size of a country’s 39 companies planning to hire Ph. D. specialists R&D labor force is one measure of a nation’s R&D in rDNA in the next 18 months are experiencing capacity. It is only an approximate measure, how- shortages. Much of the R&D activity now in the ever, because it does not take into account such commercialization of biotechnology is in this area, factors as the level of sophistication or specializa- and, thus, the demand for these specialists is high. tion, utilization, or productivity of a country’s However, as companies move toward production, R&D personnel. Furthermore, these data cannot the demand for scale-up and downstream proc- — essing specialists will increase, while the demand “Reliance on foreign R&D personnel has been common in other for the more basic scientists will not. Thus, the L},S, high.tmhno]o~v industries. Many semiconductor and COrnPUter current shortages of bioprocess engineers and in- companies hire foreigners in order to compensate for shortages of LI.S. e]ectrica] engineers. Al [rite] (L’.s. ), for instance, 50 percent of dustrial microbiologists are considered to be more the engineers holding M.S. degrees and 64 percent of the engineers serious. with Ph. D.s are foreign ( 15), Ch. 14—Personnel Availability and Training . 337

Table 64.-Number of Scientists and Engineers Engaged in R&D by Country, 1977

Number of Scientists and engineers Country scientists and engineers as percentage of work force United States ...... 573,900 0.580/o Japan ...... 272,000 0.50 Federal Republic of Germany ...... 111,000 0.44 United Kingdom...... 80,700a 0.31 France ...... 68,000 0.30 a1975 SOURCE National Science Foundation, Scierrce Indicators, 1990, Report of the National Science Board, Washington, DC , 1961 be dissected into the percentage of biological per- tion is particular unique for Japan, a country sonnel. noted for a lack of personnel mobility. The extensive effort exhibited by Japanese companies There are few statistics documenting numbers seems to have overcome the personnel shortages of specific types of biotechnology personnel in documented a few years ago. countries other than the United States. For that reason, shortages and surpluses in foreign coun- The supply of bioprocess engineers and industries are difficult to identify. Nevertheless, distinct trial microbiologists is larger in Japan than in any patterns with respect to the availability of biotech- of the competitor countries. Japanese Govern- nology personnel in foreign countries can be dis- ment officials monitoring biotechnology have in- cerned through an examination of available gov- dicated that the supply of personnel to handle the ernment policy documents and other supporting challenges of scale-up in Japan is not an area of evidence. concern (19)35). In fact, a major proportion of biotechnologists in Japan have their background in JAPAN microbial physiology, an area of neglect in every Several experts noted that in the early 1980’s, country examined here except Japan (29). Japan experienced a shortage of experts in genet- The specialties of bioprocess engineering and ic manipulation. This shortage was undoubtedly industrial microbiology are strong in Japanese due to the inadequacy of the basic biological sci- universities in part because the specialty chemical ences in the universities. * Japanese universities and other industries using traditional bioproc- have received limited Government support for ba- esses in Japan have kept the demand for gradu- sic research, so most Japanese universities have ates in these specialties high. After World War not developed extensive research programs in the II, when chemical companies throughout the basic biological sciences. Japan’s public universi- world largely switched to processes using petro- ties have been a relatively minor source of highly leum feedstocks, Japanese chemical companies retrained personnel in rDNA and hybridoma tech- tained some processes using biomass feedstocks niques (35). Thus, Japanese companies have had and came to dominate the international amino to look to other sources of trained basic biological acid market. Furthermore, applied biology depart- scientists. Some companies have started in-house ments at Japanese universities have kept in close training programs. Japanese companies have also contact with industry representatives. Each year, hired Japanese researchers from abroad, sent em- 75 students in applied biochemistry graduate ployees to be trained abroad and at Japanese from Tokyo University alone; half go on to grad- universities, and recruited midcareer researchers uate studies, and half of these go beyond their from other Japanese companies (35). The last op- M.S. degrees. Most are employed by Japan’s lead- “There is little communication between the basic and applied ing bioprocess companies (35). srirnc(> departments in Japanese uni~’ersities Onl} t hr app]ie(i wience departments hat’r traditionally’ maintained close relation- FEDERAL REPUBLIC OF GERMANY ships urith industry, k’or a more extensi~v description of the Japanese uni~ersitj sjstem and its relationship ~~ith inciustr}’, see [.’hapter The Federal Republic of Germany has sufficient 17: [ ‘[Ii\er.sit.\,7r1d11stq\ Relationships personnel to compete with the United States and 338 Commercial Biotechnology: An International Analysis ——

other countries in biotechnology. It is possible that ported by MRC are internationally prominent in there are some shortages of molecular biologists the development of rDl\'A and hybridoma tech with expertise in rONA and hybridoma research. nologies. Nevertheless, there may be shortages However, according to Norman Binder, the of molecular biologists if the industrial develop cabinet head of the German Ministrv of Science ment of biotechnology expands rapidly (2l. and Technology (BMFT, Bundesministerium fiir Like Japan and the Federal Republic of Cer Forschung und Technoiogiel, the training of peo many, the United Kingdom has a good academic ple in rONA and hybridoma technology is no\v base for training bioprocess engineers. Ne\'(~r a high priority in West Germany (21). theless, the United Kingdom appeal's to be expe The Federal Republic of Germany's supply of riencing a shortage of bioprocess engineers (2). personnel in specialties related to scale-up and A brain drain from the United Kingdom is viewed bioprocessing appears to be adequate. Like Japan, as partially responsible for this shortage. Many the Federal Republic of Germany maintained a British biotechnologists are leaving for the United steady supply of both industrial and government States, Svvitzerland, and other countries of the funding for applied microbiology and bioprocess European Economic Community, because suffi engineering after World War II. According to cient posts do not exist in the United Kingdom BMFT, however, the number of both bioprocess at present and salaries in the l fnited Kingdom are engineers and industrial microbiologists in Japan not competitive vvith those in other countries (451. surpasses the number in \lVest Germany (21). \Vhen the Swiss company Biogen S.A. * advertised for ~HJ molecular biologists, half of the 600 applica Like the United Kingdom (see below), the Fed tions they received \vere \vell-qualified British (451. eral Republic of Germany is concerned about a brain drain of biotechnology R&D personnel to Analysts estimate that a total of between 100 other countries. According to the Max Planck So and 1,500 experts in some aspect of biotechnologv ciety's senate and the present Minister of Re have left the United Kingdom over the past sev search and Technology, shortages of suitably eral years (30). Governmental institutions are tak qualified workers in West Germany are partially ing active measures to counteract the brain drain. due to a brain drain to the United States (9,37). The Research Councils, the United Kingdom's The brain drain of scientists from West Germany, public research institutes, have adopted an active however, appears to be less serious than that policy of encouraging scientists from the United from the United Kingdom. Kingdom who have spent time in industry abroad to return home. The Science and Engineering Re UNITED KINGDOM search Council (SERC) maintains a list of British Like the United States, the United Kingdon1 biotechnologists outside the United Kingdom and boasts both qualified personnel and excellent may be taking measures to encourage them to training and education programs for personnel return (30), and MRC has announced publicly that in the basic life sciences. In the 1950's and 1960's, it \vill provide laboratory space and allow reen there was considerable expansion of basic life try into the career structure without penalty for science research in British universities. By scientists who return to the United Kingdom (45). 1972-73, health-related R&D, supported mostly by the Medical Research Council (MRC), had risen SWITZERLAND to 5 percent of the British Government's R&D The access to distinctive universities and the budget, nearly hvice the percentage of Japan, the high standard of living in Switzerland attract Federal Republic of Germany, or France (26). * highly qualified personnel from around the world MRC's past investment in biology is now paying to participate in S\viss biotechnology. Although off. Molecular biologists and immunologists sup- the availability of personnel may not be impor-

'Since 1973, Government expenditures in the United Kingdom * Biogen S !\.,A, is one of the tour principal operating subsidiaries for healih·related reseal'ch have dl'Opped and are now equivaieni of Biogenlli(~gen :\I.V.,N.\’,, whichwhirh is registered in the I\'ethedandsh’etherlands Antilles. BingenBiogen to those of the other foreign countries studied he/'{~ (261. ;-..;X .\'.\’ is aboutatmut 80-percentM)-per(wnt II[ 1 .S.,S. -owned.-mtnml. Ch. 14—Personnel Availability and Training ● 339 ——

Personnel training —.

education in the other countries

● F’ot gfIn(JI’al information” on s(’ience an(i engineering f~clucalion an(l personrwl i[ltf>l’Ilii tloIlall)”, S(X’ (39) —

340 ● Commercial Biotechnology: An International Analysis —

nology. Nevertheless, interest in plant molecular biology is increasing dramatically. Botanists are learning the new techniques, and biomedically trained researchers are applying their expertise to plants. Because of the separation of agricultural researchers and plant molecular biologists in the United States, however, there are problems of communication between these groups which may slow research advances (34). There is a growing concern that a shortage of plant molecular biology professors in the United States could result from a drain of Ph. D. plant molecular biologists from U.S. universities to industry (25). As numerous companies have started efforts in plant molecular biology and existing companies have expanded into plant molecular biology, industry has been competitively recruiting university researchers. As shown in table 65, according to the OTA/NAS survey, all of the companies wanting to employ Ph.D. plant molecular biologists intend to hire from academia, and half intend to hire from industry as well. Bioprocess engineering education in the United States, now almost exclusively provided in university chemical engineering departments at the graduate level, * is closely tied to training opportunities in chemical engineering (12). Between 1970 and 1980, the number of Ph. D.s graduating in chemical engineering declined by nearly 25 percent, and the bioprocess subset of the chemical

“~!t the undergraduate lek’el, there are only two accredited bioengineering (distinct from biomedical engineering) programs in the IInited States, one at the LJni\erSity of Illinois at Chicago and one at ‘1’exas A&%!.

Table 65.—Sources of New Ph. D. Biotechnology R&D Personnel In Selected Categories in Firms in the United States (OTAINAS Sumey)

Companies planning to Companies planning to Companies planning to hire from industry hire from academia retrain current staff Area of technical expertise Percent Percent Percent (Ph. D.) Number of totala Number of totala Number of totala Recombinant DNA ...... 15 380/o 35 84 ”/0 3 7“/0 Gene synthesis ...... 9 64 13 93 3 21 Industrial microbiology . . . . . 11 67 13 81 2 13 Bioprocess engineering . . . . 19 86 11 50 2 9 Plant molecular biology . . . . 9 50 18 100 3 17 af+efer~ t. percent of ~ompanie~ that both indicated plans to hire in the specialty area and revealed the sources from which they would hire new Personnel, Many companies indicated more than one hiring source for each specialty area. SOURCE: Office of Technology Assessment. Ch. 14—Personnel Availability and Training ● 341

engineer category probably declined propor tional universities, but has no plans to expand its tionally. At most, only about 10 percent of the graduate enrollment in biology (22). recent M.S.s and Ph. D.s in chemical engineering The distinction between basic and applied sci are ready to enter the bioprocess industry with ence departments at Japanese universities is great. out additional formal training (3), At Tokyo University, for example, basic and ap The decline in the number of Ph. D.s graduat plied science departments are located on separate ing in chemical engineering in the United States campuses and have little interaction. Further in part reflects declining graduate student enroll more, professors in pure science areas such as ment. Because industry salaries are quite high for biology are proud of their independence from in bachelor's degree engineers, fewer and fe\ver dustry (35). There is little direct correlation in people have gone to graduate school. Another Japan between university basic sciences curricula reason for the decline is a shortage of engineer and corporate personnel needs. Special interdis ing professors. Most American universities do not ciplinary biotechnology programs combining pay salaries comnlensurate with industry. Cur basic and applied sciences have not been insti rently, there are 1,600 faculty vacancies at U.S. tuted at Japanese universities." engineering schools in all disciplines (43). Partic Because of Japan's need to generate and trans ipants at a 1982 workshop on biotechnology spon fer basic science to industry more rapidly, the sored by the University of Virginia and NSF T'lrVlnnCn (~f"'nT'nrnnnt ;c 'lttnrnnt;nn' tn nnr1 thn ;C'n_ agreed that the shortage of faculty in engineer JUpUJU~.""""'V '-fU\'vltltJJt..JIJl 1~ UlLLIJJpLIJJF> tl.l "-~JIU llfC 1~~.1- lation of Japan's basic research. Japan's Science ing is a more pressing problem for the long -term and Technology Agency (STA) funds "Leading educational stability of the United States than the Tp('hno!oo'u" (""pn::lt",, (~ii,If",,1 nroiP('t" th::l t declining engineering graduate student enroll ... lLJ''-' ..... a'-' ...... ,~.)' ,LJ'-' ...... 'L4.~L.J''-4 '--... &J~LLr'-A' p.I. '-'}'LJ' ...... LI'I LA ....a ... allocate research responsibilities behveen univer ment (28). sity and corporate laboratories, but this funding has not vet heen annlierl to the hiotechnoloe'v According to the OTA/NAS survey of firms ------..} ------rr------O.. f using biotechnology in the United States, Ph. D. field. STA is also funding a ne\v program called bioprocess engineers are in high demand by in the Nmv Technology Development Fund (Shingi dustry (see table 63). If incentives for Ph. D. bio iutsu Kaihatso Jigyodan) that \vas established to process engineers to remain in the academic field help companies conlmercialize university are not improved, the loss of these Ph. D.s to the generated research. The Government has also private sector may reach the point that the Ameri proposed building two new biotechnology centers can Society for Engineering Education refers to open to private sector corporations through as "industry eating their seed corn" (32). If the universities. Each researcher \vill conduct re United States is to produce high-quality Ph. D. search in his or her own laboratory, hut exchange engineers, salary money and research funding for of information between the corporate and aca engineering faculty, as well as a restructuring of demic researchers "vill take place on a regular bioprocess engineering education emphasizing in basis (35). terdisciplinary training may be necessary. National laboratories supported by the Agen JAPAN cy for Industrial Science and Technology of I\HTI Onl"'f\llT'!Hl'o tho flf\\A/ f\f nOT'cnnnol ;ntn ;ntOT'rl;c£';_ vI.l'--'-'U.l u~'-' L.l.l'v .lI.U'-" '-...1'.1 pV.l LJ\J.lJ.I.lLJl IlllU IIJlLl Ul.:J'-'I- In Japan, training in basic biology research is plinary generic applied research. The national relatively weak. The director of the nevv Bioin laboratories provide a place for university pro dustry Office of Japan's Ministry of International fessors; Government researchers; and corporate Trade and Industry (MITI) has listed as one of his researchers to work together. These laboratories primary concerns the state of basic biology re have been especially important in the develop search in Japan. However increased Japanese Gov ment of agricultural sciences and applied micro ernment funding for such research is not ap biology I because there are fe\v private institutes parent. The University of Tsukuba, the heart of a new $5 billion "science city" 37 miles north of

Tokyo, has the largest budget of Japan's 95 na- 'Spp ChapteI' 17: lTnin'I'sity7ndllstr:\, HelatiolJship.~ 342 Commercial Biotechnology: An International Analysis

carrying on significant research in these areas chemistry or microbiology (21). In August 1981, (35). BMFT policy called for greater interdisciplinary cooperation among biologists, chemists, medical FEDERAL REPUBLIC OF GERMANY experts, and engineers (21). In the Federal Republic of Germany, three types of nonindustry laboratories conduct basic re UNITED KINGDOM search in biotechnology: 1) laboratories belong The United Kingdom's system of funding re ing to universities, 2) laboratories dependent on search in biology and the medical sciences at BMFT for operating expenses and on the German universities has produced highly trained person Research Society (DFG, Deutsche Forschungsge nel in rDNA and hybridoma technology for indus meinschaft) for project support, * and 3) labora try. Furthermore, the country's Plant Breeding tories in institutes supported by the Max Planck Institute is considered a model for interdiscipli Society (Max-planck Gesellschaft zUr Forderung nary research on piants. Uniike the United States, del' Wissenschaften), which in turn receives sup therefore, the United Kingdom is probably not port from BMFT. suffering interdisciplinary training problems in piant moiecuiar bioiogy. Although laboratories supported by BMFT and DFG, such as the Cancer Research Center at Hei Many British universities have programs in bio delberg, carry out important biotechnology process engineering. Bioprocess engineering has related work, institutes funded by the Max Planck been taught at the postg"raduate le~el at Urtiver Society are responsible for the bulk of basic sity College in London and Birmingham to biolo research advances in biotechnology. The Max gists and biochemists for nearly 20 years. Further Planck Institute for Plant Breeding Research in more, at least 10 to 15 university centers are now Cologne, which recently received an unrestricted involved in postgraduate biotechnology education, grant froo1 Bayer, boasts some of the best plant and these centers are receiving extra money from genetics teams in the world. BMFT would like to the University Grants Committee. One of these, see closer cooperation between the Max Planck the Centre for Biochemical Engineering and Bio institutes and industry (21). technology I was set up by three universities both to acquire new laboratory space and to launch The center for generic applied research in bio new courses. Imperial College in London set up technology in the Federal Republic of Germany the Centre of Biotechnology with four new faculty i" thp ~nf'iptv fnr Rintpf'hnnlno'if'::Il Hp"p::Irf'h (f:RF ALI ~ .... '--' 1o..J'-"'-"A'-""',.l ...... , ...... , ...... , .. ""''-'' ...... ''''&'-'0 ...... ,'-'& ""II.'-..Ju"-",,,,.a '-'&& ''-...JI~'''' , positions. This center will work with other depart Gesellschaft fUr Biotechnologische Forschung). ments of the college involved in biotechnology to GBF is a Government -supported private institution launch a biotechnology masters course. Funding that was founded to conduct generic bioprocess for bioprocess graduate research and training in ing research to meet the needs of industries (23). Britain's universities is also being provided by In 1972,89 percent of its $13 million (DM31.6 mil SERC. SERC has plans to fund four new special lion) came from BMFT (14). ized bioiechnoiogy courses in universities, which Among the factors cited to explain Germany's will all contain elements of bioprocess engineer slow entry into biotechnology is an educational ing. SERC will fund a maximum of 60 places for ~ __ .-l ___ £ __ ... __ .-1 __ .... ___ .-1 ~ __ --.l ___ .... ___ ~ ______~_---.11 __ sysiem ihai prevenis ihe kind of inierdiscipiinary grauuale SluuenlS, ailU Inauslry IS encouragea oy cooperation that is viewed by most experts as the Government to finance more places (45). essential to the development of this field (21). British universities have 30 to 40 teaching staff Because of the traditional separation of technical who teach biotechnology (including bioprocess faculties from arts and science faculties in West engineering) on a full-time basis and a much Germany, bioprocess technicians, usually located :~ .~~1-..~:~~1 ~~1-..~~1~ ~~~~1 .. ~~~~ :~.~ ~~~.~~ ••• ...:.1-.. greater number of teaching staff who devote 111 It;LI11IJLdl 1)LIIUUI1), Idl-t;IY LUIIlt; IlllU LUllldLl Willi varying proportions of their time to teaching colleagues holding university appointments in bio· biotechnology. According to bioprocess expert

'See Chapter 13: GOl't~rIlI1Wnt Funding of Basic and Applied Malcolm Lilly, the United Kingdom has more Research. teaching biotechnologists than the United States Ch. 14—Personnel Availability and Training 343

Transnational training in the United States and other countries

A trend evident in many scientific and technical fields, including biotechnology, is the training of increasing numbers of foreign students in the United States. In 1982, foreign students constituted 2.6 percent of the total U.S. university enrollment, and 23 percent of the foreign students enrolled at U.S. universities were studying engineering. In 1981, for the first time, more foreigners than Americans received doctoral degrees in engineering in U.S. graduate programs (15). The proportion of foreign students in Amer- ican postdoctoral engineering programs was more than 60 percent. Furthermore, foreign students constituted a third of all postdoctoral students in American science and engineering programs (26). These numbers illustrate the esteem with which U.S. science and engineering education is held throughout the world (43). In the areas of molecular biology and immunology, foreign nationals are actively seeking training at U.S. institutions. Hoechst’s (F. R. G.) 10-year, $70 million contract with Massachusetts General Hospital, for example, was, in part, established to train Hoechst’s personnel at Harvard MedicaI School (21). * NIH has several programs that sponsor research by foreign nationals in NIH laboratories. Under the “visiting program, ” NIH sponsors and pays visiting scientists studying at NIH labs. In 1983, 810 foreign nationals were enrolled in this program. Of these visiting scientists, 158 were from Japan, 97 from India, 62 from Italy, 27 from France, and 6 from the United Kingdom. Under the ‘(guest researchers program, ” foreign nationals are sponsored by their native country. In 1983, 32 Japanese were enrolled, 23 Italians, 21 French, 10 Indians, and 4 British (36). Japanese personnel trained in the United States are now being actively recruited by Japanese

● This arrangement is discussed in Appendix H: Selected ~spects of” 1‘,S. [ Initersit.}’ ‘7ndtlstr:v Relationships. 344 . Commercial Biotechnology: An International Analysis

firms. In a 1982 Keidanren survey* of 60 Japa- industrial microbiology, however, is not avail - nese companies using biotechnology, 35 per- able (7). cent of the companies were active in recruiting researchers already studying or working abroad Midcareer retraining in the (35). When the Japanese company Suntory hired United States and other countries new employees for about one-third of the 126 research positions in its Biomedical Research In- To address the challenges of biotechnology, institute established in 1979, for example, many of dustrial scientists and engineers can probably be the new employees were Japanese who had been retrained. Retraining in the United States is often working abroad (35). viewed as the responsibility. of the individual scientist or engineer and not that of the employer, The larger more established Japanese compa- with some exceptions (see below). A problem is nies sponsor translational training of their em- that it is very difficult for a scientist or engineer ployees. Sixty-two percent of Japanese companies in midcareer to take a year off to go back to responding to the 1982 Keidanren survey indi- school. cated that some scientific and engineering personnel would be sent abroad for training in spe- Reflecting concern over this situation, four sen- cialized technologies (35). ior professors at MIT recently published a report advocating “lifelong cooperative education” (48). Foreign nationals are being trained not only at The report’s major recommendation was that en- university and government centers in the United gineering schools and neighboring industries col- States, but at U.S. companies looking for supple- laborate in making off-campus graduate programs mental sources of revenue. Five corporate re- available to working engineers. Although the searchers from Japan recently attended a 3- report was addressed specifically to the electrical month course at Genex in rDNA technology of- engineering department of MIT, it could also be fered at $120,000 per person. According to the addressed to a larger community, and many of Japanese companies, they learned “highly specific its recommendations may apply to biotechnology. knowledge . . . and key points for developing For example, MIT Professor Daniel Wang recently specific products by using the rDNA technology ” stated that chemical engineers who “don’t know (18). the faintest thing about how proteins are iso- Amid all the evidence that foreign countries are lated)” if taught some basic protein chemistry, making use of U.S. training facilities, data show could develop new techniques for large-scale pur- that U.S. doctoral graduates are going abroad for ification (17). Historically, chemical engineers postdoctoral study less frequently. During the in the United States have been retrained by phar- decade of the 1970’s, postdoctoral training abroad maceutical companies to be bioprocess engi- decreased by nearly 50 percent (26), In biotech- neers (7). nology especially, postgraduate training abroad As shown in table 65, a relatively small percent- appears to be an area poorly funded by the United age of the 95 companies responding to the OTA/ States. Professor Arnold Demain, for example, has NAS survey intend to retrain their workers to fill indicated that 8 of the 11 students currently vacancies in areas of biotechnology personnel enrolled in his graduate program in industrial shortages. For most categories of Ph. D. person- microbiology at Massachusetts Institute of Tech- nel, hiring from academia is considered the op- nology (MIT) are foreigners, all sponsored either timal choice. In the case of Ph. D.s in bioprocess by their government or company. Money to send engineering, however, 86 percent of the compa- Americans overseas to do postdoctoral work in nies planning to hire Ph. D. bioprocess engineers —..— “ Keidanren, the Japan Federation of Economic Organizations, intend to hire them away from other companies, is a national organization composed of about 700 of’ the largest 50 percent plan to hire from academia; only 9 .lapanese companies. It enjoys the regular and acti~e participation percent of the companies plan to retrain. * one of the top business leaciers working rloselJ’ with a large professional staff to forge agreements on behalf of business as a whole. It oft[’rl “’1’hesr perrrntages f~xceed 100, I)ecaus(’ some (wmpanies indi- sur~’evs its members on issues of eronomir importance. (’at(’d nlorr than one turing sourer. Ch. 14—Personnel Availability and Training 345 —— ———

Findings

The OTA/NAS survey of 95 companies using ber is expected to increase about 30 percent over biotechnology in the [Jnited States suggests that the next year, it is unlikely that a 30-percent an- approximately 5,OOO w’orkers are no\~’ doing bio- nual growth rate can be maintained over the next technology R&D in the 219 companies using bio - decade. The commercialization of biotechnology technology in the IJnited States. Though the num- is unlikely to contribute directly to large increases

25-561 0 - 84 - 23 346 Commercial Biotechnology: An International Analysis ———- .———— - ——— in employment. Bioprocess technology, an essen- Japan, the Federal Republic of Germany, and tial part of industrial biotechnology activities, is the United Kingdom, unlike the United States, not labor intensive. maintained a steady supply of both industrial and government funding for applied microbiology and About one-third of the technical personnel cur- bioprocess engineering after World War II. Ja- rently employed in 95 surveyed companies using pan’s supply of scale-up personnel appears to be biotechnology are specialists in basic science areas r sufficient. However, the United Kingdom and related to genetic manipulation: rDN A/molecular West Germany are suffering from a brain drain genetics and hybridoma/MAb technology. Special- to foreign countries (in particular to the United ists in these categories will continue to be impor- States), and shortages of scale-up personnel may tant to biotechnology R&D, and more hirees are occur. expected. Another third of the technical personnel currently employed by the US. companies The United States has very few undergraduate using biotechnology are specialists in areas of ap- or graduate interdisciplinary programs in biotech- plied science related to scale-up and downstream nology. Consequently, in the agricultural fields, processing: microbiology, biochemistry, and bio- for example, there are communication barriers process engineering. Of these categories, only between classical plant breeders and plant mo- hirees in bioprocess engineering will increase lecular biologists. Bioprocess engineering educa- over the next 18 months. About one.fifth of the tion in the United States is provided almost ex- biotechnology work force are specialists in areas clusively at the graduate level and is closely tied important to all aspects of biotechnology: enzy- to training opportunities in chemical engineering mology and cell culture. The balance of people with few interactions occurring between biolo- are specialists in such fields as pharmacology and gists and engineers. Funds for Ph. D. and post- toxicology. graduate education in bioprocess engineering in The United States currently has a competitive the United States have been inadequate for the edge in the supply of scientific personnel able to training of sufficient numbers of specialists for meet corporate needs for R&D in rDNA and hy - industry and academia. Furthermore, the high in- bridoma technology. This edge is primarily due dustrial demand for Ph. D. bioprocess engineers to generous Federal support for university life is likely to create a shortage of university faculty science research since World War II. Never- in the field, theless, the supply of Ph. D. specialists in plant molecular biology and in applied disciplines such Universities in the United Kingdom, in contrast as bioprocess engineering and industrial micro- to their counterparts in the United States, have biology may be inadequate for U.S. corporate long had interdisciplinary programs in biotech- needs. It may be difficult to alleviate rapidly the nology, and the British Government is encourag- shortage of engineers because of the shortage of ing the formation of overarching biotechnology Ph. D. engineers serving as university faculty and programs in those universities where they do not the lack of governmental training programs. To already exist. Though France, the Federal Repub- an extent, foreign technical personnel are allevi- lic of Germany, and Japan have systematic bar- ating some of the industrial shortages. riers to interdisciplinary programs, their governments are utilizing national research institutes With the exception of France, the other com- to facilitate interdisciplinary research in biotech- petitor countries have adequate supplies of basic nology. biological scientists. French companies are importing foreign specialists. German and Japanese com- The funding by foreign governments and companies, where slight shortages do exist, are mak- panies for the training of domestic workers over- ing efforts to train some of their personnel abroad seas is far more extensive than that of organi- and to retrain workers. Some Japanese companies zations within the United States. In fact, in bio- are making successful efforts to repatriate Japa- technology-related areas, the U.S. Government nese workers trained overseas. appears to fund more the training of overseas Ch. 14—Personnel Availability and Training 347 nationals in the United States than the training fied Swiss researchers in the university or may of U.S. nationals abroad. recruit foreign scientists, with apparently little difficulty, to work in Slvitzerland (20). Switzerland, which has not been extensively discussed in this chapter, appears to have no trouble Retraining of corporate workers in biotechnol- meeting the personnel needs in either its uni- ogy is being pursued more actively in foreign versities or companies developing biotechnology. countries than in the United States. Japanese com- Particularly in relation to the size of the coun- panies, in particular, make a regular practice of try, Swiss academic institutions show unusual sending their workers to be retrained at Japanese strength in both basic and applied research rele- and foreign universities and research institutions. vant to biotechnology. Swiss companies seeking Only a very small percentage of companies using to develop and expand their expertise in these biotechnology in the United States intend to re- technologies may choose to work with the quali - train their workers in areas of personnel scarcity.

Issues and options

ISSUE 1: HOW could training for biotechnol- Another area where more Federal research ogy at the graduate–and postdoctoral funding could potentially reduce personnel short- levels be improved? ages is that of interdisciplinary research. The in- The United States appears to be suffering short- terdisciplinary nature of biotechnology requires ages of Ph. D. plant molecular biologists, applied research collaboration among people with back- microbiologists, and bioprocess engineers in its grounds in biology, engineering, and chemistry. biotechnology-related industries. Although im- Options that Congress could take to encourage interdisciplinary research are discussed below. proved science education at the secondary school and undergraduate level could enhance the development of biotechnology in the future, the 0PTION 1: Authorize increased funding for LISDA, graduate level seems to be the best place to ad- NIH, and NSF graduate and postdoctoral dress the shortages of certain types of personnel. training grants in plant molecular biology, applied microbiology, and bioprocess en - For the past several years, U.S. Government gineering. funding for research in the areas of plant molec- The lack of training grants is probably the single ular biology, applied microbiology, and bioprocess most outstanding reason for U.S. shortages in se- engineering has been far less than funding for lected areas of biotechnology personnel. There research in animal and bacterial molecular biol- are no NIH or NSF training grants for industrial ogy and immunology. Increasing Federal funding microbiology or process engineering. The U.S. De- for research grants in plant molecular biology, partment of Agriculture (USDA) this past year applied microbiology, and bioprocess engineer- gave only five training fellowships in plant sci- ing, by encouraging more investigators to enter ence. NSF until recently had no training grants these fields, could help alleviate shortages of per- at all in plant science, although in May of 1983, sonnel. Since fields of faculty endeavor are at least NSF’s Biological and Behavioral Directorate ap- partially determined by the availability of re- proved 24 postdoctoral fellowships for study in search grants, increased funding for research plant cell biology. might encourage training and indirectly prevent future shortages of faculty. Options for directing In fields such as molecular biology, competitive research funds toward areas of personnel short- training grants have been one of the most effec- ages are discussed in Chapter 13: Government tive uses of Government funds for graduate and Funding of Basic and Applied Research. postdoctoral education. Training grants encour- 348 ● Commercial Biotechnology: An International Analysis age university departments to carry on a cohesive U.S. researchers could fruitfully be visiting-e. g., training program and allow money from faculty Japan’s Fermentation Research Institute and Uni- research grants to be used for research instead versity of Tokyo; the Society for Biotechnological of salaries. The institution of adequate training Research (GBF) in Braunschweig, Federal Republic grants in the areas of plant molecular biology, ap- of Germany; and the John Innes Institute and plied microbiology, and bioprocess engineering Plant Breeding Institute in the United Kingdom. would be a long-term strategy to counter person- Few Americans are studying at those institutions. nel shortages in these areas. Such grants could Though NSF’s Science and Engineering Director- be administered by NIH (for applied microbiology ates can give grants to students studying overseas, and plant biology), USDA (for plant biology), and such grants are not generally given because they NSF (for all three). are usually more costly than regular grants.

OPTION 2: Continue to support special incentives to NSF’s Science, Technology, and International Af- encourage young engineers to stay in fairs Directorate has an International Coopera- academia. tion and Scientific Activities program that provides special funds for researchers to study The shortage of engineering faculty at U.S. uni- abroad—funds that can supplement the grants of versities could seriously hamper efforts to in- other programs within NSF. One advantage of au- crease the number of qualified engineers, includ- thorizing more money for this program is that ing bioprocess engineers, in the United States. The this program has had experience negotiating recently instituted Presidential Young Investigator standards of bilateral student exchange with Awards to be administered by NSF is an exam- foreign governments, having negotiated a suc- ple of the sort of special incentives program that cessful bilateral agreement with France. In most Congress could continue to support to counteract foreign countries, American students cannot the shortage of engineering faculty. Two hundred study at the best institutions (usually national) of these awards, 100 of which are to go to engi- without the proper contacts and encouragement neers, are to be awarded each year for 5 years of the domestic government. to scientists and engineers in academia who have fewer than 7 years postdoctoral experience. Each Congress could also specify that the NSF inter- award could total up to $100,000 per year for 5 national grants that are given have a clearer train- years. The first $25,000 per year is to come from ing component. Currently, even the international NSF. Industry funding for the engineers, of up fellowship grants are evaluated on the basis of to $37,500 per year, is matched by NSF, giving their proposed research, rather than the quality the total amount of $100,000. of training for the US, nationals. It should be noted, however, that setting aside a part of NSF OPTION 3: Specific that a certain percentage of NSF international grants for graduate and postdoctoral graduate and postdoctoral grants be used training would probably reduce the current per- for training in other countries and author-centage of international grants given to junior ize NIH and other relevant agencies to ini- professors. tiate researcher exchanges with other industrialized countries. NIH’s unilateral programs to support the study and research of foreign postdoctoral personnel Increasingly fewer U.S. Ph. D.s are doing post- in the United States could also be expanded to doctoral work abroad, while the number of for- support the study of American nationals overseas. eign Ph. D.s doing postdoctoral work in the United Since the United States is not the sole source of States is increasing. The U.S. Government sup- advanced R&D capability, Congress could author- ports the training of its nationals overseas far less ize NIH to formulate programs that result in re- than its industrialized competitors. ciprocal exchanges and postdoctoral research op- Foreign countries have many significant and portunities for American scientists and engineers growing research programs in biotechnology that in areas of foreign expertise. Ch, 14—Personnel Availability and Training ● 349

ISSUE 2: How could Congress improve inter- tion between classical plant breeders and plant actions between classical plant biol- molecular biologists. The Federal Government is ogists and plant molecular biolo- spending about $20 billion on an acreage diver- gists? sion program. This money subsidizes the market Many people would argue that the agricultural price, but does not address the central agricul- research system in the United States does not tural production issue, the farmer’s low profit need to be improved because the United States margin. Diverting a portion of this money to re- has the most productive agricultural system in search on plant genetics could go a long way the world. Nevertheless, there are specific areas toward reducing agricultural production costs. where some advances in plant science, aided by new biotechnology, may be crucial to feeding the OPTION 1: Legislate the creation of one or more plant world’s population in the coming years. These ad- research institutes. vances can be made only with the interaction of A plant research institute was established under classical plant breeders and plant molecular bi- the Department of Energy’s (DOE’s) management ologists. Yet, because of the historical separation and with cooperation from the State of Michigan of agricultural researchers and plant molecular in 1965. DOE’s contribution to this effort was biologists in the United States, these groups do $1.65 million in fiscal year 1983 and will be $1.7 not have established communication networks. million in fiscal year 1984. This is a beginning Most of the classical plant breeders are trained toward solving some of the problems of commu- at agricultural research stations and land grant nication among biologists of different disciplines, colleges, whereas most of the plant molecular bi- but it is only one effort. ologists were originally trained in biochemistry, bacterial genetics, and animal biology (funded ex- The creation of several more plant research in- tensively by NIH) and are now working at the uni- stitutes could facilitate interdisciplinary research versities where much of the molecular biology is between classical plant biologists and plant mo- done. The lack of interaction between these two lecular biologists, although there could be some disciplines puts the United States at a disadvan- problems. First, a large amount of money would tage in modern agricultural research. * be required. Second, scientists to work in the institute would have to be drawn from other insti- The agricultural surpluses that the United States tutions, thereby possibly causing a shortage of has today could vanish in a single year and prob- teaching faculty. Faculty shortages could be par- ably are temporary. Greater productivity will be tially alleviated if the institute were located near necessary as we move into the 21st century. The a major research university or land grant college. United States is also depleting its water resources Third, it is not obvious what agency would ad- and its topsoil. Advances in biotechnology can minister the institute. DOE is one choice because contribute to the solution of these problems with it already has experience with one institute. USDA the development of plants that need less water, is another choice, but recent studies (see preced- have greater nutritive value, and are more resist - ing footnote) have suggested that the research sta- ant to the high saline content of irrigation water. tions it already administers have not kept up-to- The costs of production can be lowered if plants date with the latest molecular techniques being are pest-resistant, and fewer fertilizers will be applied to plants. NIH, which is well versed in mo- needed if plants can fix their own nitrogen. These lecular biology, is not an ideal agency to admin- advances cannot be made without greater interac- ister an essentially agricultural program, NSF might be a candidate to administer a new plant ● The administration of’ basic research in agriculture has recent- lj been rmi(’i~f’d b~ sm era] agencies [5,34,41). Changes in the ad- research institute because of its interdisciplinary ministration of L’SDA research will be extremel~ important to the staff, dirertion of de~wlopment of biotechnology in agriculture. A proposal within LISDA to significantly increase the competiti~e grants in plant biok)~y has recentl}~ been put)lished (2.5). Howe~’er, an assess- OPTION 2: Establish grants for cooperative research ment of the LISDA twhn ical and administrate ii’e infrastructurf~ is between classical and molecular plant bi- t)e~ond the sropr of this rf~port. ologists from different institutions. 350 ● Commercial Biotechnology: An International Analysis

An increase in funding alone would facilitate ceutical industry has shown that chemical engi- interaction between classical and molecular plant neers can be retrained in bioprocess engineering. biologists. Because of its interdisciplinary focus, Continuing education sponsored by large U.S. NSF might be the agency to administer these companies, in general, takes place through short grants. courses or joint research performed at universi- Careful specification of requests for proposals ties. University/industry training and research and monitoring of the grants by technically qual- agreements in biotechnology are being developed ified staff would be needed to ensure that the re- without the assistance of the Federal Government. search that is funded is truly cooperative. Other- But the Government could further encourage re- wise, some researchers experiencing difficulties training in biotechnology by increasing funding in obtaining research funding might be tempted for NSF’s Industry/University Cooperative Centers to cooperate in proposal writing in order to ob- Program, which provides seed money for a uni- tain a grant and then carry out independent versity to set up a research center with industrial research. partners. This option is discussed in Chapter 13: Government Funding of Basic and Applied Re- search. ISSUE 3: How could the retraining of industrial personnel in biotechnology be Whether human resources in the United States improved? are used and retrained adequately is a larger, national question that addresses the transition of the The OTA/NAS survey of companies using bio- U.S. labor force from declining to growing indus- technology in the United States shows that there trial sectors. Suggestions to encourage more re- is little retraining of personnel in this field. This training have included revision of the tax code situation is probably due, in part, to the fact that to encourage business loans to employees for re- many of the US. companies using biotechnology training and an extension of unemployment in- are small and have neither the resources nor insurance to include payment for retraining. The centives to retrain personnel. These small com- comparative evaluation of measures such as these panies depend on their ability to attract already that include other disciplines is beyond the scope highly qualified personnel. However, the pharma - of this study.

Chapter 14 references

1. Abelson, P. H., “Science and Engineering Educa- 7, Demain, A., Professor of Industrial Microbiology, tion, ” Science 210:965, 1980. hlassachusetts Institute of Technology, personaI 2. Advisory Council for Applied Research and Devel- communication, 1983. opment, Advisory Board for the Research Coun- 8. Demain, A. L., and Solomon, N. A., “Responsibilities cils, and The Royal Society, “Biotechnology: Report in the Development of Biotechnology, ” Bioscience of a Joint Working Party” (Spinks’ Report) (Lon- 33(4):239, 1983. don: H. M. Stationery Office, March 1980). 9. Dunnet, J. S., “Brain Drain Threatens Progress, ” 3. AFP Sciences, “Scientific Research Policy and Nature 302:644, 1983, Organization, ” July 22, 1982, pp. 4-5. 10. Feinberg, L., ‘(Panel LJrges Measures To Halt De- 4. ASM News, “Shockman Testifies on Manpower cline of Education in America, ” Washington Post, Needs . . . ,“ 48(8):349-350, 1982. Apr. 27, 1983, p. 1. 5. Bentley, O., “Perspective on Agricultural Research, ” 11. Feldman, M., and O’hlalley, E. P., The Biotechnol- Science 219:4584, 1983. ogy Industry in California, contract paper pre- 6. Chemical and Engineering News, “Foreign Precol- pared for the California Commission on Industri- lege Curricula Gives Strong Dose of Science, ” Jan. al Innovation, Sacramento, Calif., August 1982. 25, 1982, p. 42. 12. Gaden, E., “Bioprocess Technology: An Analysis .—

Ch. 14—Personnel Availability and Training ● 351

30.

31. 13 :32, 14 33.

1,5 :14.

4- 35.

36.

37.

43.

44.

4.5. 352 “ Commercial Biotechnology: An International Analysis

46. Walgate) R., “La Loi at Last,” Nature 298:1 10, 1982. 49. Worthy, W., “Classroom Crisis in Science and 47. lValsh, J., “Trouble in Science and Engineering Math,” Chemical and Engineering News, July 19, Education,” Science 210:215, 1980. 1982, pp. 9-16, 48. Walsh, J., “ New’ Slant on Engineering Training,” Science 2 18:269, 1982. Chapter 16 Health, Safety, and Environmental Regulation Contents

Page Introduction ...... 355 Regulation Directed Specifically Toward Biotechnology: rDNA Research Guidelines . . . . 356 Scope ...... $ ...... 4. 357 Containment Requirements ...... 358 Approval Requirements...... 358 Enforcement ...... 359 Effect on Competitiveness ...... 359 Existing Regulation of Biotechnology Products ...... 359 United States...... 360 European Economic Community Countries...... 365 Switzerland ...... 370 Japan ...... 370 Environmental Regulation ...... 371 Regulation of Worker Health and Safety ...... 373 Findings ...... 374 Issue and Options ...... 376 Chapter 15 References ...... 378 Chapter 15 Health, Safety, and Environmental Regulation

Introduction

Regulation has been and will continue to be a effects on workers’ health from exposure to novel factor in the development of biotechnology, organisms and products and about the risks of especially for recombinant DNA (rDNA) processes deliberately releasing genetically manipulated and products. When the rDNA technique was first organisms into the environment. In addition, some developed, its novelty and tremendous power to of the products that will be made by biotech- manipulate organisms raised the specter of poten- nology may present special risks. For example, tially drastic consequences to human health and the U.S. Food and Drug Administration (FDA) has the environment through the creation and prolif- been concerned about bacterial endotoxins found eration of organisms with unknown but poten- in drugs produced by Escherichia coli (28). tially hazardous traits. In the United States, there- Regulation will have a moderately important fore, Congress moved to develop stringent regula- effect on the development of biotechnology and, tion of rDNA. This movement was forestalled in consequently, on U.S. competitiveness in biotech- part by the adoption in 1976 of fairly restrictive nology. Special risks may lead to limited new regu- self-regulatory guidelines by the scientists (27). lation that could direct commercial efforts away As time passed, however, concern and fears di- from certain areas or at least slow advancements minished greatly. As scientists learned more about in those areas. In addition, most of the products molecular genetics, perceived risks associated that could be made by biotechnology and associ- with probing the unknown diminished, and no ated processes are already subject to considerable evidence was discovered to support many of the regulation, pharmaceuticals and chemicals being early risk scenarios. Formal risk assessment the best examples. This existing regulation also studies also led to downward evaluation of poten- will affect corporate strategies and patterns of tial risk. Molecular biologists gained the confi- industrial development. dence of the public by bringing other experts and The costs and time involved in complying with the public into the decisionmaking process that regulatory requirements are the price society established the system of voluntary self-regula- pays for safety. However, unreasonable restriction. And, most importantly, there has been no tions and unnecessary burdens may delay or pre- evidence of any harm to human health or the vent important products from reaching the mar- environment from rDNA. Consequently, the ket or may increase the business risks of develop- requirements of the rDNA guidelines in the ing those products. Uncertainties, for example, United States have been substantially relaxed. about what the regulatory requirements will be or which agencies have jurisdiction, will also Today, most experts believe that the potential affect the risk, time, and cost of product develop- risks of rDNA research were drastically over- ment. Those countries that have the most favor- stated and that rDNA technology generally does able regulatory environment in terms of least not involve a risk beyond that already inherent restrictions and uncertainties will have a com- in the host, vector, DNA, solvents, and physical petitive advantage in the commercialization of apparatus being used (35). This is not to say, biotechnology. however, that biotechnology-like most new technologies-does not continue to raise special This chapter evaluates the regulatory environ- concerns or present special risks. In particular, ment for the commercialization of biotechnology questions have been raised about the long-term in the United States and five competitor countries

355 356 ● Commercial Biotechnology: An International Analysis

being examined in this assessment—the Federal much of the current activity in biotechnology is Republic of Germany, the United Kingdom, France, directed toward those types of products. In ad- Switzerland, and Japan. Two specific factors are dition, with respect to regulation of products in considered in the evaluation: 1) the restrictiveness other countries, most of the information OTA was of the regulation, and 2) the uncertainties with able to obtain related to the approval process for respect to possible agency jurisdiction or require- pharmaceuticals and veterinary medicines. Suf- ments. Congressional options for improving ficient information on foreign regulation of food, U.S. competitiveness in biotechnology through food additives, medical devices, and chemicals changes in the regulatory environment are pre- was not available for meaningful international sented at the end of the chapter. comparisons; however, this information is included for the United States because of its avail- In the analysis that follows four areas of regula- ability and because of the interest in it. tion are considered: Two inherent limitations could qualify the anal- ● regulation directed specifically toward bio- ysis in this chapter. The first results from the diffi- technology; culty of determining and interpreting foreign laws ● existing regulation that would apply to and especially the rules and policies of the foreign biotechnology products; agencies. Much of this material is not readily avail- ● environmental regulation relevant to biotech- able in English or even in the native language. In nology; and addition, enforcement of laws and regulations in . worker health and safety regulation. other countries generally is much more discre- The chapter concentrates on the guidelines for tionary than in the United States. * Thus, there rDNA research adopted by the competitor coun- may be a wide gap between the written laws and tries and the approval requirements for pharma- regulations and the actual regulatory environ- ceuticals (human drugs and biologics) and for ment in which foreign companies operate. The veterinary medicines (animal drugs and biologic). second limitation results from the fact that the The guidelines for rDNA research merit signifi- analysis does not consider the positive effects of cant attention because they are the only type of regulation and a country’s track record for safety. governmental oversight developed specifically for In other words, the restrictiveness of regulation biotechnology. The approval requirements for theoretically should be balanced against some pharmaceuticals and veterinary medicines also measure of the harm avoided. However, the nec- merit attention because those products are sub- essary data are generally not available, and such ject to the most restrictive regulation, even when an analysis is beyond the scope of the chapter, made by conventional means, * and because so “Significant regulation also exists for commodity and specialty chemicals (including herbicides and pesticides), but it is generally not as restrictive as for pharmaceuticals and some types of veterinary medicines. The use of genetically modified organisms in the environment will probably face some moderate degree of regula- ● In fart, this discretion has led to claims of selecti~’e enforcement tion, Agricultural products currently face little health, safety, or against l] .S. companies, thus creating a nontariff trade barrier, For environmental regulation, but this situation could change in the case discussion of other nontariff trade barriers, see Chapfer 19: Inter- of genetically modified plants and animals. national Technolo@ Transfer, Investment, and Trade.

Regulation directed specifically toward biotechnology: rDNA research guidelines

The only oversight mechanism directed specifi- cerns in the mid-1970’s about potential risks of cally toward biotechnology is the rDNA research rDNA research and the desire to proceed cau- guidelines. These guidelines grew out of the con- tiously in the face of the uncertainties. Guidelines Ch. 15–Health, Safety, and Environmental Regulation . 357

similar to the National Institutes of Health Guide- presented here is based on the more detailed lines for Research Involving Recombinant DNA description of the rDNA research guidelines of Molecules (NIH Guidelines) in the United States the six countries and the European Economic have been adopted by Japan, the Federal Repub- Community found in Appendix F: Recombinant lic of Germany, the United Kingdom, France and DNA Research Guidelines, Environmental Laws, Switzerland. Over time, they have been substan- and Regulation of Worker Health and Safety, tially relaxed worldwide in a series of revisions which the reader is urged to examine. that reflect decreasing concern about the risk. In fact, many types of experiments involving rDNA Scope are now exempt from the guidelines. The guidelines are essentially self-regulatory. In the United States, Japan, and France, the guidelines technically apply only to government- The guidelines for rDNA research reflect the funded rDNA research, while in Switzerland, the decision by experts and policymakers that rDNA Federal Republic of Germany, and the United research presents some special risks and uncer- Kingdom, they apply to all rDNA research. (Actu- tainties that require special attention. They are ally, all the guidelines also apply to large-scale based on two underlying concepts: rDNA work to varying degrees, as discussed be- ● rDhA research should be conducted at in- low.) While U. S., Japanese, and French private creasing levels of physical and biological con- laboratories might seem to have some advantage tainment related to the degree of possible over private laboratories in the other countries hazard, and because they could dispense with safety measures ● the degree of oversight should relate to the perceived to be unnecessary, this ‘(advantage” is degree of possibIe hazard. probably illusory, Industry perceives compliance with the guidelines to be in its best interest, and The implementation of these concepts is fairly there has been no publicized evidence of non- similar in the competitor countries, because the compliance. worldwide scientific community was involved in their development and because most countries Perhaps the single most important issue for followed the lead of the United States. Neverthe- companies using biotechnology is the rDNA less, there are some important differences among guidelines’ treatment of large-scale research (i.e., the guidelines adopted in the various countries, work with cell cultures in volumes exceeding 10 and different countries are at different stages in or 20 liters), which is a necessary step in success- the process of relaxing them. ful commercial development. The guidelines in Japan are easily the least favorable in this regard. This section surveys the rDNA research guide- Recombinant DNA research with volumes exceed- lines of the six competitor countries with respect ing 20 liters can be conducted in Japan only after to their scope, containment requirements, ap- Government permission, and that permission has proval requirements, and enforcement mecha- been quite difficult to obtain. * It should be noted, nisms in order to assess their impact on competi- however, the situation in Japan is expected to tiveness in biotechnology. * The commercial de- change shortly. * * Under the U.S. guidelines, the velopment of biotechnology in many of these large-scale work need only be reviewed by each countries, however, will depend less on the specific biological and physical containment ● measures required by their rDNA research guide- Six companies ha~e obtained permission for large-scale work (14), ● *The Council for Science and Technolo&v, which advises the lines than on the scope of activities reached by Prime Minister and oversees rDNA work by private institutions in the guidelines (i.e., whether they cover large-scale Japan, is expected to recommend the elimination of the prohibition of large-scale work without special Government approval. Instead, research) and the structure set up for implement- large-scale bioprocess facilities would classify into two categories, ing and enforcing the guidelines. The analysis LS1 and LS2. LS1 facilities would be covered by rules similar to those for con~’entional microbiological laboratories, LS2 facilities, which “Pro~isions relating specifically to worker health and safety are would involve work with more hazardous microa-ganisms, would dl>(’uss(’(i 1[1 t tl(’ 5(’(’11( )[1 of this (’hiipter entltlt’(i “R(>~UlaIN)n of be covered by more stringent rules. The Prime Minister is expected \\ orh[’1” I Ir’ilth ‘In(i s’itf’t\’ to act favorably on the recommendation in August 1983. 358 ● Commercial Biotechnology: An International Analysis

Institutional Biosafety Committee (IBC), although The physical and biological containment meas- NIH has made specific recommendations regard- ures required for an experiment vary slightly ing physical containment, which were recently from country to country, but it is difficult to incorporated into the U.S. guidelines. Large-scale determine what effect on a country’s competitive research in the United Kingdom is treated on a position any one requirement might have. It is case-by-case basis by the supervising authority, difficult to determine, for example, what effect the Genetic Manipulation Advisory Group will come from the fact that at the United King- (GMAG). * But in explaining the need for a differ- dom’s physical containment level II, a continuous ent kind of review of large-scale research, GMAG air flow into the laboratory is required, while it has suggested that large-scale research will not is not required in other countries until the third be subject to as stringent containment measures containment level. The measures with the great - as smaller scale research. The French rDNA est impact are probably the biological contain- guidelines exclude large-scale research from their ment rules in Japan, which severely restrict the coverage, but the Government oversight agency types of organisms that can be used in host-vector will apparently consider such activity on a case- systems. These restrictions may prevent commer- by-case basis. The West German guidelines do not cially promising rDNA research from going forward. mention large-scale research. The Swiss guidelines permit scaling-up without special approval; Approval requirements it is unclear whether the small-scale rules continue to apply or whether, as with the NIH guide- Notice and approval requirements depend on lines, large-scale research is subject to the safety the risk of the experiment. Research in the United measures decided on by the IBC. States at the highest risk level is subject to the approval of NIH and the appropriate IBC; at the Containment requirements next level, only IBC approval before initiation is necessary. IBC notification at the time of initia- Each country’s rDNA guidelines specify require- tion is required for some lower level risk experiments for physical and biological containment of ments, while many are exempt entirely. More the research organisms. Except for the United than 85 percent of all rDNA work in the United Kingdom, each country assesses risk in the same States is done at the lowest containment levels manner—according to the source of the DNA used (23), and virtually all monitoring of rDNA work in the experiment and the pathogenicity of the is done by IBCS. host-vector system. The United Kingdom deter- The recommendation of the European Econom- mines risk by considering the survivability and ic Community (EEC) on rDNA research suggests likely harm of the organism containing rDNA. that notice of experiments be given to the central Whether this risk assessment method gives the authority in each member state, usually before United Kingdom an advantage or disadvantage de- the work begins. For some types of research, pends on the particular experiment. The United notice would not have to be made before work Kingdom does have an advantage with respect to is begun. The United Kingdom, France, and the rDNA production of insulin and interferon, which Federal Republic of Germany are members of the are classified at a lower containment level there EEC. than in the United States (8). Each country uses four levels of physical containment, Most research In the United Kingdom, the Health and Safety is now conducted at the lowest physical contain- Executive (HSE) is directed to inspect the facilities ment level. for rDNA research at the two higher containment levels, categories III and IV. For research at these *GMAG’s status was recently’ reviewtxi hy tht? }{ealth and Safet~’ levels, GMAG also must have notice and an oppor- Executive, and the subsequent report recommended relocation ot to give the group from the Department of Education and Science to the tunity advice. Advance notice is required Department of Health and Social Security. GMAG has been moved for research at the category II level but not and is now called the Health and Safety Commission Advisory Group approval. Activities at the category I level can go on Genetic Manipulation. forward provided only that the local safety com - Existing regulation of biotechnology products

A comparative assessment of the regulation of regulation for generic products, it is first biotechnology products in the competitor coun- necessary to compare these general regulatory tries involves two stages. Since biotechnology regimes. In other words, biotechnologically made products generally will be subject to existing pharmaceuticals, for example, will be subject to 360 ● Commercial Biotechnology: An International Analysis

the general regulations covering pharmaceuticals, Office of Regulatory Affairs. FDA’s Recombinant regardless of how they are made; thus, comparing DNA Coordinating Committee has determined the pharmaceutical laws of the different countries that rDNA products whose active ingredients are will provide information about competitiveness. identical to ones already approved or to natural In this context, the following questions are par- substances will still have to go through the new ticularly relevant: product approval process. Data requirements may be modified and often abbreviated, however, and ● How much time and effort does it take to get each case will be handled on an ad hoc basis. * products through the approval process? (In the case of many conventionally produced ● What is the usual or average cost for securing products, abbreviated review procedures are regulatory approvals? available when the active ingredient of the new ● What are the import and export restrictions product is identical to one already approved or on approved and unapproved products? to natural substances.) FDA will not require com- ● Will the regulatory authorities accept foreign pliance with the NIH Guidelines as a condition of test data in the approval process? approval. For monoclinal antibody (MAb) prod- The second stage of the analysis involves look- ucts, no coordinating body similar to the Recom- ing at specific issues raised by biotechnology. binant DNA Coordinating Committee exists; FDA’s Some of these are the following: policy for these products has been set by the Na- tional Center for Devices and Radiologic Health ● Will new biotechnology products chemically (NCDRH) and the Office of Biologics. Actual prod- identical to approved products made by other uct regulation will occur at the individual bureaus means still be required to go through the full or offices as discussed below. regulatory review process? ● Will the classification of a pharmaceutical as Human Drugs. —FDA’s Office of New Drug a drug or biologic affect the time or cost of Evaluation has taken the position that drugs made securing regulatory approval? by rDNA technology, even if identical to currently approved drugs, are “new drugs.”* * Therefore, United States such drugs cannot be marketed until approved by FDA as safe and effective. Three Federal agencies will be most involved in regulating biotechnology products. They are FDA’s approval process for a new drug can take the Food and Drug Administration (FDA), the U.S. several years because it requires a series of animal Department of Agriculture (USDA), and the Envi- and human tests. Clinical investigations can be ronmental Protection Agency (EPA). carried on only after a drug’s sponsor files a Notice of Claimed Investigational Exemption for FOOD AND DRUG ADM1N1STRATION a New Drug (IND). The IND contains the results of animal testing, a description of the planned FDA regulates drugs, biologics, food, food addi- clinical investigations, and other information. The tives, and diagnostics pursuant to the Federal preclinical investigations generally last from 1 to Food, Drug, and Cosmetic Act (FFDCA) (21 U.S.C. 2 years (20). The human studies then go through \f301-392) and section 351 of the Public Health Service Act (21 U.S.C. f262). “FDA has been concerned about bacterial endotoxins and immu - Since the first commercial applications of bio- nogens contaminating the products and about the genetic stability of the rDNA organism. In the latter case, the product might be technology (i.e., pharmaceuticals) have been in affected if the DNA underwent changes. areas subject to FDA jurisdiction, FDA is the agen- * ● A new drug is a drug whose composition is not generally rec- cy having the most experience with biotechnol- ognized by qualified experts as safe and effective under the conditions of use set forth in its labeling or, men if so recognized, has ogy products. FDA has approached rDNA-pro- not been used to a material extent or tor a material time [sec. 201(p) duced products on an agencywide basis by cre- of the Federal Food, Drug, and Cosmetic Act; 21 U.S.C. $321(p)). ating a Recombinant DNA Coordinating Commit- A drug is a substance intended for use in the diagnosis, treatment, or prevention of disease or which is intended to affect the struc- tee, composed of representatives of its centers ture or function of the body (sec. 201(g) of the Federal Food, Drug, and bureaus, the office of General Counsel, and and Cosmetic Act; 21 U.S.C. $321(g)). Ch. 15—Health, Safety, and Environmental Regulation 361 three phases to establish safety, set dosage levels, adequate data are available in the published and establish efficacy. This clinical testing often literature to establish safety and effectiveness. takes 5 to 6 years (20), During or after the clinical Human Biologics. —A biologic is a vaccine, studies, the sponsor files a New Drug Application therapeutic serum, toxin, antitoxin, or analogous (NDA), which contains the results of animal and product for the prevention, treatment, or care human testing, a statement of the drug’s composi- of diseases or injuries, The distinction between tion, a description of the methods and controls a drug and a biologic is largely historical and used in its manufacture, and other information. bureaucratic and is becoming even more blurred The time required for processing an NDA de- with the advent of biotechnology. pends on the completeness of the data, the drug’s performance, and the speed of FDA review. In Although biologics also come within the defini- 1980, the duration of the NDA phase for new tion of drugs in section 201(g) of the Federal Food, chemical entities varied from about 1 to 7 years Drug, and Cosmetic Act (FFDCA), they primarily and averaged slightly less than 3 years (20). * are regulated under section 351 of the Public Taking into account the research and develop- Health Service Act and by FDA’s Office of Biologics ment (R&D) costs of drugs that fail to reach the rather than the Office of New Drug Evaluation. * market, various economic analyses indicate that Section 351 creates a regulatory structure for bio- the R&D costs per marketed new chemical entity logics similar to that for drugs. However, it is a range from $54 million to over $70 million (11). licensing procedure; both the product and the establishment where it is produced must be li- There are abbreviated approval procedures that censed. At the investigational stage, the Office of FDA might eventually permit sponsors to use after Biologics follows the requirements for INDs. After it gains more familiarity with rDNA technology clinical trials, the procedure involves a license and if warranted by the risks. One is the Supple- application for the establishment and for the mental New Drug Application (SNDA), which is product; together they provide essentially the required when an NDA holder intends to market same information as required by an NDA. Differ- the drug under conditions materially different ences, however, occur in practice. The Office of from those approved in the NDA. An SNDA could Biologics generally has been perceived to be more become available in the case where the manufact- flexible than the Office of New Drug Evaluation. urer of an approved drug made by chemical syn- It often uses informal, unpublished guidelines, or thesis decides to make the drug by using rDNA “regulatory memoranda .“ * * on the other hand, and bioprocess techniques. A second procedure it is the administrative practice of the Office of is the Abbreviated New Drug Application (ANDA), Biologics to require lot by lot approval of many which is available for generic versions of drugs biologics before they are released by the manufac- first marketed between 1938 and 1962. An ANDA turer, which is not usually required by the Office might be used by a manufacturer using rDNA of New Drug Evaluation (l). techniques to make an approved drug made by conventional techniques by another manufac- Biologics made by biotechnology will have to turer. The final procedure is a “paper” NDA, avail- go through the approval process outlined above. able for generic copies of drugs marketed after In accordance with announced policy, rDNA-pro - 1962. Such drugs require an NDA, but FDA is will- duced biologics, even if chemically identical to ing to accept published reports demonstrating approved biologics, will have to go through the safety and efficacy, thus saving the new sponsor the time and costs of clinical trials. A “paper” NDA *The Office of Biologics also regulates diagnostics related to blood bank products. All other diagnostics, including most of those incor. could become available in the case where a man- porating monoclinal antibodies (MAbs), are regulated b~ FDA’S ufacturer wants to make an rDNA-produced drug National Center for Drugs and Radiologic Health INCDR}I) “1’he first whose NDA is held by another manufacturer, if MAb diagnostic kits related to blood products and were appro~ed hJ the office of Biologics. —. ● “It has published three about biotechnology. One covers hfAb ‘~ General Accounting Office stud~’ of the [1.S. drug approtral diagnostic kits for blood bank related products [31) Another ro~ers process found that for 132 NDAs submitted to FDA k 1975, the MAbs for use in human therapy (33). A third co~!ers the production a~wra~e approval time was about 20 months (2o). anci testing of interferon (32).

25-561 0 - 84 - 24 —

362 ● Commercial Biotechnology: An International Analysis full approval process, but data requirements may which requires certain performance standards to be lessened. For MAbs, there has been no an- be met, rather than Class III, which would require nounced policy, but virtually all of those that the manufacturer to demonstrate safety and effi- would be used for therapeutic purposes would cacy. * The availability of the 510(k) application be truly new and therefore have to go through is highly desirable from a company’s perspective the full review process. because NCDRH must respond within 90 days. Medical Devices. —Medical devices are reg- Food and Food Ingredients. ● ● —The dis- ulated by FDA’s National Center for Devices and tinction between food and food ingredients (sub- Radiologic Health (NCDRH), except for those in stances added to food) is important in terms of vitro diagnostic products used in connection with the regulatory approval process. Food can be mar- blood banking activities such as tests for hepati- keted without FDA clearance, but food ingre- tis B surface antigen. Those products are regu- dients are subject to the food additives provisions lated by the Office of Biologics. of FFDCA, which may require premarketing approval. FFDCA defines food broadly and circularly The Medical Device Amendments to FFDCA in as food or any component thereof (sec. 201(f)). May 1976 required that all devices for human use A food additive is defined as a substance that may, marketed before the amendments be classified by by its intended use, become a component of food FDA into one of three categories on the basis of or affect the characteristics of food (sec. 201(s)). recommendations by expert panels. Class I prod- This definition excludes, among other things, sub- ucts are subject to general controls, such as good stances generally recognized as safe (GRAS) by manufacturing practice regulations. Class II de- qualified experts and certain prior-sanctioned vices are required to meet performance standards (previously approved) substances. A new food ad- in addition to the general controls. Class 111 devices ditive requires premarketing clearance by FDA, require FDA premarket approval for safety and and its sponsor has the burden of demonstrating effectiveness. For devices marketed after May its safety. Favorable action by FDA results in a 1976, those that are “substantially equivalent” to published regulation stipulating the concentration a preamendment device are classified with that and other conditions under which the additive product, and those that are not substantially may be used. GRAS substances technically can be equivalent are placed in Class III. Under section marketed without prior approval by FDA, but also 510(k) of the act, manufacturers are required to can be the subject of published FDA regu- give FDA a 90-day notice before they can market lations. * * * a device, during which period FDA determines whether the device is substantially. equivalent to FDA’s Bureau of Foods has not been confronted a preamendment device. with any foods, food additives, or GRAS substances produced by rDNA techniques; however, Manufacturers of MAb diagnostic kits general- on the basis of the announced policy of FDA’s ly have been successful in using the 510(k) notice Recombinant DNA Coordinating Committee and procedure to get their products to the market discussions with the staff, the Bureau appears quickly. Although MAbs are different from and likely to take the following positions. If FDA were generally superior to polyclonal antibodies for concerned about the safety of such a food, high diagnostic purposes, applicants have been suc- lysine corn, for example, it could take various cessful in showing that MAbs are “substantially equivalent” to polyclonal antibodies marketed *If a MAb kit were placed in Class 111, the sponsor could petition before May 1976. That is, the applicants have for a reclassification to Class 11; however, such reclassifications are demonstrated to the satisfaction of NCDRH that supposedly difficult to obtain. ● the MAbs provide essentially the same (or better) * This section uses the term food ingredient instead of the term food additive used in other chapters, because the term food additive results as polyclonal antibodies used for the same has a particular meaning under FFDCA. As explained in this sec- diagnostic purposes (1). Since the review panels tion, under FFDCA a food additive is one type of food ingredient of experts required by the statute have placed (substance added to food). ● ● “FDA publishes lists of what it considered to be GRAS substances most preamendment diagnostic kits in Class H (l), and sometimes it will consider a substance GRAS only when used the new MAb kits have been placed in Class II, under certain conditions. Ch. 15—Health, Safety, and Environmental Regulation ● 363 steps to prevent its sale or remove it from the These jurisdictional distinctions have been market by proving it was “ordinarily . . . injurious blurred by rDNA and MAb technology. An to health” and, therefore, was adulterated within FDAAJSDA memorandum of understanding cre- the meaning of section 402(a) of FFDCA. It might ates a standing committee to sort out regulatory be able to require premarketing clearance if the responsibilities in this area (29). * The memo says corn were used as an ingredient in other foods, FDA will regulate where the VST Act does not such as stew, because then it would be subject apply or does not offer an appropriate remedy. to the food additive requirements (21 C.F.R. The first product to be considered by the stand- \170.30 (f)), Recombinant DNA products that are ing committee is bovine interferon. Both agencies similar or chemically identical to GRAS substances claimed jurisdiction, and the committee has split or food additives already approved for use will along agency lines. Several attempts to resolve the be required to go through the approval process impasse on scientific grounds have failed; how- by FDA’s Bureau of Foods, although the Bureau ever, efforts are continuing. In the meantime, the will be flexible on data requirements. manufacturer has encountered additional costs Animal Feeds, Feed Additives, and De- and burdens by attempting to meet the require- vices.—These products are regulated in a way ments of both agencies (6). similar to the way in which human foods, food Control Over Exports.—Under section additives, and medical devices are regulated; how- 801(d) of FFDCA, unapproved food additives and ever, the regulation for animal products is less medical devices can be exported if certain condi- rigorous than that for human products. For ani- tions are met. * * Unapproved new human drugs mal feeds and feed additives, the requirements or biologics and unapproved new animal drugs, for demonstrating safety are less than for the however, cannot be exported except in the follow- comparable case of human food and food addi- ing two cases: 1) if the products are subject to tives. In the case of animal feed additives, how- an IND, providing the importing country’s govern- ever, there is an additional requirement that they ment has approved such imports; or 2) if the be shown to be safe to people consuming edible importing country’s government formally re- products from animals receiving the additive. For quests through the U.S. Department of State that animal devices, there is no premarket approval the product be exported (for purposes of clinical requirement as there is for many human devices. trials only) (21 C.F.R. j312.l(a)). As to unapproved At this time, there is no reason to expect any par- animal biologics, there is some question about ticular regulatory problems if these products are whether the VST Act applies to exports. Never- made by biotechnology. theless, it is clear that FDA has authority over Veterinary Medicines.—For veterinary such exports, and, as indicated in the previously medicines (animal drugs and biologic), FDA’s — authority is similar to its authority for human ● The FDA/USDA memorandum of understanding defines animal drugs or biologics with two exceptions. First, biologic products as those that “generally act through a specific there is an additional requirement in the animal immune process and are intended for use in the trwatment (including prevention, diagnosis, or cure) of diseases in animals. Such products drug approval process, i.e., animal drugs must not include but are not limited to vaccines, bacterins, sera, antisera, leave unsafe residues or metabolizes in edible antitoxins, toxoids, allergens, diagnostic antigens prepared from, tissues or other food products. Second, FDA does derived from, or prepared with microaganisms, or growth products of microorganisms, animal tissues, animal fluids, or other not have the primary regulatory authority over substances of natural or synthetic origin. ” animal biologics; USDA regulates them under the ● ‘h approved food additive can be exported if the exporter deter- Virus, Serum, Toxin Act of 1913 (VST Act) (21 mines, without any need to inform or petition FDA, that the four conditions in sec. 801(d)fl) of FFDCA are met. The same is true for U.S.C. \~151-158), even though they are also tech- a Class I medical device, but an unapproved Class II or Class III nically drugs under FFDCA. USDA’s authority ap- medical device cannot be exported unless a petition has been sub- plies only to interstate marketing. According to mitted to FDA and FDA has found that the exportation is not contrary to the public health and safety of the importing country and a recent case, FDA has jurisdiction over intrastate has the approval of the importing country, under sec. 801(d)(2) of marketing (10). FFDCA. 364 ● Commercial Biotechnology: An International Analysis

discussed memorandum of understanding, FDA use. The U.S. prohibitions on the export of un- could exercise that authority. approved drugs and biologics might be one reason why an NBF could not fulfill its agreement The U.S. policy of restricting the export of un- to supply bulk product to its foreign partner, approved drugs and biologics is essentially based thereby being required to transfer the organism on paternalism. Many countries do not have the and the technology. mechanisms either to evaluate or to regulate the quality of the drugs they import. In addition, there In proposed revisions to the regulations govern- have been cases of drug dumping—situations ing the approval of new drugs, FDA has taken the where drugs deemed unsafe or ineffective by the position that bulk products, which it calls “drug United States or other developed countries have substances,” can be exported only if they are used been marketed in less developed countries (25). in the manufacture of approved drugs and if certain labeling requirements are followed (30). FDA This policy has several implications for U.S. has proposed to define “drug substance” as “an companies using biotechnology, and the implica- active ingredient that is intended to furnish phar- tions may differ depending on the size of the macological activity or other direct effect in the company. In part because of the export restric- diagnosis . . . treatment or prevention of dis- tions, several of the large U.S. pharmaceutical ease. . . .“ (30). This definition would cover drug companies have established manufacturing facil- products produced by biotechnology, even if they ities in foreign countries, where their products required purification, packaging, and labeling, be- are approved or where the law permits the export cause such products usually will be active. At least of unapproved products. These actions result in one NBF in the United States has argued that sec- the transfer of technology, lost employment tion 801(d) of FFDCA should not be interpreted opportunities for U.S. workers, and lost oppor- to prohibit the export of such substances for pur- tunity to help the U.S. international balance of poses of clinical trials (if the conditions of sec. payments. These consequences can be expected 801(d) are met) and that such an interpretation to continue with respect to biotechnology prod- will require it to transfer technology for the rea- ucts. The existence of such facilities in foreign sons mentioned in the preceding paragraph (9). countries may provide the large companies with at least a short-term competitive advantage over This entire problem concerning the export of small, new biotechnology firms (NBFs). * The vast unapproved drugs can be avoided in the future, majority of the latter companies do not have and however, without changes in the law or regula- probably cannot afford to establish foreign tions. As mentioned previously, the current U.S. facilities. regulations allow the export of unapproved drug substances upon the formal request of the import- The export restrictions will also have an impor- ing country’s government. NBFs in the United tant implication for NBFs and for U.S. competi- States rightly point out that such requests are tiveness in general because they may foster tech- unlikely in cases where the government is actively nology transfer to foreign companies with which seeking to encourage inward technology transfer. they have joint ventures. In their joint ventures However, the NBFs’ licensing agreements with with large foreign companies, some NBFs in the foreign companies could be written so that the United States are required to provide bulk prod- NBFs would not have to transfer the technology uct produced by the microorganism to the for- if the foreign company’s government did not eign partner, which would secure necessary ap- make the necessary request. provals and purify, package, and market the drug in foreign markets. If the U.S. firm is unable to Imported Pharmaceuticals and Foreign provide bulk product, the foreign partner then Test Data.—Imported pharmaceuticals must has the right to obtain the organism for its own meet FDA’s IND and NDA requirements, even if approved for clinical testing or marketing in a ● NBFs, as defined in Chapter 4: Firms Commercializing Biotech- nology, are firms that have started up specifically to capitalize on foreign country. A question naturally arises renew biotechnology. garding the acceptability of foreign test data. Ch. 15—Health, Safety, and Environmental Regulation ● 365 — .—

Currently, FDA will accept foreign clinical data stances. Commodity and specialty chemicals made in support of an NDA, but it very seldom approves by biotechnology (except those regulated under an j\;DA solely on the basis of foreign data, even FFDCA) will face the same kind of regulation if the study that produced the data meets FDA under TSCA as those chemicals made by conven requirements for well-conducted studies. Under tional means. TSCA will also be applied to orga proposed revisions to its regulations, FDA would nisms used in the environment, as noted in the consider approving NDAs based solely on foreign "Environmentai Reguiation H section beiovv. clinical trials on a case-by-case basis if: 1) the data Pesticides, herbicides, and related products are are applicable to the U.S. population and U.S. med covered by the Federal Insecticide, Fungicide, and ical practice; 2) the studies have been performed Rodenticide Act (FIFRA) (47 U.S.C. §§136(aHy)). by investigators of recognized competence; and FIFRA creates a premarketing clearance proce 3) FDA is able to assure itself of the validity of dure under which EPA reviews data on safety and thD rl".. ~ t'lnl l.IJ\.~ \.....aUlU ,,1\.',. then registers the pesticide, provided it \vill not If adopted, the revised data requirements would generally cause unreasonable adverse effects on have at least t\'\lO implications for this country's the environment. EPA has proposed a rule on data competitiveness in biotechnology. First, they requirements for such registration (36). Sections \vould allow large U.S. drug companies to con 158.65 and 158.165 of the proposed rule cover tinue their practice of conducting much of their biological pest control agents, including genet clinical \vork in foreign countries where drug ically manipulated ones. * approval has been quicker than in the United States, but also to secure quicker drug approvals European Economic Community in the United States. Second, they would lessen countries a U.S. nontariff trade barrier faced by foreign firms. The Federal Republic of Germany, the United Kingdom, and France are members of the EEC, u.s. DEPARTMENT OF AGRICULTURE or Common Market, which was established by the Under the VST Act, the manufacturer of an ani Treaty of Rome in 1958. * * The regulations ~f the mal biologic to be sold interstate needs premarket EEC and the national regulatory processes of clearance by getting licenses for the product and these three countries that are relevant to biotech the factory from USDA. The agency has broad nology products are discussed further below. authority to require any data it thinks necessary to judge product identity, purity, safety, and effi EUROPEAN ECONOMIC COMMUNITY cacy. USDA regulation is generally seen as signif Since 1965} the EEC has issued a series of di icantly less costly and time-consuming than FDA rectives aimed at harmonizing the member states' regulation. However, USDA's position on biotech testing and approval processes for proprietary nological products appears to be consistent with medicinal products and veterinary nledicinal FDA's, i.e., such products will need a new license, products. None of these directives specificaHy even if identical to other licensed products} deals with biotechnological products. The direc although data requirements may be lessened. tives are important for the development of bio technology because} to the extent biotechnological ENVIRONMENT AL PROTECTION AGENCY products are proprietary or veterinary medicinal EPA has extremely broad authority over chemi products} * * • their approval for manufacture or cals, herbicides, and pesticides. Chemicals are "These sections set extensive data requirements on product per covered by the Toxic Substance Control Act formance, toxicology, residue analysis, hazards to nontarget orga rrSCA) (15 ~U.S.C. §§2601-2629). TSCA is intended nisms, and environmental fate and expression. "'The other members of the EEC are Belgium, Denmark, Greece, to fill gaps in other environmental laws. It Ireland, Italy, Luxembourg, and the Neth~rlands. authorizes EPA to acquire information on "chemi ••• Proprietary medicinal products are drugs, biologics, or similar cal substances" in order to identify and evaluate products sold under brand or trade names. In practice, most mem ber states regulate biologics differently from chemically synthesized potential hazards and then to regulate the produc drugs and the European Community directives have not been used tion, use, distribution, and disposal of those sub- to try to harmonize those regulations. 366 ● Commercial Biotechnology: An International Analysis marketing will be governed by national proce- can be relied on or whether new tests must be dures conforming to the directives. undertaken. Although the ultimate aim of the EEC directives A variation of this same issue involves unpub- is to replace national drug approval processes lished test results. Under current regulatory pol- with a Community-wide system, such a system icies for drug approvals in both Europe and the is unlikely in the near future. The speed with United States, the documents submitted in sup- which the EEC does achieve a Community-wide port of an application for approval of a drug (the drug approval system, however, will have a sig- “dossier”) are treated as confidential. Proposals nificant impact on the development of biotech- are being considered in Europe, particularly in nology, because such a system could cut costs, the Federal Republic of Germany, to change the provide uniform regulation, speed up the ap- scope of the confidentiality of the dossier. one proval process, and open access to new markets. proposal is to retain the confidentiality of the dossier for a certain number of years, and then Currently, the existing directives deal only with allow access to the information after the payment drugs and veterinary medicines, not biologics. of compensation to the original manufacturer The directives also deal only with some aspects who performed the tests. of the pharmaceutical approval process—marketing authorizations and certain testing requirements. A system has been set up for obtaining FEDERAL REPUBLIC OF GERMANY multiple authorizations for marketing in EEC The Law on the Reform of Drug Legislation of member states, but control over exports outside 1976 sets forth the approval process for drugs, the EEC is entirely up to member states. biologics, and veterinary medicines (7). It is de- Council Directive 65/65/EEC established the signed to conform with the relevant EEC direc- basic regulatory framework with respect to drugs tives, and responsibility for its administration lies (4). It requires an authorization from the com- with the Federal Health Office (BGA, Bundes- petent authority of a member state before a drug gesundheitsamt). can be marketed in that state. It sets forth the The licensing procedure for new drugs and bio- required information that must be submitted to logics produced through biotechnological proc- the authorizing agency and provides that author- esses will be the same as for more traditional ization of the product shall be based on a finding products, A manufacturer of pharmaceuticals of safety, efficacy, and quality. Licenses are to be must obtain individual marketing authorizations granted for a 5-year period, subject to extension. to distribute each drug or biologic that it manufac- A similar directive exists for veterinary medicine (5). tures and separate manufacturing authorizations Two questions that will be important to biotech- for each of its production plants. Generally, the nology companies that manufacture drugs and drug approval process takes 4 to 6 months from that seek EEC marketing authorizations remain the time the application is filed. In the case of bio- unanswered. The first concerns the so-called logics, BGA defers to the Paul Ehrlich Institute, paper NDA issue. The EEC permits a new manu- which provides authorizations for the manufac- facturer of an already approved product to rely ture of sera, vaccines, test aUergens, test sera, and on published data to establish the safety, efficacy, test antigens. Before deciding to approve a new and quality of its version. It is unclear, however, drug or biologic, BGA must consult an independ- whether this policy will apply to biotechnological ent commission of experts composed of physi- products. Under most member states’ existing reg- cians and representatives of the pharmaceutical ulations, a change in manufacturing process from industry. After an authorization for a drug or a chemical to biotechnological synthesis requires biologic is given, BGA continues to monitor the either a new market authorization or an amend- competence of the managers and the adequacy ment to an existing one. Since the EEC has not of the facilities. An authorization may be with- addressed the issue, the individual member states drawn, revoked, or suspended if satisfactory will determine whether published tests results standards are not maintained. Ch. 15—Health, Safety, and Environmental Regulation . 367

BGA regulations governing clinical testing of despite an existing authorization. The circum- drugs and veterinary medicines track the appli- stances in which such a reauthorization must be cable EEC directives. No specific prior approval sought include a change in the composition of the of clinical testing is required, but BGA guidelines active constituents either in type or quantity, a for such trials must be followed. The process for change in dosage form, or an extension in the field obtaining marketing approval and the information of application. For biologics such as sera, vaccines, required in the application follows the EEC direc- and test allergens, a change in the manufacturing tives on proprietary medicinal products and on process also requires a reauthorization. veterinary medicinal products. * In addition, the Two regulatory issues currently being debated manufacturer must show that it holds a manufac- in the Federal Republic of Germany are also rele- turing license. vant. The first is a regulation now in force that Anyone seeking to market an imported product requires any person who markets a drug in the must show that the product’s foreign manufac- country to maintain a legal presence in the turer has the equivalent of a manufacturing Federal Republic of Germany. The EEC has re- license and a marketing license in the country of cently ruled that this requirement is illegal and manufacture; otherwise an explanation of why has asked that it be abolished, Whether the Fed- such authorization has not been granted must be eral Republic of Germany will do so remains to supplied. be seen. With respect to exports, it appears that a man- The second issue involves current proposals to ufacturer intending to produce an item solely for modify the confidentiality of drug authorization export must comply with the requirements anci dossiers. As in most of Europe, no manufacturer obtain a manufacturing license but need not in West Germany has access to confidential infor- obtain a marketing license. mation in another manufacturer’s dossier unless it specifically receives permission from the origi- Certain biologics, specifically sera, vaccines, or nal manufacturer, permission which is usually test allergens, may only be marketed if each batch granted, if at all, only after the payment of sub- is approved by the Paul Ehrlich Institute. Ap- stantial compensation. A second manufacturer of proval is given only if a test shows that the batch a drug that has already been approved may also possesses the required safety, efficacy, and quali- rely on published material in lieu of relying on ty, and has been manufactured and tested by the dossier or conducting its own tests, but most methods which conform to the standard set by important drugs are not the subject of published scientific knowledge currently prevailing. studies. Almost any scientifically reliable material Several aspects of the Federal Republic of Ger- will be contained in the confidential dossier that many’s pharmaceutical approval process are of the first manufacturer submitted. Under active particular significance to pharmaceuticals pro- consideration are proposals that would maintain duced by biotechnology, because a change in absolute confidentiality of the dossier for a given manufacturing process from chemical synthesis number of years, but then allow for access to the to biotechnology would necessitate a reauthoriza- dossier with a statutorily prescribed compensation of these products. In certain cases, a manu- tion system. It will probably be some time before facturer must apply for reauthorization of a drug any such system is enacted (8).

UNITED KINGDOM ● The application data must contain data showing: 1) the toxicological effects and pharmacological properties of the drug; 2) its effec- Because the United Kingdom is a member state tiveness in the given indications; 3) the propriety of the suggested dosage; 4) side effects; .5) the drug is of appropriate quality’; and of the EEC, its regulations conform to the basic 6) the production control methods correspond to scientific knowl- requirements of the EEC pharmaceutical direc- edge currently prevailing and are suitable for quality’ assessment, tives. Its current standards are embodied in the An application for an authorization for veterinary medicines anci medicated foodstuffs must include residue tests and indicate how Medicines Act of 1968 and in the regulations long it takes for residues to occur in edible tissues and how such adopted under this statute. No specific regulations residues are to be assessed, governing the approval of biotechnologically pro- .

368 ● Commercial Biotechnology: An International Analysis duced pharmaceuticals have yet been adopted, each batch of product be subject to certain tests so such products are subject to the general ap- and that samples and the results of the tests be proval process set forth in the Medicines Act. The submitted to the National Institute of Biological approval process for pharmaceuticals and related Standards and Controls (NIBSC). The basic tests substances is similar to the U.S. system in several administered by NIBSC, which may have to be respects, but it is somewhat less restrictive and modified in the case of new biotechnological ap- much more efficient in terms of the time for plications, include potency, purity, toxicity, pyro- approval. genicity, and immunogenicity. The Medicines Act of 1968 provides a compre- NIBSC has begun considering how its testing re- hensive framework for the regulation of “medici- quirements may have to be modified for biotech- nal products” which include drugs, biologics, and nological products but has not formally adopted veterinary medicines. Its provisions are adminis- new requirements (2). Among the issues which tered by the Health and the Agriculture Ministers NIBSC has identified as requiring modification of of the United Kingdom, acting with the advice of its procedures for biotechnologically produced the Medicines Commission. The day-today opera- products are establishment of the identity of large tion of the act is the responsibility of the Med- proteins produced by rDNA technology, adapta- icines Division of the Department of Health and tion of bioassay techniques, biological potency, Social Security. contamination of biotechnologically produced products with macromolecules of bacterial origin, and The regulations governing the use of medicinal chemical modification of the required products. products focus on the safety, efficacy, and quality of the product. The system utilizes five types of Several aspects of the pharmaceutical approval licenses: licenses as of right, clinical trial certifi- process in the United Kingdom will be particularly cates, * product licenses, manufacturers’ licenses, relevant to the development of biotechnology. The and wholesale dealer licenses. These licenses batch release system for testing biologics will ap- apply to the manufacture, sale, storage, import, ply to many biotechnologically produced prod- or export of any medicinal product. The require- ucts, but that will be the case in many countries. ments for the issuance of clinical trial certificates Also of importance for biotechnology is the treat- are considered to be among the strictest in ment of already licensed drugs produced with Europe. Before a certificate can be granted, an new methodologies. In the United Kingdom, such applicant must present animal pharmacokinetic drugs require product and manufacturing licenses. data, acute and chronic toxicity data, and infor- However, the full documentation that would be mation on potential reproductive toxicity. The required for a completely new drug need not be basic documentation required to obtain a product provided. The precise amount of documentation license is similar to that required by the relevant will vary with the particular drug. In general, the EEC directives. Trial certificates valid for up to United Kingdom will allow the substitution of 2 years and product licenses valid for 5 years are published references for actual test results in issued for drugs on which clinical testing and pro- those situations permitted under the EEC Council duction began after September 4, 1971. Either Directive 65/65/EEC (4). However, a second manu- may be renewed. facturer is not permitted to rely on the confidential information submitted in the dossier of a first Additional requirements are imposed with re- manufacturer. Thus, a new manufacturer of an spect to “biological,” which include vaccines, already approved drug is required independently toxins, antigens, sera, and enzymes. Such biologi- to demonstrate the safety, efficacy, and quality cal medicines are licensed on a batch release of the drug through its own research or that of system. The manufacturing license requires that independent researchers. “Licenses of right and clinical trial certificates are self-limiting. Imported drugs also require a product license. The trial certificates terminate automatically once the trial process The manufacturer may be required to declare has ended. Licenses of right are transformed into product licenses once the drug has been reviewed by the Medicines Review Com- that any requirements imposed by the law of the mission and found safe, effective, and of proper quality. country in which the drugs are manufactured Ch. 15—Health, Safety, and Environmental Regulation . 369

have been complied with and to permit the licens- from the Directorate of Pharmacy and Medica- ing authority to inspect his premises to ensure ments to manufacture the new drug product. If that they comply with any prescribed conditions the product is to be manufactured abroad, the of the license. Drugs produced solely for export manufacturer must attach to the French market- also must be licensed, but the licensing authority ing application the document granting it authority is required to consider only quality, not the safety to manufacture the product in the foreign coun- and efficacy of the drug. try. The marketing authorization itself is subject to the documentary requirements established by FRANCE the EEC directives. The French approval processes for pharmaceuticals includes many of the same steps as the proc- Once a manufacturer has submitted all relevant esses in the United States. The basic standards data to the Ministry of Health, the Minister must for approval are quality, safety, and efficacy of announce a decision on the application for mar- the pharmaceuticals, and the necessary tests are keting registration within 120 days. This period largely the same. may be extended for another 90 days in exceptional cases. In practice, however, the process- The authority responsible for the registration ing time for an application averages 6 to 8 months. of new drug products is the Directorate of Phar- A second manufacturer cannot rely on the dossier macy and Medicaments of the Ministry of Health, of a first manufacturer to qualify its drug, so a which administers the requirements of the Public new manufacturer making an already approved Health Code, Book V, and the EEC protocols for drug by biotechnological processes would have analytical, toxicological, and pharmacological tests to show the drug’s safety, efficacy, and quality and clinical trials. The Ministry of Health uses the all over again. However, as in other EEC coun- same basic standards of quality, safety, and effi- tries, a manufacturer may rely on some published cacy required by the EEC. data to support its application. A manufacturer must notify the Ministry of Once registration has been approved, as in the Health before commencement of clinical trials of rest of the EEC, the marketing license is valid for a new product or for a new indication of an estab- 5 years. It may be renewed for additional 5-year lished product. The trials must be carried out periods only if the manufacturer formally de- under the supervision of an “approved expert”* clares that no modification has occurred in the and must follow procedures and present data in scientific data submitted in support of the original the format established by the Ministry of Health. application. The Ministry of Health must there- Toxicological and pharmacological data must be fore be notified of any new data. submitted to the approved expert prior to commencement of the trials. Except for the analytical A drug may be imported from another EEC data, the information does not have to be gener- country and, in exceptional circumstances, from ated by local French studies; however, the for- a non-EEC country, provided that a marketing eign data can only be accepted if it is justified by license has been obtained in France. A certificate approved experts and conforms to EEC protocols. is required proving authorization for sale or dis- These rules apply also to clinical data generated tribution within the exporting country. Author- by studies conducted abroad. Clinical trials must ization for the marketing of an imported drug is be performed in hospitals as controlled experiments. only valid for 6 months, but presumably may be Prior to obtaining a marketing license, a manu- renewed. facturer is also required to request authorization .—.. .— Drug products designed for animal consump- ● “Approwd experts” are scientists tvith expertise in various aspects tion are also regulated by the Ministry of Health. of pharmaceutical testing who are approved by the Minister of The application procedures for obtaining author- Health. The Minister maintains lists of these experts from among whom an applicant may select experts to re~’iew his or her data ization to market veterinary drugs are basically and supenise further testing. Approved experts need not be French. the same as those for human drugs. 370 . Commercial Biotechnology: An International Analysis

Switzerland tions and on old drugs being produced through biotechnology. The Intercantonal Convention for the Control For imports, it is necessary to have a certifica- of Medicaments is the authority for the regulation of drugs and related products. Under the Con- tion that the drug is authorized for sale or distri- vention, the Intercantonal Office for the Control bution in the country of manufacture and that of Medicaments (IOCM, Interkantonale Kontroll- the manufacturer is subject to regular inspection. stelle fti Heilmittel) administers the drug regula- Drugs intended solely for export are exempt from tory system. IOCM has four principal tasks: quali- registration, but voluntary registration can be made. ty control of marketed drugs, quality control of manufacturing, the licensing of new drugs, and the review and relicensing of existing drugs. Japan IOCM has responsibility for pharmaceuticals, * The approval process for drugs, biologics, and veterinary medicines, and medical devices. Food veterinary medicines in Japan is set forth in the and cosmetics are controlled by the Federal Office Pharmaceutical Affairs Law (17). The law gener- of Public Health under separate Federal author- ally requires each manufacturer or importer to ity. The quality control functions of IOCM are obtain a license for each manufacturing plant or exercised through sampling of drugs at the time business office and a separate approval for each of their registration and periodically thereafter drug manufactured or imported. * The manufac- and through periodic inspections of pharmaceu- turer’s or importer’s license must be renewed tical facilities. every 3 years. The product approval has no set The licensing of pharmaceuticals is much more duration, but in practice many drugs are re- streamlined than in other countries. There is no viewed again after 6 years. The approval process requirement for government approval before ini- is quite drawn out and complex because many tiation of clinical trials. This is due both to the agencies are involved. The time from submission small size of IOCM and to greater reliance on the of an application to approval is supposed to take good faith of manufacturers and the common 1 to 3 years but in practice takes longer (13). sense of medical practitioners participating in the The information that must be filed with the clinical trials of new drugs. application for the approval of a new drug in Approval of the marketing of a drug is based Japan include data on origin, discovery, use in on its efficacy and safety, which are judged by foreign countries, physical and chemical structure an independent board of university scientists. and properties, stability, various forms of toxicity Approval can be refused not only if the drug is and other dangerous side effects, pharmacological found not to be safe and effective, but also if its action, how the drug will be used in the body, price is excessive. Licenses are issued for a 5-year and results of clinical trials (15). Most of the data period and may be renewed by the same board.** is required to be published as an original article The drug approval process generally takes 6 to in a Japanese scientific journal. Data on animal 10 months. tests for toxicity must meet certain special requirements. The application will be denied if the Of particular importance for biotechnology is drug has no effect, efficacy, or efficiency as in- the fact that less documentation is required for dicated in the application, if the drug is “remark- drugs that are not new chemical entities. Swit- ably dangerous” in comparison to its effect, or zerland’s streamlined drug approval process if the drug has been designated improper under should mean faster action on new drug applica- the Ministry of Health and Welfare Ordinance (17).

“This includes in vivo diagnostics, contraceptives, narcotics, An application to import a new drug must meet anesthetics, antibiotics, some industrially produced homeopathic these standards. It must also contain a document medicines, herbal remedies, radiopharmaceuticals, and certain blood products. *The separate approval for each drug is unnecessary if the drug “ “In special cases, up-todate analytical, preclinical, and chemical is listed in the Japanese Pharmacopoeia and has been exempted by data as well as samples may be required if requested by 10CM, the Minister for Health and Welfare. Ch. 15—Health, Safety, and Environmental Regulation 371 certifying that the exporting country approves its reexamination is to determine whether the drug manufacture and copies of the import contract now displays any condition that would, if a new or similar document (16). The import or manu- drug application were now filed, require its rejec- facture of biologics is prohibited unless special tion, i.e., that the drug is not efficacious, is more requirements concerning their processing, prop- dangerous than efficacious, or has been desig- erties, quality, and storage are met (16). Each nated improper (17). The approval for a drug may batch of biologics must be tested and approved be canceled if the drug cannot pass reexamina- by the National Institute of Health. tion, if health or sanitation reasons so require, if the licensee fails to submit accurate reexamina- New drugs must be reexamined about 4 to 6 tion material, or if the licensee has not produced years after approval, largely so that the safety of the drug for 3 years (17). How this will affect the drug can be assessed in light of post-approval drugs produced with biotechnology is unclear. clinical tests and other scientific research. The

Environmental regulation *

Protection of the environment is one aim of the NIH, after consultation with the Recombinant rDNA guidelines in each of the competitor coun- DNA Advisory Committee. * tries; none of them have any other rules specifi- It is difficult to determine what effect, if any, cally directed to the environmental effects of bio- the more general environmental regulations of technology. Nevertheless, the more general en- each country dealing with air and water pollution vironmental laws will apply to biotechnological and waste disposal will have on biotechnology in processes, products, and waste products. The ex- that country. Since much of the environmental tent to which these general laws will apply to ge- regulation in any country is performed on the netically modified organisms used in the environ- local level, generalizations about national environment is uncertain in all of the countries except mental controls can be misleading. States (Lander) the United States, where EPA has asserted juris- in the Federal Republic of Germany, for example, diction under TSCA. are about to enact specific legislation to fill in the The environmental requirements in the rDNA framework set up by Federal laws. Certain envi- guidelines are likely to have little effect on the ronmental legislation in Japan, though enacted at competitive position of any country. The specific the national level, applies only to certain areas. measures required for any physical containment Local authorities in France and the United King- level vary little from country to country, More- dom possess considerable responsibility for ad- over, most rDNA activities are now conducted at ministering and enforcing environmental rules. low containment levels that require essentially Switzerland leaves most decisions on environmen- only that good microbiological practices be fol- tal regulation to the cantons, as it does decisions lowed. Deliberate release of genetically modified on other subjects. The United States has one of organisms is generally prohibited, although pro- the more centralized systems for environmental cedures exist for exceptions from the prohibition. control, but even Federal statutes allow for In the United States, deliberate release is not pro- responsibility to be transferred to the States. hibited as such, but one who would do so under the guidelines must have the approval of IBC and *,A Iamsuit has heen filed against N1l I rlaiming that al)})rm al b~ *For specific information regarding the six countries, see the the Recombinant DN’A ,Ad\isorJ Committee is not consistent i~i[h section on environmental regulation in Appemh F“: f?ecornbinanf thr National Ent’ironnwntal Polir} Act iind rlaiming that an k;ntiron- DIVA Research Guicfelinm, Environmental Lawrs, anc] Regulation of mvntal Impact Statement ITILISt t)(’ pI’(?[MI’(?d k’OUldatk)ll ()[1 L%’orker Health anti .$afet.b. I<[wnomic ‘1’I’f’lJdS \ tlt’rld(’r, so. 83 (: I\’ ~y 1A (1).[),(:, Sept. 14, 1 983)). 372 ● Commercial Biotechnology: An International Analysis

All of the countries except Switzerland have interpretation of the definition of “chemical sub- fairly comprehensive and stringent environmental stance” survives any subsequent legal challenge, regulation. Switzerland’s national regulation is TSCA would have great potential for regulating directed only toward water pollution. Thus, its the deliberate release of genetically modified orga- biotechnology companies may have a competitive nisms. Under section 4 of TSCA, EPA can adopt advantage over those in the other countries be- rules requiring testing of chemical substances that cause of less restrictive environmental regulation. “may present an unreasonable risk of injury to Yet even the more stringent regulation in other health or the environment” or will be produced countries would not necessarily handicap com- in substantial quantities (and enter the environ- panies because the regulation is directed mainly ment in substantial quantities or result in sub- toward toxic chemicals. The degree of traditional stantial human exposure) when existing data are environmental problems that companies using insufficient to make a determination and testing biotechnology might create—air and water pollu- is necessary to develop adequate data. Section 5 tion and hazardous waste-does not now appear requires the manufacturer of a new chemical sub- to be so great that environmental controls will stance to notify EPA 90 days before beginning significantly affect the commercialization of bio- production and submit any test data it may have technology. However, increasing commercializa- on the chemical’s health or environmental effects. tion of biotechnology eventually will require more If the agency decides that the data are insufficient consideration about the disposal of waste byprod- for evaluating the chemical’s effects and that it ucts. All countries are now about equal in this “may present an unreasonable risk of injury to area, but those who undertake to resolve uncer- health or the environment” or will be produced tainties about the specifics of that regulation in substantial quantities (and enter the environ- should enhance the competitive positions of their ment in substantial quantities or result in substan- biotechnology companies. tial human exposure), it can propose an order to restrict or prohibit the chemical substance’s man- The United States seems to be the farthest ufacture or use. Under section 6, EPA can pro- ahead in considering the risks and regulation of hibit or regulate the manufacture or use of any the deliberate release of genetically modified chemical substance that “presents, or will present organisms. This may simply be the result of the an unreasonable risk of injury to health or the fact that this area of biotechnology is further environment. ” TSCA also provides for record- along in the United States than in the other coun- keeping and information gathering about the tries. In any event, NIH recently has reviewed and environmental and health effects of chemical approved several proposals to release organisms substances. into the environment. Also, on June 22, 1983, two congressional subcommittees held a joint hearing Despite its theoretical applicability, TCSA may on the topic of regulating such releases (22). leave much to be desired in terms of a practical program to regulate the use of genetically manip- At the hearing, EPA took the position that such ulated organisms in the environment. First, EPA organisms are “chemical substances” as defined has little expertise or experience in the area of by TSCA * and therefore subject to regulation by genetic manipulation. Second, its toxic substances EPA under TSCA (3). Although the matter is not program has been significantly understaffed, ac- free from doubt, a consensus has been developing cording to a 1980 study by the U.S. General Ac- among the experts that TSCA would apply (18). counting Office study (21), Third, TSCA may not TSCA gives EPA broad authority to regulate the give EPA sufficient regulatory power, if the risks products of biotechnology, and, assuming EPA’s presented by deliberate release are viewed as substantial, For example, section 5, which creates the ● A ‘{chemical substance” is defined in the relevant part under sec. premanufacturing notice requirement, does not 3(2)(A) of TSCA as “any organic or inorganic substance of a par- require the generation of toxicological data. A ticular molecular identity,” including “any combination of such substances occurring in whole or in part as a result of a chemical reac- recent OTA background paper found that near- tion or occurring in nature. . . .“ ly half of the premanufacturing notices submitted Ch. 15—Health, Safety, and Environmental Regulation . 373 to EPA do not have information about the chem- \\151-167; 7 U.S.C. \150aa et seq.). Thus, some ical’s toxicity (26). * Moreover, the burden is on of the “raw materials” of interest to biotechnolo- EPA to take legal action if it believes that insuffi- gists in the agriculture field are subject to USDA cient data exists for a new chemical substance. restrictions. For example, two potential mechanisms for transferring genes into plants are the USDA also has an environmental role to play bacterium Agrobaclerimn Imnefaciens with its with respect to biotechnology. It regulates impor- integrating Ti plasmid and the cauliflower mosaic tation and interstate shipment of plants, animals, virus. Both the bacterium and the virus are sub- and their pathogens (21 U.S.C. \$lO1-135; 7 U.S.C. ject to the restrictions. Similarly, work with particularly dangerous animal viruses may be pro- ● As to the importance of such information, OTA’S background hibited or severely restricted. For example, work paper stated (26): “(k?rtainly, the absence of toxicity data complicates on foot and mouth disease virus can only be per- EPA’s efforts to decide whether a new chemical may present an unreasonable risk to health or the environment. But the importance formed at Plum Island, a high containment USDA of toxicity data for making decisions about particular chemicals laboratory located off the coast of Long Island, iraries. Those data are less important for chemicals that closel~’ N.Y. USDA also bars entry into the United States resemble others for which there is much information and experience. They are critical for unusual chemicals or chemicals for which of 22 other pathogens that might be of interest there is limited information. ” to companies desiring to produce animal vaccines.

Regulation of worker health and safety*

The rDNA research guidelines in each of the as yet on the industries using biotechnology in six countries (but not those of the EEC itself) con- each country. Each country imposes general tain provisions for the safety and health of labora- duties on employers to maintain safe workplaces tory workers. Each country also has more widely and to eliminate or control hazardous substances applicable laws and regulations, but it is the rDNA (although when these substances are specified, guidelines that will have the most immediate im- they do not include materials likely to be found pact on the biotechnology companies. in a biotechnology laboratory). The most that can be said is that each country has at least one The substance of the various worker health and authority able to impose further requirements to safety provisions in the national rDNA guidelines protect worker health and safety, but none has varies among the six countries studied, although yet done so. Such requirements would be pri- most set forth rules to ensure that laboratory marily process rather than product oriented. workers are knowledgeable about laboratory procedures, that emergency procedures are known The United States has studied the question of and safety equipment is available, and that worker the possible risks posed to workers from long- health is monitored for certain types of work. It term exposure to novel organisms and products. seems fair to infer that the costs and burdens The Centers for Disease Control and the National associated with these requirements are modest, Institute of Occupational Safety and Health because there has been little criticism or com- (NIOSI-1) created an ad hoc working group on plaints about them from academia or industry (8). medical surveillance for industrial applications of rDNA. The group concluded that, while physical The more general worker health and safety containment of rDNA-containing organisms and laws in the United States and in each of the five their products is the first line of defense, medical foreign countries have had no measurable effect surveillance of industrial workers can play a valuable auxiliary role in protecting their health (19). ● For specific information regarding the six countries, see section on regulation of worker health and safety in ,4ppendix 1+-: Recombi- Others have disagreed with this finding, question- nant D,N’A Research Guidelines, En~fironmental La~+rs, and Regula- ing the need for surveillance and the ability to tion of H’orker Health and Safet~J. construct a meaningful program. . . . .

374 . Commercial Biotechnology: An International Analysis

The NIOSH findings have not been implemented with biotechnology, the agency could act on by the Occupational Safety and Health Admini- known biological risks (e.g., those presented by stration (OSHA), the U.S. agency primarily respon- known pathogens), or physical risks (e.g., those sible for worker safety and health. Under the presented by the use pressurized containment Occupational Safety and Health Act of 1970, OSHA vessels). In any event, OSHA has not promulgated can promulgate workplace standards to protect any standards for bioprocesses in general, nor has workers from toxic substances or harmful phys- it taken any position on regulating biotechnology. ical agents. Under a recent decision by the US. At this point and for the foreseeable future, Supreme Court (12), such standards must be “rea- worker health and safety regulation of biotech- sonably necessary to remedy a significant risk of nology is minimal. Thus, it will give neither an material health impairment. ” Although this re- advantage nor a disadvantage to any of the com- quirement would appear to prevent OSHA from petitor countries. acting on those purely conjectural risks associated

Findings _ -—

Health, safety, and environmental regulation can be done at the lowest containment levels. can affect the cost, time, and financial risks of Prior approval, even by the IBCS) is required only getting products to market. Thus, such regulation for a limited category of experiments. The rDNA can be expected to affect international competi- research guidelines of Japan and the European tiveness in biotechnology. countries are more restrictive than the U.S. guidelines in one or more of the following ways: The only government controls directed specif- ● ically toward biotechnology are the rDNA guide- they require more stringent containment; lines adopted by the EEC and the six competitor ● they require more time-consuming approval countries. They are essentially voluntary and procedures; directed primarily at research, although they do ● they have fewer categories of approved host- apply to large-scale work to varying degrees. vector systems; or Their containment and oversight provisions have ● they severely restrict large-scale work. been substantially relaxed since they were origi- Japan has the most restrictive rDNA guidelines. nally adopted, and this trend is expected to A limited number of host-vector systems have continue. been approved for use. More importantly, companies have had extreme difficulty in obtaining The rDNA guidelines in the competitor coun- approval to do work with more than 20 liters of tries are quite similar in their regulatory goals, culture, but this is expected to change soon. requirements, and implementation because they are generally patterned after the U.S. guidelines, Of the remaining countries, Switzerland ap- which were initially developed through the efforts pears to have the least restrictive guidelines. Its of the international scientific community. Never- Government has played no role in the guidelines, theless, there are differences that allow the and there are no requirements covering large- guidelines to be ranked in terms of their restric- scale work. However, Switzerland follows an tiveness and potential impact on the competitive- earlier, and thus more restrictive, version of the ness of the various countries. U.S. guidelines. The guidelines in France and the United Kingdom appear to be roughly equivalent The rDNA guidelines of the United States are with regard to their impact on biotechnology. The the least restrictive of the guidelines in any of the Federal Republic of Germany appears to be competitor countries. The vast majority of the ex- slightly more restrictive, primarily because periments that are done with the most common- Government approval must be obtained before ly used host-vector systems are either exempt or even moderate risk experiments can be started. Ch. 15—Health, Safety, and Environmental Regulation 375

It is the existing regulation that will most affect venture agreements between U.S. NBFs and their biotechnology: product approval laws, environ- foreign partners, these requirements could en- mental laws, and worker health and safety laws. hance the transfer of biotechnology to foreign The most important of these for biotechnology companies. will be the product approval requirements, espe- Specific requirements regarding biotechnology cially for pharmaceuticals and veterinary medi- products are or will be set at the agency level cines because those products are the most strin- within the existing statutory framework. In the gentl regulated or the subject of much of the cur- y United States, FDA has taken the lead in develop- rent effort in product development. For this ing and publishing informal statements. Since reason, and because of insufficient information these statements help dispel uncertainties, they on foreign regulation of the other products, the will help product development. In its policy state- analysis for product approval in this chapter con- ments, however, FDA has taken the position that centrated on the regulation of pharmaceuticals and rDINA products whose active ingredients are veterinary medicines, identical to ones already approved or to natural With respect to the product approval process, substances will still need to go through the new particularly for pharmaceuticals and animal product approval process. However, data require- drugs, the United States appears to be at a comments may be modified and abbreviated. This ap- petitive disadvantage with respect to all of the pears not to be the situation in other countries, other countries except Japan. The competitive dis- although there have not been definitive pro- advantage for the United States results mainly nouncements by the regulatory agencies. from the time and cost necessary to secure one area of uncertainty that could hinder U.S. premarketing approval. In contrast, the United competitiveness in biotechnology to some degree Kingdom has the most expedited pharmaceutical is the question of jurisdiction over animal bio- approval process, even though its substantive re- logics. FDA and USDA are engaged in a jurisdic- quirements are quite similar to those of the United tional dispute that could delay product approvals. States. Switzerland is the least restrictive of the countries in terms of substantive requirements. Environmental and occupational safety and For example, it does not require Government ap- health regulations are not likely to give any of the proval before initiation of clinical trials, In con- countries a significant competitive advantage in trast to pharmaceuticals and animal drugs, the biotechnology. This regulation is likely to play a regulatory requirements for animal biologics are minor role, except in the area of deliberate release less restrictive in the United States and roughly of genetically manipulated organisms into the on par with those in other countries. environment. For that application of biotechnology, uncertainties exist as to what, if any, kind Another reason the United States is at a com- of special regulation will develop. The United petitive disadvantage is that the United States, in States appears to be the farthest along in consider- contrast with the other countries, does not allow ing the problem; thus, to the extent that decisions the export of unapproved pharmaceuticals. In are made and the regulatory picture clarified for addition, bulk drug products may also not be able corporate planners, the United States may have to be exported, Given certain provisions in joint a slight advantage. 376 ● Commercial Biotechnology: An International Analysis

Issue and options

ISSUE: How could Congress improve U.S. making their own health and safety decisions. competitiveness in biotechnology Partly to avoid the U.S. ban on the export of un- through changes in the regulatory approved drugs, the multinational drug compa- environment? nies have established foreign manufacturing fa- Regulation imposes costs, constraints, and de- cilities. This practice results in the transfer of lays on biotechnology companies that are justi- technology and jobs from the United States and fied when they promote such general goals as the has an adverse effect on the U.S. balance of enhancement of human health or quality of the payments. For NBFs, which may not have the environment. To the extent that such regulation money to establish foreign facilities or the time is inefficient or unnecessarily restrictive or before contract revenues and capital run out, the creates uncertainties that impede business plan- export restriction may be especially burdensome. ning, however, it will restrict biotechnological FDA has taken the position that bulk pharma- innovation and U.S. competitiveness in biotech- ceutical products made by biotechnology are nology without achieving the other goals. drugs because such products are biologically ac- OTA has identified several options that could tive; thus, the export prohibition of FFIICA ap- improve U.S. competitiveness in biotechnology plies. One U.S. company, Genentech, has asserted through changes in laws, regulations, and admin- that its inability to sell bulk pharmaceutical prod- istrative policies regarding health and safety. ucts to its foreign joint venturers will result in Many of these are not specific or limited to bio- its being required to transfer the technology to technology but nevertheless could significantly produce that bulk product to its foreign partners. affect this technology. Furthermore, many of the This company has argued that bulk pharmaceu- actions could be taken by executive agencies, and, tical products produced by biotechnology and not in fact, are being considered. Nevertheless, Con- labeled as drugs should not be considered drugs gress may decide legislative action is necessary under FFDCA and FDA regulations. Clearly, this or more appropriate. question of interpretation could be resolved on the administrative level without congressional ac- Option 1: Amend the Federal Food, Drug, and Cos- tion. To change the general prohibition in FFDCA metic Act (FFDCA) to permit the export of against the export of unapproved human and ani- unapproved drugs and biologics. mal drugs and biologics, however, legislation would be necessary. of the six competitor countries identified in this assessment, the United States is the most restric- The arguments against amending FFDCA to per- tive regarding the export of unapproved drugs mit the export of unapproved drugs and biologics and biologics. The relevant provision of FFDCA are essentially moral ones. There have been is designed to prevent “drug dumping’ ’—situations documented cases of drug dumping in developing where drugs deemed unsafe or ineffective by the countries. Supporters of the existing restrictions United States or other developed countries have argue that the United States has a moral duty to been marketed in developing countries. try to prevent such actions and that the developing countries are unofficially in favor of these Those who advocate eliminating this provision export restrictions. of FFDCA argue that a US. company can have ethical reasons for wanting to export a drug that There are several different ways that legislation is unapproved by FDA. For example, it may be to permit the export of unapproved human and supplying a company that sells the drug in a coun- animal drugs and biologics could address these try that has approved the drug for sale. Advocates moral arguments. First, the legislation could ex- of eliminating this provision also argue that the clude products that have actually been barred by provision simply embodies U.S. paternalism FDA. Second, it could permit the export of un- toward other countries, which are capable of approved drugs and biologics only if they have Ch. 15—Healfh, Safety, and Environmental Regulation 377 .— been approved by at least one other developed ()ptwn 3: Amend t/w patent Jaw to e.\tend t/u' IeI'm country. Third, it could permit the export of un of patents on products or processes I ha I approved drugs and biologics only to countries need nwuJaIOl:\' appr()\'aJ.<; /w{ore 111ilr where the products has been approved. Finally, ketinf{. the legislation could be drafted so that un This option was considered extensively by the approved drugs and biologics can be exported 97th Congress, in which legislation passed the only to developed countries. The potential Senate and failed to pass the House by a few votes. diplomatic problems that could arise by having It was also the subject of an OTA report, Patent to decide \vhich countries are "developed" could Term Extension and the Pharmaceutical Industry be avoided or lessened by using the definitions (24). Legislation to accomplish this option (S. 1306, of various international organizations, such as the H.R. 3502) has been introduced in the 98th Congress. International Monetary Fund. Firms that are heaviiy invoived in basic research Option 2: Pass legislation to merge the \'irus, Serum, support patent-term extension. They claim that Toxin Act of 1913 into the Federal Food, R&D costs and risks are rising, yet the effective Drug, and Cosmetic Act. Hfe of patents on the products resuiting from the The reasons for the different statutes are pri R&D is declining because of the increasing time marily historical, and the distinctions between necessary for securing regulatory approvals be- £ ___ ~ __ 1 __ .! __ ~:. ___ ... 1_.= ______..&. ______animal drugs and biologics, if they were not lure lllal·Keullg. ~lllce tIllS rnay cause retUrIlS Ull already anachronistic, have virtually been made R&D investments to decrease, the firms assert so by rDNA and hybridoma technology. Neverthe that innovation will suffer. Several biotechnology i'~.""""" h""..,. "" ...... ~.,,+..,.rl +h~" ~ ..... +~~ ...... "hl~~I" less, USDA and FDA were engaged in a jurisdic 111 111., IHIVC; .,UPPUI LC;U llll., UPllUI1 PULJIILI'y. tional dispute over bovine interferon and may well continue to engage in disputes over future Generic drug producing firms and consumer products. By trying to satisfy both agencies, U.S. groups oppose patent-ternl extension. The generic companies using biotechnology are likely to in drug firms, which derive most of their revenues cur additional costs and delays. In addition, the from drugs equivalent to the pioneering ones uncertainties over regulatory authority may whose patents have expired, assert that patent hinder corporate planning for what product areas term extension will delay their entry into the to pursue or may steer firms away from pursu market or not make that entry worthvvhile be ing these kinds of products. As a result, U.S. firms cause of limited product life renlaining. They also may be at a competitive disadvantage with respect assert that patented products often maintain an to foreign firms. exclusive market position after their patents ex pire because of nonpatent barriers to market ac Although combining the regulatory jurisdiction ceptance of generically equivalent products. As into one agency, FDA, may make sense concep a result, patent-term extension would cause com tually, there will be substantial institutional petition to decline and prices to increase. The barriers to doing so. If USDA is unwilling to give consumer groups support this position and also up its jurisdiction, as it appears to be, it can count note that the pharmaceutical industry has been on substantial political support from inside and extremely and consistently profitable for a great outside of government. In addition, despite the many years, even whiie the reguiatory burdens adverse consequences of this jurisdictional dis have been increasing. pute, the biotechnology companies themselves may well prefer USDA to retain or enhance its The OTA report mentioned above found that jurisdiction over animal biologics because USDA "[t]he evidence that is available neither supports regulation is viewed as substantially less burden nor refutes the position that innovation will in- nT'o ... "n "irlnifin<)nth, hO£"'<)ll(,O rtf n-::.tont_toT'TYl ovton_ some and costly than FDA regulation. This option \"",1 ca~v ~1511111'-'Ul1Ll ...y UL'--'UU~'-' U.l PULvlll.-LL.llll v.l'\.1.""".11- has been proposed several times in past years, sion." It did note, however, that the incentives pro but there has been little progress to\vard its vided by patents for pharmaceutical R&D would implementation. be enhanced.

25-561 0 - 84 - 25 378 ● Commercial Biotechnology: An International Analysis

Option 4: Address the uncertainties and concerns uncertainties about the Federal Government’s au- about the deliberate release of genetical!y thority to regulate such activities may impede manipulated organisms into the environ- developments in the use of biotechnology in areas ment by passing new legislation or amend- such as microbial enhanced oil recovery, pollution ing the Toxic Substance Control Act to clari - control, and mineral leaching. It may even hinder [V its applicability to living organisms. genetic manipulation of plants, * although the There are risks associated with releasing non- risks involved are seen as much less than those indigenous organisms into the environment. Al- for micro-organisms. Given the concern about though most nonindigenous such organisms do risk and the uncertainty over the Federal Govern- not establish an ecological niche, many have done ment’s possible regulatory response, U.S. com- so with disastrous consequences. For example, panies may have difficulty planning where to over half of the insect pests in the United States place limited resources for research and product today came from abroad; similarly, the micro- development. organism causing Chestnut blight was not indigenous to the United States. Opponents of this option are likely to question whether legislative action is needed to accomplish The risks of releasing genetically manipulated the goal of environmental protection. Although organisms into the environment are not known. most experts acknowledge that there is uncer- On one hand, changing the genetic makeup of an tainty about whether TSCA covers organisms, a organism usually decreases its ability to survive. consensus seems to be developing that it does. On the other hand, many of these organisms, such More importantly, EPA has taken the position that as microbes used for enhanced oil recovery, will TSCA applies. In addition, voluntary oversight is have to be manipulated so as to be competitive being exercised by the Recombinant DNA Advi- with indigenous micro-organisms and to be able sory Committee, although the quality of that over- to withstand extreme environments in order to sight is the subject of litigation. be able to accomplish the task. Some industry spokespeople, who believe that rDNA-containing microorganisms do not present any special risks when properly contained in bioreactors, have expressed concern about the deliberate release ● The U.S. Recombinant DNA Advisory Committee (RAC) recent- of such micro-organisms into the environment. ly approved a change in the guidelines that would permit field tests with plants containing rDNA with the prior approval of the local The concern about releasing genetically manip- Institutional Biosafety Committee and a working group of the RAC ulated organisms into the environment and the under certain conditions.

Chapter 15 references* —

1. Bozeman, N. H., “The Regulation of Hybridoma 3. Clay, D. R., Acting Assistant Administrator, Office Products)” The Impact of Hybridoma Technology of Pesticides and Toxic Substances, Environmental on the Medical Device and Diagnostic Product In- Protection Agency, statement in Environmental Im- dustry, T. J. Henry (cd.) (Washington, D.C.: Health plications of Genetic Engineering, hearings before Industry Manufacturers Association, 1982). the Subcommittee on Science, Research, and Tech- 2. Bristow, A. F., and Bangham, D. R., “The Control nology and the Subcommittee on Investigations of Medicines Produced by Recombinant DNA Tech- and Oversight, House Committee on Science and nology, ” Trends in Biological Science (Amsterdam: Technology, U.S. Congress, June 22, 1983 (Wash- Elsevier/North-Holland Biomedical Press, August ington, D.C.: U.S. Government Printing Office, 1981), 6: VI-VIII. 1983). 4. Council of the European Communities, Council ● Note: F.2d =Federal Reporter, Second Series Directive of 26 January 1965, No. 65/65/EEC, on S Ct. =Supreme Court Reporter. the Approximation of Provisions Laid Down by Ch. 15–Health, Safety, and Environmental Regulation 379

16.

17.

18.

6. 19.

20.

21.

9. 22,

10.

11.

23.

24. 12,

13. 25.

14, 26,

15. 27. 380 ● Commercial Biotechnology: An lnternational Analysis

33. 29

34.

35.

36.

32 Chapter 16 Intellectual Property Law Contents

Introduction ...... 383 Intellectual Property Law of the United States ...... 384 Law of Trade Secrets ...... 384 Patent Law ...... 385 Plant Breeders ’Rights Statutes ...... 392 Comparison of U.S. and Foreign Intellectual Property Law ...... 393 Patent Law ...... 393 Trade Secret Law...... 398 Plant Breeders’ Rights ...... 399 Evaluation of Effectiveness of Intellectual Property Law To Promote the Development of Biotechnology ...... 400 United States...... a s+...... 400 Foreign Countries ...... 401 Findings ...... 401 Issue and Options ...... 403 Chapter 16 References ...... 405 Chapter 16 Intellectual Property Law

Introduction

Biotechnology will give rise to a vast array of the Federal Republic of Germany, the United new inventions. The inventions may be placed Kingdom, France, and Switzerland-aIlows inven- into two general categories: products and proc- tors, private companies, and others to protect the esses. Products will include organisms, such as results of their efforts. genetically modified micro-organisms, cell lines, The three categories of intellectual law most hybridomas, plants, and possibly even animals. relevant to biotechnology are those dealing with Products also include parts of organisms and trade secrets, patents, and plant breeders’ rights. related material such as high expression plasmids, These are the focus of this chapter. * Copyright viral vectors, synthetic genes, probes, and restric- may also be relevant, because it protects the tangi- tion enzymes. Finally, there will be products of ble expression of information, and a gene may organisms, such as drugs, chemicals, biologics, be viewed as the tangible expression of informa- and monoclinal antibodies (MAbs). Processes will tion (36). Because this idea has not been widely include various ways to make new organisms or accepted, and several commentators have criti- parts thereof or to use an organism to make some cized its usefulness (16)40)52)) here it will not be product such as insulin. Other examples of proc- discussed any further. esses include various bioprocessing techniques, regeneration of plant tissue culture, breeding The categories of intellectual property law work techniques, and methods of treating the human together as a system. If one has disadvantages, body. In addition, research and development a company can look to another. To the extent that (R&D) will give rise to new knowledge, which will a country has available many alternative ways for be of value to whoever possesses it. companies to protect biotechnological inventions, it is more likely to be competitive in biotech- The ability to secure a property interest in an nology. invention and to protect related know-how generally is perceived as providing an extremely im- This chapter compares and contrasts the law portant incentive for a private company to spend relating to the protection of biotechnological time and money to carry out research, develop- inventions and related know-how in the United ment, and scale-up for the commercialization of States, the United Kingdom, the Federal Republic new processes and products. Without the ability of Germany, Switzerland, France, and Japan. The to prevent other companies from taking the re- chapter begins by examining U.S. law in order sults of this effort, many new and risky projects to provide a basis for comparisons, raise the rele- that could lead to important new products would vant issues, and explain some basic legal concepts. not be undertaken. Empirically proving this no- — tion, however, is difficult (47). It is beyond the ● Two other areas of law are also relevant to biotechnology but scope of this chapter to delve into the debates will not be considered in this chapter: personal property law and among experts on that problem. This chapter will contract law. Traditional personal property law will apply to cell lines and many other biological inventions because they are physical assume—as our society does—that the ability to objects—just like cars and jewelry. Contracts create legally enforce- secure property interests in or otherwise protect able rights and duties between the contracting parties. Thus, biotechnological processes, products, and know-how technological inventions can be protected by contract, and in k’iew of some of the uncertainties in the intellectual property lam’ regard- will encourage development of technology. There- ing biotechnolo~~,, contracts can be important to biotechnolo~~ fore, one factor to evaluate in assessing U.S. com- companies in many instances. These topics will not be considered petitiveness in biotechnology is how well the law further in this chapter, because OTA was unable to obtain information on how they would apply to biotechnoloqv in other coun- of intellectual property of the United States and tries. Some commentators have ad[iressed their applicability to the five other major competitor countries—Japan, biotechnolo~~ in the LJnited States (10,40,42).

383 384 ● Commercial Biotechnology: An International Analysis

Foreign intellectual property laws are considered tected; and 3) what questions are unanswered? after the discussion of the U.S. law and also in Policy options for Congress addressing the issue appendix G. The strengths and weaknesses of the of how to improve U.S. competitiveness in bio- laws of the six countries are then analyzed by con- technology by strengthening U.S. intellectual sidering three basic questions: 1) what interests property law are identified and discussed at the will the law protect; 2) how well will they be pro- end of the chapter.

Intellectual property law of the United States

As noted above, three categories of intellectual In the United States, virtually any biological in- property law are particularly relevant to biotech- vention, including cells and their components, or nology: trade secrets, patents, and plant breeders’ related information would be protectable by the rights, law of trade secrets. * It should be noted, however, there are some Law of trade secrets limitations on its scope. One important limitation An inventor is regarded in the United States as arises from the fact that a trade secret must be having a natural right to keep an invention secret. continuously used in a business. This requirement This right is recognized by the law of trade se- raises questions about the results of basic re- crecy. A trade secret is generally viewed as “any search. Generally, the courts have held that if in- formula, pattern, device, or compilation of infor- formation is merely a preliminary idea, it does mation which is used in one’s business, and which not qualify as a trade secret (41,51). Some degree gives him (sic) an opportunity to obtain an advan- of commercial value must be established if the tage over competitors who do not knew or use information is to be considered a trade secret. A it” (l). * Examples of trade secrets in biotechnol- few States have taken a more expanded view of ogy are a method for genetically manipulating an the concept of trade secret and protect informa- organism, a method for selecting among the orga- tion that also has only potential economic value. nisms for those particular characteristics, and the In those States—Arkansas, Idaho, Kansas, Minne- organism itself. sota, and Washington—the results of basic research clearly would be protected. The holder of a trade secret in the United States can enforce his or her interests in State courts Another possible limitation on the scope of the by securing either an injunction or monetary law of trade secrets arises from the fact that the damages against a person who takes or otherwise holder of a trade secret must know the informa- acquires the secret through improper means, or tion and attempt to keep it secret from others. even against a person who acquired it through In the well-known case involving disputed owner- mistaken disclosure by the owner.** Criminal ship of an interferon-producing cell line, Hoff- penalties may also be available in egregious cases mann-La Roche, hc. v. Go/de (28). Genentech in the majority of States. The underlying policy (U. S.) and Hoffmann-La Roche (Switzerland) ap- is that a person should not benefit by unfairly parently argued that the University of California using another’s efforts. had no trade secret interest in the cell line because the university did not know about its abil- “In recognizing the existence of a trade secret, the courts do not ity to produce interferon (10). use a hard and fast definition, but look at numerous factors, such as the extent to which the information is known outside of the The advantages of a trade secret to its holder business, the effort involved in developing and guarding the information, and the difficulty with which the information could be prop- are several. First, there is no time limit on trade erly acquired by others (see 34). * ● The cases also recognize secret information that does not qualify *Misappropriation of an organism or other tangible biological as a trade secret, but a person acquiring or using that information material constitutes misappropriation of the information it contains is liable only if he does so by “improper means” (l). (see 53). Ch. 16—Intellectual Property Law ● 385 secret protection. It should be noted, however, it. Finally, the acquisition of a trade secret by a that in a fast moving area like biotechnology, the competitor through misappropriation or breach “useful life” of a trade secret may actually be quite of a confidential agreement may be difficult to short. Second, a trade secret does not have to be prevent, discover, or prove. Microorganisms are a patentable invention. Third, maintenance and especially easy to steal, once one gains access to enforcement are generally less expensive for them, because of their small size and self-repli- trade secret rights than for patents. Fourth, com- cating nature. Further, the thief would not even petitors are not apprised of the information, in have to understand exactly the valuable informa- contrast to the situation with patents (see below). tion contained in the micro-organisms; he or she Fifth, trade secret protection is valuable for cer- has acquired the factory (i.e., the microorganism) tain inventions that would be hard to police if and the ability to grow it in any amount desired. patented. For example, if a product is capable of being made by many different processes, keep- Patent law ing secret a new process for making the product might be preferable to patenting it. Sixth, if there U.S. patent law, Title 35 of the United States is doubt as to the patentability of an invention, Code, is designed to encourage invention by grant- trade secrecy is a viable alternative. Finally, cer- ing inventors a limited property right in their in- tain organisms and parts thereof, such as high- ventions. A U.S. patent gives the inventor the right expression plasmids, may be better off held as to exclude all others from making, using, or sell- trade secrets, since they could not be reverse ing the invention within the United States without engineered from the products that they produce, the inventor’s consent for 17 years. In return, the but, if patented, would be placed in the public inventor must make full public disclosure of the domain. invention. Disadvantages of relying on trade secrecy in- The policy behind U.S. patent law is twofold. clude the following. First, the protection exists First, by rewarding successful efforts, a patent only as long as secrecy exists. The holder of a provides inventors and their backers with an in- trade secret has no rights against someone who centive to risk time and money in R&D. Second, independently discovers and uses the trade secret and more importantly, the patent system encour- and has no rights against someone who may have ages public disclosure of technical information, innocently learned the secret from someone who which may otherwise have remained secret, so originally obtained it improperly. Second, reverse that others are able to use it. The inducement in engineering (the examination of a product by ex- both cases is the potential for economic gain perts to discover how it was made) is a legitimate through exploitation of the patent right. way to discover a trade secret. The structure of To qualify for patent protection in the United a gene, for example, may be determined by re- States, an invention must meet the following reverse engineering a polypeptide that is on the quirements: market. Because of the complexity of biological processes and organisms, however, most of these . it must be capable of being classified as a will not be capable of being discovered by reverse process, machine, manufacture, or composi- engineering of their products. Third, trade secretion of matter;* ● it must be new cy is, by definition, incompatible with the desire ) useful, and not obvious; and of most scientists to publish the results of their . it must be disclosed to the pubIic in sufficient research. If a company wishes to attract and re- detail to enable a person skilled in the same tain good scientists, it may not be able to rely on or the most closely related area of technology trade secrecy to protect their work. Fourth, there to construct and operate it. is always the chance that a trade secret will be independently discovered by another, who then “These categories are set out in j 101 of Title 35 of the Llnited States Code (35 [T.S.C. $101). Sec. 101 is the basic section under which obtains a patent on it. The patent holder may then most inventions are patented. Patents under 35 U.S.C. $101 are often prevent the holder of the trade secret from using called utility patents. 386 ● Commercial Biotechnology: An international Analysis

Plants that reproduce asexually may also be used by the Court was whether or not the orga- patented under slightly different criteria. nism is human-made. As a result, eukaryotic cells, cell lines, tissue culture, and even plants are gen- The criteria for obtaining and enforcing patents erally viewed as being patentable under 35 U.S.C. on biotechnological inventions are quite similar $101. The harder question is whether the U.S. Pat- in the six countries being examined in this report. ent and Trademark Office or the courts would The following eight subsections discuss the cri- permit patents on higher organisms such as teria of patentable subject matter, novelty, util- animals. * ity, nonobviousness, disclosure requirements, deposit requirements, claims, and enforcement in There is no question, however, that virtually the United States in order to provide a basis for any other biotechnological invention would be a comparative analysis of how each country’s pat- patentable subject matter, providing that it meets ent law will affect its competitiveness in biotech- the other requirements. Such inventions would nology. include processes using micro0organisms, recombinant DNA (rDNA) molecules, subcellular units PATENTABLE SUBJECT MATTER such as plasmids, methods for making these in- The categories of patentable subject matter ventions, and biotechnological methods for treat- under 35 U.S.C. $101—process, machine, man- ing human or animal disease (29). * * ufacture, or composition of matter—are quite broad but they are not unlimited. The courts have NOVELTY held scientific principles, mathematical formulas, The statutory requirement of novelty signifies and products of nature to be unpatentable on the that an invention must differ from the “prior art,” grounds that they are only discoveries of pre- which is publicly known technology. Novelty is existing things—not the result of the inventive, not considered to exist, for example, if: 1) the ap- creative action of human beings, which is what plicant for a patent is not the inventor; 2) the in- the patent laws are designed to encourage. vention was previously known or used publicly by others in the United States; or 3) the inven- One of the major patent law questions arising tion was previously described in a U.S. or foreign with respect to biotechnology is whether living publication or patent (35 U.S.C. f102). The inabili- organisms are patentable subject matter. The U.S. ty to meet novelty requirement is another reason Supreme Court addressed this question in 1980 why products of nature are unpatentable. in the landmark case Diamond v. Chakrabarty (21). In a five to four decision, the Court held that Two questions are particularly relevant to bio- the inventor of a new micro-organism, whose in- technology. First, how can naturally occurring vention otherwise met the legal requirements for substances, such as genes, plasmids, and even obtaining a patent, could not be denied a patent organisms, be patentable? Second, what actions solely because the invention was alive. The Court on the part of an inventor, such as discussing the ruled that Congress had not intended to distin- invention with colleagues or publishing a paper guish between unpatentable and patentable sub- about the results of research, can place the inven- ject matter on the basis of living v. nonliving, but tion in a public domain, thus barring patentabil- on the basis of “products of nature, whether or ity because the invention will not be novel? living or not, and human-made inventions” (22).

The U.S. Supreme Court stated that its decision ● The U.S. Patent and Trademark Office has statedthat it will deter- in the Chakrabarty case was limited to a human- mine questions as to patentable subject matter on a case-by~ase made micro-organism, leaving unresolved ques- basis following the test set forth in Chakrabarty (49). * ● A [J.S. Patent and Trademark Office official estimated that there tions of whether eukaryotic cells or other higher are currently 500 genetic manipulation related patent applications organisms would be patentable subject matter. pending, that the office is receiving applications at the rate of 200 In theory, however, the Chakrabarty decision per year, and that the rate is increasing (46). These applications are classified in Class 435, Subclass 172 in the U.S. Patent Classifica- stands for the proposition that any organism is tion System (46). This classification is not coextensive with OTA’S potentially patentable, because the crucial test definition of biotechnology. Ch. 16—intellectual Property Law . 387

As to the first question, the crucial element of research that may be very important for research patentability for most biological inventions in the purposes (e.g., a new DNA probe or even certain United States, as shown in the Chakrabarty case, organisms) may not meet the utility standard. This will be the fact that the substance was in some problem can generally be avoided by describing way changed from the naturally occurring sub- some practical use of the invention in the patent stance by human intervention. For example, application, even if that use will not be the one although genes and regulatory sequences may be that is of ultimate commercial value to the obtained from natural sources, it is the removal company. of the DNA sequences from their natural habitat and their joining to other DNA sequences that NONOBVIOUSNESS provides the human-made requirement of the Chakrabmty case. Thus, it is not the sequence that The nonobviousness standard that inventions is new, but the environment, such as the host or must meet to qualify for a U.S. patent pertains flanking DNA regions (44). * to the degree of difference between the invention and the “prior art .“ An invention that would As to the second question, it should be noted have been obvious at the time it was made to a that U.S. law, in contrast to the laws of most person with ordinary skill in the relevant field of foreign countries, provides a l-year grace period technology is not patentable (35 U.S.C. ~103). The between the date of any publication by the in- U.S. patent law requirements for nonobviousness ventor relating to the invention and the filing of and novelty together represent a policy that a pat- a patent application, This grace period in the ent should not take from the public something United States is generally viewed as favorable to that it already enjoys or potentially enjoys as an the rapid dissemination of new scientific knowl- obvious extension of current knowledge. edge, because knowledge pertaining to an invention can be published without the inventor’s Given the fact that many of the basic techniques foregoing the opportunity to file for a patent. in biotechnology are well known and straightfor- Most countries other than the United States reward to competent scientists, how can the various quire the patent application to have been filed inventions meet the nonobviousness standard? before the invention is disclosed, for example, in The answer is that biotechnology is still in many a scientific paper. This requirement is known as respects a very inexact science. Many of the var- “absolute novelty” and will be discussed in greater ious manipulations of genetic material, for exam- detail in the section comparing and contrasting ple, will give unexpected results. Difficulty in the U.S. and foreign law. * * isolation or preparation of materials and the unexpected or superior nature of results are some UTILITY of the criteria that would be used to show nonobviousness. The utility standard in the United States is generally not a difficult standard for an invention to It is interesting to note that some scientists view meet to qualify for a U.S. patent. There is one hybridoma technology as more straightforward potential problem, however, with regard to bio- than rDNA technology. If this is true, patents may logical inventions. Since the courts have held that be more difficult to obtain for hybridoma tech- an invention must show some practical or com- nology than for rDNA inventions, necessitating . mercial utility (12,32,33), certain results of a greater reliance on trade secrets. However, there are still many problems associated with ● In a companion case to Chakrabart-v, a lower court, the Court human-human hybridomas, so broad patents may of Customs and Patent Appeals (now the Court of Appeals for the Federal Circuit), held that a purified culture of naturally occurring be able to be secured for inventions in that area. bacteria was patentable subject matter (3). For procedural reasons, (See Box D.–patents on Hybridoma Inventions for the Supreme Court did not rule on this issue. further information on patenting hybridoma tech- ● *Japan provides for a limited 6-month grace period for: 1) experimentation, publication, and papers presented before scientific nology.) organizations by the applicant; Z) unauthorized disclosure by third parties; and 3) displays at authorized exhibits. Otherwise, it is con- The nonobviousness requirement may present sidered an absolute novelty country. another problem for biotechnology. The rapid 388 ● Commercial Biotechnology: An International Analysis

DISCLOSURE REQUIREMENTS The requirement for adequate public disclosure of an invention is designed to ensure that the public receives the full benefit of the new knowledge in return for the granting a limited monopoly to the patent holder, Thus, a U.S. patent, which is a public document, must contain a sufficiently detailed description of the invention to enable others in that field of technology to build and use the invention without “undue experimentation. ” This is known as the enablement requirement. The patent also must disclose the best mode known to the inventor for carrying out the invention at the time the patent application is filed. In the case of biological inventions, satisfying the enablement requirement is a major hurdle. Because of their complex and unknown nature, many biological inventions, especially organisms, cannot be sufficiently described in writing to allow their predictable reproducibility on the basis of that description alone. Even with fairly precise techniques such as rDNA, random events provide uncertainty as to predicting the exact nature of the final product. There is always the possibility during the manipulation of DNA fragments, plasmids, and transformed organisms that random changes have occurred, The final product may in fact be quite different from the description provided by the experimenter, even though the experimentation process itself may have been accurately described. This problem has been dealt with for patent applications on new micro-organisms or processes involving them by permitting the microorganisms to be placed in culture depositories, where they are available to the public (31). The depository and the culture catalog number are then referenced in the patent application, and if the patent issues, the public gains access to the culture. * There is some debate over whether such things as plasmids must be deposited, because there is some question as to the reproducibility of the plas - mids on the basis of a written description alone.**

● The case law has left open the possibility of satisfying enablement in ways other than through a deposit (25,31). development and complexity of the field will make * ● One of the questions raised by the patent examiner in the pending Cohen-Boyer patent application on the products of rDNA tech- it difficult to determine as of a given point in time nique, e.g., plasmids, was whether the application disclosed a re- what is ordinary skill or what is obvious. producible way to make a certain plasmid (5). Ch. 16—intellectual Property Law 389

In an-y event, the enablement requirement will peptide such as insulin must turn his or her “fac- be one major hurdle to the patentability of higher tory” (i.e., the micro-organism) over to competi- organisms because of the logistical problems tors. Given the current state of the technology, associated with depositing those organisms. this situation is probably unavoidable. Possibly, however, consideration could be given to allow- DEPOSIT REQUIREMENTS ing various restrictions to be placed on access to Deposit requirements in the United States have the deposits. developed by court decision and administrative action. The practice of the U.S. Patent and Trade- CLAIMS mark office has been to require a deposit to be made at a recognized depository no later than the Claims are the precise language that define the patent application filing date (50). The office fur- boundaries of an invention protected by a patent. ther requires that deposits be maintained for the U.S. law permits a series of claims, ranging from life of the patent (50). broad to narrow, to be made with respect to an invention, so that if one or more of the claims are Along with the other five countries being con- subsequently held invalid (e.g., for covering some sidered in this report, the United States is party of the prior art or being indefinite), the inventor to the Budapest Treaty on the International Recog- may still be able to rely on a narrower invention. nition of the Deposit of Microorganisms for the of course, all of the claims could be held invalid. purpose of Patent Procedure (14), which attempts The scope of permitted claims will be impor- to harmonize the deposit requirements of the signatory countries. Under the treaty, the signatory tant for biotechnology. The scope is initially deter- states recognize in their own patent procedures mined by what the U.S. Patent and Trademark a micro-organism deposit made in another coun- Office will accept. In any new technology, the initial inventions tend to be broad and pioneering, try if the deposit is made in a depository meeting the requirements of the treaty. * Thus, if the pat- so broad claims are usually permitted. As time ent applicant is filing applications in several coun- passes, however, prior art develops and new ex- tries, only one deposit need be made. Deposits tensions of the art become more obvious. Then, made under the treaty must be maintained for the claims permitted by the Patent and Trade- mark Office will be narrower. The Cohen-Boyer at least 30 years. patent on the basic rDNA technique (U.S. Patent A potential problem that arises with respect to 4,237,224) is an excellent example of a broad, pio- deposits should be noted. Although any valid pat- neering invention, although some commentators ent must describe an invention with sufficient have questioned its validity (7). In the case of specificity so as to enable a person of ordinary hybridomas and MAbs, however, there is some skill in that technology to make the invention, indication that the Patent and Trademark Office there is a significant difference between describ- is being fairly conservative from the start. The ing an invention and actually turning it over to data supporting this perception are largely anec- the other person. The know-how that is associ- dotal, because there have been few patents issued ated with the actual making and subsequent per- on hybridoma technology. If the claims being fection of an invention clearly provides the inven- allowed are more narrow, however, the value of tor with an advantage over a competitor who patents on this technology would be lessened. must construct the invention from the descrip- A recent decision by the U.S. Patent and Trade- tion in the patent. Yet in the case of a micro- mark Office, Ex parte Jackson (24), has important organism, the invention must actually be turned over to any competitor who desires it. In essence, implications for the scope of permitted claims on micro-organisms, cell lines, and processes for pro- therefore, the holder of a patent on a micro-organism that produces a commercially useful poly - ducing or using them (6). The case involved the isolation and purification of three strains of *’l-h(~ American ‘1’vpe Culture Collection in Rock\ ri]k?, Nld., and bacteria that made a new antibiotic. All three LTsD,,\’s ~orth(?rn Kegional Research Lahorator~’ in Peoria, 11!., strains had been deposited and referenced in the together with fiiw foreign institutions, currently meet the requirements (45). patent application. Although the Board of Appeals 390 . Commercial Biotechnology: An International Analysis of the U.S. Patent and Trademark Office upheld ENFORCEMENT a claim to producing the antibiotic by using a Patent infringement in the United States is de- micro-organism selected from the deposited fined as the unauthorized making, using, or sell- strains (or mutants thereof), it rejected a claim ing of any patented invention within the United to producing the antibiotic by using any micro- States (35 U.S.C, \271(a)). No liability for infringe- organism of the same species on the grounds that ment exists prior to the date the patent is issued. the claim was not enabling. Thus, the scope of With respect to enforcing a patent, certain the patent on the applicant process for produc- problems arise. One problem, generally not a ing the antibiotic will be limited, and others may problem for products but potentially a very be able to legally practice the invention by using serious problem for processes, is knowing other strains. This case, if broadly applied, may whether or not an infringer is using the patent. have a significant adverse impact on the incen- If an unpatented product can be made by many tive to patent many kinds of biotechnological inventions, because inventors may see the scope of different processes, the owner of a patent on one patent protection as being too narrow. of those processes may have no way of knowing whether a product made by a competitor has Subsequent to patenting, the scope of the claims been made by a different process or by the pat- will be determined by Federal courts ruling in patent owner’s process. This is a special problem for ent infringement suits. If the patent is upheld, the any process involving a micro-organism or cell court has some discretion on how broadly to in- line. To get a patent on such a process, a deposit terpret the written claims. It will tend to inter- must be made, making the microorganism or cell pret the scope more broadly for fundamental in- line available to anybody who desires to use it. ventions. Sometimes the scope of the literal word- For this reason, processes using such organisms ing of the claims can be extended, if the infring- are likely to be held as trade secrets unless the ing invention does substantially the same thing, process is truly a major advance. by substantially the same means, and in substantially the same way, as does the patented inven- Another problem with respect to enforcing tion, yet the literal wording of the claims in the process patents granted in the United States is patent for the invention does not cover the in- the fact that the patented process may be used in other countries to make the same product, fringing invention (26). In such cases, the courts which can then be imported into the United States will interpret the claim as covering the infringing invention. This is known in patent law as the and compete with the product made by the owner “doctrine of equivalents.” of the U.S. process patent. Although many countries would define this action as infringement of The fact that the claims define a new invention that process patent, the United States does not. does not mean that the new invention does not A remedy for the owner of the process patent infringe on a previously patented invention. For is available through an action before the U.S. In- example, consider the Cohen-Boyer patent on the ternational Trade Commission. If the owner of fundamental rDNA technique. Its existence will the patent can prove that the foreign activity in- not prevent new applications of the rDNA tech- fringes the US. process patent and that impor- nique from being patented (providing they also tation of the product would injure an efficiently meet the other requirements of the patent law); conducted U.S. industry (or prevent its establish- however, the new inventions may infringe the ment), the product can be excluded from the Cohen-Boyer patent. Thus, for a holder of the new United States (19 U.S.C. \1337, \1337(a)). This patent to make use of that invention, he or she remedy has been criticized as leaving much to be may have to pay royalties to the owners of the desired (39). However, one commentator has Cohen-Boyer patent. pointed out many substantial advantages of go- Ch. 16—intellectual Property Law ● 391 ing this route as compared to an action in Federal discovering the invention independently or district court (13). The requirement for proving through reverse engineering, injury to an industry is not as problematical as ● what the invention’s projected commercial it might seem because the International Trade life is and how readily others could improve Commission has held that the domestic industry on it if it were disclosed in a patent, may consist of only one company, the U.S. patent ● how easily the patent could be “policed)” owner (13). Thus, the issues of whether biotech- ● whether it is a pioneer invention, nology is an industry or whether one imported ● the cost of the related R&D and regulatory product could injure that whole “industry” would approvals, not be relevant. In fact, an International Trade ● whether there are any plans for scientific Commission action is one way the owners of the publication, and Cohen-Boyer patent might enforce it against ● what the costs of patenting are versus reli- foreign users of the rDNA process. ance on trade secrecy. Another problem area relevant to biological The first factor speaks for itself. The next two inventions has been the general attitude of the factors require difficult decisions to be made on courts in the United States toward patents. De- the basis of the characteristics of the invention spite a statutory presumption of validity, about and the competitive environment. If research to one-half of all litigated patents are held invalid develop a particular product is widespread and by the courts (48). There has been a certain judi- intense (as is the case with interferon), the risk cial hostility toward patents because they are of a competitor developing the invention inde- “monopolies, ” even though permitted by the U.S. pendently provides a significant incentive for pat- Constitution and Title 35 of the U.S. Code (29). enting. On the other hand, reverse engineering Certain language in U.S. Supreme Court decisions, by competitors is virtually impossible for most for example, refers to such “monopolies” and products of micro-organisms because of the vari- states that patents must be construed very nar- ability and biochemical complexity of microbio- rowly and must not be upheld on “mere gadgets” logical processes. (27). In the 15 years before Chakrabarty, the The fourth factor, how easily the patent could Supreme Court had not ruled in favor of a single be policed, is especially relevant for processes. patent applicant or patentee (29). Greater protection may lie in keeping a process On the other hand, this judicial hostility appears secret, even if the microbe and the process could to be changing. In some recent U.S. Supreme be patented. This is especially true for a process Court decisions, including the Chakrabarty case, that is only a minor improvement in the state of the Court has upheld the patents and has used the art or that produces an unpatentable product broad language to do so (20,23). already made by many competitors. The commercial life of the process might be limited if it were PATENT V. TRADE SECRET PROTECTION ● patented, beause infringement would be difficult to detect and not worth the time and money to Patents and trade secrets are alternative and prosecute. Reliance on trade secrecy might then not necessarily mutually exclusive ways to pro- extend its commercial life. tect biotechnological inventions. Companies are likely to choose between them on a case-by-case Most companies would patent truly pioneer basis. In choosing, they would evaluate the follow- inventions, which often provide the opportunity ing factors: for developing large markets. Moreover, patents . whether there is any significant doubt that of this sort tend to have long commercial lives, since it is difficult to circumvent a pioneer inven- the invention can meet the legal require- tion and since any improvements are still subject ments for patenting, to the pioneer patent. Furthermore, infringement ● whether there is the likelihood of others ——..— is easy to detect because of the invention’s trail-

‘This section draws on the analogous section in 017A’S report im- blazing nature. This would be true for processes pact ot’,-lpplifll {;fvwtics: Aficro<)rganisnw, Plants, and Animals [47). also. 392 . Commercial Biotechnology: An International Analysis

High costs for research, development, and reg- These acts are basically consistent with an in- ulatory approval of products is a factor in favor ternational treaty designed to provide consisten- of patenting because a company will want to pro- cy in the international protection of plant breed- tect its investment. The research-oriented phar- ers’ rights—the International Union for the Pro- maceutical companies have traditionally relied on tection of New Varieties and Plants—known as patents for this reason. UPOV. * UPOV has been signed by 16 countries, including all those discussed in this chapter, but The last two factors involve considerations sec- not all of those countries have yet conformed ondary to a product and its market. obviously, their laws to it. any publication of the experiments leading to an invention forecloses the option of trade secrecy. Until the Chakrabarty decision, the Plant Patent Also, a company must evaluate the options of pro- Act and PVPA were generally viewed as the sole tection via either patenting or trade secrecy in source of plant breeders’ rights in the United terms of their respective cost effectiveness. States. The Chakrabarty decision raises the possibility of protecting plants under 35 U.S.C. Plant breeders’ rights statutes 101, because the essential point of the decision is that a human-made organism is a “manufacture” Ownership rights in new varieties of plants are or “composition of matter” as those terms are specifically granted by two Federal statutes: 1) the used in 101. Further, there is no indication in Plant Patent Act of 1930 (35 U.S.C. ~~161-164) and the decision that the Plant Patent Act and PVPA 2) the Plant Variety Protection Act (PVPA) of 1970 preempt protection for plants. (7 U.S.C. \2321 et seq.). There would be certain advantages and disad- The Plant Patent Act, which covers new and vantages of securing protection of sexually and distinct asexually reproduced varieties other than asexually reproduced plant varieties through tuber-propagated plants or those found in nature, 101. One advantage is that more than one claim confers the right on the patent holder to exclude could be presented, as opposed to the single claim others from asexually reproducing the plant or permitted under the Rules of Practice relating to from using or selling any plants so reproduced, plant patent applications (37 C.F.R. $1.164) This for a period of 17 years. Because of the impossi- would allow parts of the plant to be covered as bility of describing plants with the same degree well as the whole plant. Further, a patent grant of specificity as machines and the inability to under 35 U.S,C. 101 for a new variety would pro- recreate a new plant solely from a written de- vide more comprehensive protection against in- scription, this law also liberalized the enablement fringement in certain situations. requirement; the description need be only as complete as “reasonably possible.” The disadvantages of proceeding under 35 U.S.C. ~101 are that other currently irrelevant PVPA provides for patent-like protection to sections of the patent law would come into play. new, distinct, uniform, and stable varieties of For example, the Plant Patent Act (35 U.S.C. $162) plants that are reproduced sexually, excluding significantly modifies the disclosure requirements fungi, bacteria, and first-generation hybrids. The of 35 U.S.C. $112, simply requiring that the de- breeder may exclude others from selling, offer- scription be as complete as reasonably possible. ing for sale, reproducing (sexually or asexually), This would at least theoretically no longer be true. importing, or exporting the protected variety. In However, the use of depositories for plant mate- addition, others cannot use it to produce a hybrid rial, as required for micro-oganisms, could satisfy or a different variety for sale. However, saving the enablement requirement. A further potential seed for crop production and for the use and factor is the applicability of the nonobviousness reproduction of protected varieties for research is expressly permitted. The period of exclusion “The Plant Patent Act conforms, but PVPA does not. Since the United States is a party to UPOV, some changes in PVPA may be is 18 years for woody plants and 17 years for necessary. At this time, however, it is hoped that conformity can other varieties. be achieved through administrative practices (45). Ch. 16—/nte//ectua/ Property Law ● 393

requirement of 35 U.S.C. $103. This test is inher- example, tuber-propagated plants such as pota- ently difficult for plant material. toes, which are not patentable under the Plant Patent Act, would appear to be patentable under On balance, the Chakrabarty decision is likely 35 U.S.C. ‘$101. to provide yet another protection option which can, in certain circumstances, be very useful. For

Comparison of U.S. and foreign intellectual property law

Much of the analysis in this section is based on PATENTABLE SUBJECT MATTER the more detailed description of intellectual prop- One of the most difficult problems facing the erty law of the Federal Republic of Germany, the owners of biological inventions is the inability of United Kingdom, France, Switzerland, and .Japan the law to respond rapidly enough to keep pace r found in Appendix G: Intellectual Property Law. with the development of the technology. This is especially a problem in the case of the law’s defini- Patent law tion of patentable subject matter. Questions about what constitutes patentable subject matter create The Federal Republic of Germany, the United a significant degree of uncertainty for owners of Kingdom, France, and Switzerland, along with inventions. seven other Western European countries, are signatories to a treaty that creates a European pat- One of the basic decisions to be made by owners ent system. That treaty, known as the European of inventions is whether to maintain their inven- Patent Convention (EPC), went into force on Oc- tions as trade secrets or to attempt to protect tober 7, 1977. The EPC establishes a legal system them by patents. An intelligent decision is near- for granting European patents through a single ly impossible when one does not even know supranational European Patent Office and a uni- which basic subject matter is patentable under form procedural system with respect to patent the laws of particular countries. In the United applications. The single European patent applica- States, the trade secret route can still be selected tion, if granted, become a bundle of individual in the event that no patent protection is ultimately European patents, one for each of the countries secured. In most foreign countries, including the designated by the applicant. * The EPC system and United Kingdom, France, the Federal Republic of the resulting patents exist in parallel with the pat- Germany, and Japan, however, pending applica- ent systems of the member countries. Enforce- tions are published before it is known whether ment, however, is handled by the individual patenting will be possible, thereby providing com- member countries. The ultimate goal is for each plete and enabling disclosure to the public, in- of the member countries to adopt in its national cluding samples of any deposited micromganisms law the same substantive law of patents set forth necessary to carry out the invention. Such pub- in the EPC. The following discussion compares lication usually occurs 18 months after the ap- the patent law of the EPC countries and Japan plication is filed. This situation effectively with that of the United States. precludes reliance on trade secrecy once a patent application is filed. As a result, there exists in many foreign countries today considerable disincentive to seek patent protection for certain ● A proposed European Community Patent Comwntion would take types of biological inventions, particularly those the EPC one step further by pro~iding for a single patent colering involving basic genetic procedures and the result- the entire European Fxonomic Community, ing products. However, with respect to the five

25-561 0 - 84 - 26 394 ● Commercial Biotechnology: An International Analysis

foreign countries under study here, much of the appear to permit patenting of the same general uncertainty surrounding subject matter patent- classes of subject matter. France, Switzerland, the ability of biotechnological inventions has been United Kingdom, and the Federal Republic of Ger- resolved. many follow the EPC, except Switzerland does not allow patents on micro-organism themselves. This uncertainty in many foreign countries may indirectly discourage U.S inventors from filing for Japan’s definition of patentable subject matter patent protection in the United States, since there is essentially coextensive with the definition of is no way available at present to confine within the EPC, excluding processes in the fields of medi- the United States the culture deposit samples cine, diagnosis, therapy, and pharmacology in which must be made available once a U.S. patent which the human body is an indispensible ele- issues. While enabling disclosure theoretically is ment. However, certain microbiological inven- communicated upon issuance of a U.S. patent to tions could be excluded from patentability in all countries, regardless of whether correspond- Japan if they are “likely to injure the public ing protection is available or is actually sought health.” The situation with respect to plants and in those countries, it is only in connection with animals in Japan is unclear. many biological inventions that an applicant is required to provide also the physical means to carry NOVELTY out the invention, i.e., a self-replicating organism, U.S. law requires the patent application to be which in many instances is a “factory” capable filed by the inventor. If two different applicants of carrying out the invention. happen to have the same invention, the patent will issue to the one who invented it first. Hence, One important aspect of this problem of uncer- the U.S. system is called a “first-to-invent” system. tainty in the definition of patentable subject mat- The laws of the other five countries, in contrast ter is the uncertainty of classification of certain to U.S. law, permit someone other than the in- types of biological inventions. It is not clear in the ventor (e.g., the employer) to file the patent ap- case of certain lower organisms, for example, plication. If there are two applications for the whether they are to be classified as plants, ani- same invention, the patent will issue to the ap- mals, or something else (e.g., protista) (see, e.g., 15,19). Fortunately, in the United States, it seems plicant who filed first. These countries thus have what is called a “first-to-file” system. The combina- to be a matter of choosing between multiple option in the United States of a first-to-invent system tions for protecting such subject matter by either with the provision of a l-year grace period be- utility patents or plant patents, but in most other tween the date of any publication relating to an countries, plants and animals are explicitly ex- invention and the filing of a patent application cluded from patentability. Thus, a definition may makes the U.S. system fundamentally different be determinative of patentability. from nearly all foreign systems, which are gen- As a result of the 1980 U.S. Supreme Court’s erally first-to-file systems are characterized by ab- decision in the Diamond v. Chakrabarty case, the solute novelty (i.e., allow no grace periods). U.S. definition of patentable subject matter is very This difference manifests itself in connection broad. It is broader than that under the EPC or with prior disclosures by the applicant. Under any of the national laws of the five other coun- US, law, the general rule is that a disclosure of tries being examined in this assessment. In con- an applicant’s own invention cannot be used to trast to the United States, the EPC, which has a prevent the applicant from obtaining a patent, very liberal definition of patentable subject mat- unless the disclosure satisfies the requirements ter, excludes methods for treatment of the human of one of the statutory bars under 35 U.S.C. $102 or animal body by surgery or therapy and diagnostic methods. Also, the EPC excludes plant and (18). For example, consider the following types of possible disclosure by an inventor of his or her animal varieties and biological methods for pro- own work: ducing them, which are apparently not excluded by Chakrabarty. In all other respects pertaining I. Communicating with colleagues by tele- to biological inventions, the United States and EPC phone, letter or in person; Ch. 16—/nte//ectual Property Law ● 395

a. under expressed confidentiality; number of persons (43). If the disclosure were b. with no indication as to confidentiality; or limited to the colleagues contacted and not other- c. under expressed nonconfidentiality. wise made freely available, it would not defeat 2. Delivering a paper at a conference or semi- novelty of a subsequently filed application. It is nar, orally only. too early to tell how EPC law will develop on this 3. Delivering a paper at a conference or semi- issue. The same can be said for the United King- nar, both orally and with a disseminated writ- dom, where introduction of the EPC novelty ten text. standards represents a significant change from 4. Submitting a paper for publication. prior law and practice. 5. Submitting an abstract prior to a conference The Japanese law provides a limited 6-month to the conference promoting organization. grace period for publications and papers pre- Under U.S. law, items 1, 2, 4, and 5 would not sented before scientific organizations. Thus, items bar patentability. * Item 3 will become a statutory 1, 4, and 5 would not bar patentability, and items bar 1 year after the paper is disseminated in some 2 and 3 would bar patentability after 6 months. tangible form, assuming the disclosure was enabl- It must be noted that the above discussion re- ing. garding bars to patents because of lack of novel- Under the laws of the four Western European ty is predicated on the assumption that the dis- countries, items 2 and 3 would prevent the grant- closure is enabling. If the disclosure is not enabling of a patent if they occurred before the earliest ing, even a published paper about the invention effective filing date (e.g., before a U.S. applicant would not bar patentability. filed a patent application in the United States Because of the different approaches with re- which will later serve as a basis for claiming the spect to novelty, the US. patent law provides a right of priority in corresponding foreign appli- competitive advantage in that scientific informa - cations). * * Items 4 and 5 would normally not bar tion can be quickly disseminated in the United a patent, assuming that the paper and/or abstract States without forgoing patent rights, if the ap- were not disseminated to members of the public, plication for a patent is filed within a year. This (e.g., conference attendees) prior to the actual advantage is qualified by the fact that the inven- date the patent application was filed. This is based tor who also wishes to file abroad cannot public- on the implied confidentiality under which sub- ly disclose the invention until the priority applica- missions of this type are usually handled by pub- tion is filed. The case of the Cohen-Boyer patent lishers. Similarly, the concept of expressed or im- on the rDNA technique is a well-known example plied confidentiality prevents items l(a) and l(b) of a case in which the inventors were able to ob- from constituting prior art under German law tain a U.S. patent, even though they had published concepts, which commentators believe will apply papers about the techniques, but were unable to to the EPC and other European countries (11). It file for foreign patents because of the absolute appears that even item I(c), in and of itself, does novelty requirement in other countries. The prob- not necessarily constitute prior art under German able result will be a substantial loss of income principles, inasmuch as such a nonconfidential from foreign royalties. disclosure must be available to an unlimited

● If a paper or proceedings of conference were published, how- UTILITY ever, then the inventor would be barred if he or she filed a patent application more than 1 year after the date the proceedings or paper The U.S. patent law’s requirement for practical were published. A]so if the invention were sufficiently disseminated utility differs slightly from the requirement of so that it was deemed to be “in public use, ” then the int’enter would European and Japanese law for industrial appli- be barred by sec. 1020)) from patenting it after the expiration of the I -year grace period. cability. The U.S. utility doctrine has been criti- ● * IInder the Paris LJnion Convention, to which a]] six competitor cized by the American patent bar, but has not countries subscribe, applications filed in any country within I z proved to be a major obstacle for industry (45). months of the first filing in a member countr} ha~e, as their efl’&’- titw fihng date, the filing date of the first application. ‘1’his is kmmn It has undoubtedly disadvantaged some research- as the “right of priorit} ,“ ers and simultaneously deprived the public of 396 ● Commercial Biotechnology: An International Analysis ——— —— .— -. prompt disclosure of research on, for instance, intentions may have been produced by random new pharmacological compounds and processes mutation and selection or another procedure that that do not yet have an established utility (45). cannot be repeated with the certainty of obtain- In some cases, effort has undoubtedly been ing the same results. The solution that has been wasted in establishing trivial or unimportant yet adopted essentially worldwide is to permit a “practical” utilities for such inventions in order deposit of the appropriate biological material in to satisfy the U.S. Supreme Court’s definition (45). a depository, from which samples will be made This problem will affect researchers in biotech- available to the public. nology to some extent, particularly those work- The Federal Republic of Germany’s requirement ing with pharmaceuticals. for reproducibility raises additional obstacles to On the other hand, the foreign systems present patenting a micro-organism itself. It requires that a different problem of “utility. ” They exclude a patent application describe a repeatable proce- method inventions in the field of therapeutic or dure for reproducing with certainty the deposited diagnostic treatment, at least those involving treat- organism apart from the deposit itself (i.e., “from ment of humans, as not being part of “industry. ” scratch” so to speak) before a patent can be Thus, certain types of biological inventions (e.g., granted on the organism per se. This is not re- monoclinal antibody diagnostic assays) will not quired if one claims only a method of using such be patentable in EPC member countries or pos- a deposited organism. Thus, this requirement, in sibly in Japan, although patent protection can be effect, could preclude patents on many micro- obtained for them in the United States. This is, organisms. in most cases, not a serious obstacle, since patent Neither the EPC countries nor Japan specify a protection is not precluded for the materials that best mode requirement in their respective laws. are used in the excluded methods or the products In the United States, the best mode requirement of those methods. arguably requires the best producing micro- DISCLOSURE REQUIREMENTS organism strain to be deposited, but this issue is not resolved. U.S. disclosure requirements are stricter than those of the EPC and Japan. The U.S. law requires The written description of the invention re- (35 U.S.C. l12): quirement under U.S. law is not articulated as such in foreign laws, but a requirement similar ● a written description of the invention, in principle is applied in some situations under ● enablement both with respect to “how to the laws of most countries. make” the invention and also with respect to “how to use” the invention, and DEPOSIT REQUIREMENTS

. a disclosure of the best mode known t. the At present, uncertainty regarding the deposit inventor for carrying out the invention as of requirements exists in many countries. The cir- the time of filing. cumstances under which a deposit is necessary As to the basic enablement standard, however, are not clearly spelled out. Moreover, before re- U.S. law does not differ substantially from the ceiving a substantive examination on this ques- foreign laws. Under the U.S. law, the test of tion in the EPC, for example, the patent applicant enablement is whether the invention can be car- must take action that has the effect of making the ried out by a person of ordinary skill in the art deposit, and also access thereto upon publication without “undue experimentation” (30). This is of the application, irreversible. In the United another way of stating the requirement for “re- States, the same basic uncertainty exists, but the producibility” which is fundamental to European applicant need not make a commitment until after law. substantive examination is completed. *

As previously mentioned, compliance with the *,% a practical matter, however, if patent protection is sought in other countries, this irret’ersible effect will have taken place enablement requirement creates serious difficul- alread~’, prior to conclusion of the examination in the CJnited States ties for many biological inventions, because such berause of the l%nontb publication prartice in other countries. Ch. 16—Intellectual Property Law ● 397 —

The United States does not have any explicit de- potential problems exist in the present deposit posit requirements in the patent statute or rules system as a result of import/export restrictions thereunder. For deposits necessary in order to imposed by countries. In one case, a German ap- comply with the enablement requirement, how- plicant was unable to perfect a deposit in a US. ever, certain requirements for the deposit have depository (one of two in the world which ac- been developed by aciministrative action (SO) and cepted his type of cell line) within the 12-month court decisions. priority period because of health-oriented import restrictions imposed by the United States (9). It As far as timing and location of deposit, the U.S. is also possible that a patentee could lose his or practice is basically consistent with the practice her rights entirely in a given country if that coun- most countries, i.e., the deposit is to be made no try imposed restrictions on the import of samples later than the patent application filing date and of a culture in a foreign depository that is other- at a recognized depository (so). The United States wise recognized by its patent office. The same does not have a specific list of recognized deposi- result could occur if the country in which the tories and therefore maintains more flexibility depository is located refuses to permit export of than the EPC and certain national offices that do samples of the deposited culture. In the latter in- have such lists. Of course, the United States also stance, however, the Budapest Treaty permits a recognizes deposits meeting the requirements of second deposit to be made in another depository the Budapest Treaty. without loss of deposit date. The U.S. Patent and Trademark office has required only that deposited cultures be maintained for the life of the U.S. patent (although any deposit made under the Budapest Treaty must be main- CLAIM PRACTICE tained for a minimum of 30 years). The EPC and Claim practice in the United States is extreme- many European countries have opted to apply the ly liberal and is regulated primarily by the re- longer period of the Budapest Treaty to any de- quirement for definiteness contained in the sec- posit made in accordance with national law. This ond paragraph of 35 U.S.C. $112. This fact, togeth- will require additional costs for the applicants in er with the fact that patentable subject matter in those countries. the United States is generally less restricted than in most other countries, results in an very broad Samples of deposited micro-oganisms become freedom for an applicant to claim his or her in- available to the public under U.S. practice at the vention in a U.S. patent application. time the patent issues, after which time no restrictions on access are permitted. The situation in the There is a dearth of experience with claims di- United States is quite different than that in the rected to the relatively new inventions of biotech- EPC countries and Japan. In the EPC countries nology, and the EPC itself is too new for any sig- (except for Switzerland) and Japan, patent applica- nificant precedent. Existing precedent primarily tions are published approximately 18 months involves processes for the use of micro-oganisms. after the effective filing date. Such publication, Under U.S. practice, biological inventions can which also makes the deposit publicly available, be claimed in many different ways. In addition may place foreign applicants at a disadvantage. to process claims directed to methods of genetic On the other hand, under many foreign sys- manipulation, the products thereof can be tems, including the EPC, the patentee is entitled claimed with regard to their structure, or if their to maintain certain limited restrictions on those structure is not known, with regard to their receiving samples of the deposited culture chemical and/or physical characteristics or in throughout the life of the patent. The restrictions terms of the process steps for preparing them. also apply to cultures derived from the original Despite this flexibility, however, the previously one (EPC Rule 28(6)). The Federal Republic of Ger- discussed Jackson case (24) indicates that the U.S. many also allows territorial restrictions to be Patent and Trademark Office may impose signifi- placed on deposited micro-organisms. cant limitations on the breadth of claims. 398 ● Commercial Biotechnology: An International Analysis

Some of the patent offices in foreign countries other countries, the United States does not grant have taken positions similar to that taken in the extraterritorial effect to process patents by defin- Jackson case. Switzerland and Japan have refused ing as infringement the importation of a product to grant claims that are broader than the spe- made by the patented process without the author- cific microorganisms disclosed in the application ization of the patent owner. and deposited (Swiss Patent Ordinance, Section The United States grants the basic remedies of 15.15.3, May 12, 1980; Japanese Examination injunction and monetary damages for infringe- Guidelines). ment (35 U.S.C. $283, $284), as well as reasonable There is little reported precedent regarding ju- attorneys’ fees to the prevailing party in excep- dicial interpretation of claims pertaining to bio- tional cases (35 U.S.C. $285). The foreign coun- logical inventions in infringement cases. Never- tries provide for similar remedies. There are no theless, one can extrapolate from general prin- criminal penalties provided under the U.S. patent ciples of claim interpretation in the various for- statute, contrary to many foreign patent laws. eign patent systems. The law in most countries Enforcement of patents claiming biological in- provides for application of the doctrine of equiva- ventions involves unique problems. The first is lents in some form, although in some countries, simply identification of infringing activity. Many including Japan, the scope of equivalents is ap- of the products will be unpatentable for lack of parently very limited. As a general rule, it can be novelty and will be manufactured in small quan- said that the scope of equivalents must be deter- tities. Thus, it will be difficult to determine if a mined on a case-by-case basis, depending on fac- competing product infringes one’s patented proc- tors such as the degree of unpredictability of the ess. In addition, strains of micro-organisms can technology (i.e., equivalents must be obvious to be altered through mutation and other modifica- persons of ordinary skill) and the degree of ad- tion techniques to produce different organisms vance which the claimed invention exhibits over that possess the same basic characteristics of the the “prior art .“ The more unpredictable the sub- protected organism. ject matter, the smaller the scope of equivalents, whereas the more pioneering the invention, the It may prove to be an essential, or at least im- broader the scope of equivalents. Biological inven- portant, element of the case for the patentee to tions typically involve highly unpredictable phe- establish that the alleged infringer actually de- nomena; thus, claims are likely to be narrowly rived his or her organism from a sample obtained interpreted. directly or indirectly from the culture deposit of the patentee’s organism. Without adequate con- Even if it is assumed that a reasonable degree trols on the access to samples of deposited strains, of equivalents will be given for biological inven- proof of this fact will be extremely difficult. tions, the next problem is to determine what constitutes an equivalent. No precedent is available, Proving the identity and equivalence of the pat- and, of course, the determination will be made ented microorganism with an allegedly infring- on a case-by-case basis. It would seem that good ing microorganism can also present difficult arguments can be made to the effect that closely problems for the present state of this technology. related strains of the same species can be looked The technology is still sufficiently undeveloped on as equivalents, that different species normal- that much room exists for honest differences of ly would not constitute equivalents, and that opinion among experts. Most questions of in- mutants of the basic strain would, in most infringement will probably turn out to be a battle stances, be expected to have equivalent proper- between the respective parties’ expert witnesses, ties to the basic strain (see 8). until more objective criteria are established.

ENFORCEMENT Trade secret law The United States, the four European countries, and Japan define patent infringement in similar Of the countries considered in this assessment, ways. The major difference is that, unlike the the Federal Republic of Germany seems to have Ch. 16—intellectual Property Law ● 399

the strongest statutory system for the protection The protection of proprietary information in of proprietary information, and its courts are Japan has been improving over the last two dec- most consistent in enforcement of those statutes. ades, but still is not on a level with the protec- Switzerland’s system, which closely resembles tion in the United States or the major European West Germany’s, has also been very effective in countries. As Japan continues its development protecting such information. However, Swiss law from a technology-importing country to a tech- does not recognize as trade secrets the secrets nology-generating country, further progress in held by professors, scientists, and others not this area may be expected (45). engaged in a business (45). This could affect the exploitation of commercial rights by educational Plant breeders’ rights institutions in Switzerland. CHOICE OF TYPE OF PROTECTION The United States and the United Kingdom ap- A breeder of asexually reproduced varieties of pear to be slightly less effective than the coun- plants in the United States will normally proceed tries just mentioned in protecting proprietary under the Plant Patent Act, However, 35 U.S.C. information. The British courts emphasize the $101 may provide a viable option. Although ad- ‘(confidential” over the “secret” aspects of such ditional disclosure requirements for asexually re- information. Breaches of confidence are therefore produced plant material will be required (e.g., the not tolerated, regardless of whether the particular deposit of plant material in a satisfactory deposi- information misappropriated fits within a pre- tory), this is not an onerous burden. Moreover, established “trade secret” category. The U.S. with the depository, there is the additional advan- courts often overlook the breach of obligation tage that the patented plant material will be avail- aspect of misappropriation and concentrate on able during the life of the patent for comparison determining whether or not the information qual- purposes with any alleged infringing varieties. ifies as a ‘(trade secret. ” As a result, misappro- The public would also be able to practice the in- priators of confidential information are some- vention when the patent expired. times held not liable in the United States, whereas they would be held liable for the same activity For sexually reproduced plant varieties, the in the United Kingdom (45). Nevertheless, U.S. principal advantages of proceeding under 35 courts have shown much greater flexibility than U.S.C. $101, as opposed to PVPA, are the substan- their British counterparts in fashioning remedies tially reduced costs of filing a patent application that prevent the use of misappropriated informa- (as opposed to an application under PVPA)* and tion. Furthermore, U.S. law provides for crimi- the possible increased protection afforded by the nal penalties in addition to the usual civil rem- patent as opposed to the protection certificate edies provided for under U.K. law. Finally, the issued pursuant to PVPA. Moreover, whereas nu- sheer mass of successful trade secret cases, in- merous judicial decisions have been rendered cluding favorable rulings from the U.S. Supreme under the patent statutes, judicial interpretation Court in the Kewanee case (38) and in Aronson of PVPA is relatively limited. V. Quick point (4), indicates that the United States In the United Kingdom, the Federal Republic is probably more effective than the United King- of Germany, Switzerland, France, and Japan, a dom in safeguarding such information (45). single statute covers both sexually and asexually France does not have as strong a system for pro- reproduced plant varieties. As previously noted, tection of proprietary information as the United protection is in the form of protection certificates Kingdom or the United States. French courts have rather than patents. Therefore, there is no choice been rather restrictive in defining the types of of the type of protection obtained in these coun- information that may receive protection and more tries. protective of the employee who leaves with the “The cost of filing an application under PL’PA is $1,000, as com- employer’s confidential information than the pared with the cost of filing a utility patent application f$15tI for courts in other industrialized countries (45). small entities and $300 for others). 400 ● Commercial Biotechnology: An International Analysis .—

LIMITATION ON PROTECTABLE VARIETIES of designated genera or species for a country to In the United States, only tuber-propagated comply with the provisions of the text. Thus, the plants or plants found in an uncultivated state are protection provided in the European countries excluded from protection under the U.S. Plant and Japan is relatively limited when compared Patent Act. As a practical matter, this exclusion with the all-encompassing protection provided by - affects only the Irish potato and the Jerusalem the U.S. Plant Patent A& ‘and PVPA . artichoke. All other plant varieties that can be propagated true to type through asexual repro- EFFECT ON COMPETITIVENESS duction can be protected. Similarly, under PVPA, With respect to plant breeders’ rights, only first-generation hybrids are excluded, and provides a competitive advantage over the other all other varieties otherwise meeting the act re- countries. The scope of protection is much broad- quirements can be protected. er in terms of the tvpes. of varieties than can he In most countries other than the United States, protected, and U.S. law provides the additional by contrast, the number of specific genera or spe- option of using 101 of the patent law (35 U.S.C. cies that can be protected is restricted. The 1 978 $ 101). UPOV Text requires only a very limited number

Evaluation of effectiveness of intellectual property law to promote the development of biotechnology

United States now choose between the special plant pro ection provisions of the law and the possibility of ob - U.S. patent law embodies a number of pro- taining a utility patent. innovation features: a “first-to-invent” system coupled with a l-year grace period; secrecy of the The 1980 Chakrabarty decision has far g reater invention subject matter until grant of the patent; significance than merely holding that living orga- and, as a result of the latter, no requirement for nisms constitute patentable subject matter under owners of biological inventions to grant access U.S. law. It, together with other recent cases, rep- to deposited cultures until after protective rights resents the first truly positive pronouncement in have been established. These features provide in- many decades from the U.S. Supreme Court re- centive for owners of biological inventions to garding the role and value of the patent system utilize the patent system, thereby making their in promoting and maintaining technological com- inventions known to the public to aid further de- petitiveness of U.S. industry (37,45 ).* This should veloprnent. They also provide a sufficient period have an effect on the way in which the lower of time for the patentee to develop a leading posi- courts will treat patents in the future. In addition in the technology before being forced to hand tion, creation of the new Court of Appeals for the over his or her enabling disclosure (including Federal Circuit should provide uniformity and means for immediately practicing the invention, consistency at the appellate level, as well as a body in the case of culture deposit samples) to com- of law that is well informed and respected by petitors, both domestic and foreign. The “first- those whom the patent laws serve. The impor- to-file” systems in the other competitor countries tant role of trade secret protection has been re- do not provide these advantages to applicants. affirmed by the Supreme Court in its 1974

Another strength of the U.S. system is the “Jus[ire Jarkson uas prompted to state in his dissenting opinion choice of protection routes it now offers to in- In JIJngPrSOn y’ OS(QJI & Barton [.’(J. (35) that: “The only patent that ventors. Developers of new varieties of plants can is \ a]i(! is onf~ ~~hirh this (:ourt hus not heen ahk> to get its hands 01]. ” Ch. 16—Intellectual Property Law . 401

Keu'anee decision (38). Finally, the United States Foreign countries has responded to the needs of plant breeders of asexually reproduced varieties by adhering to It would appear that the United Kingdom, the lJPO\/, and conformity between UPO\/ and the Federal Republic of Germany, Sv.ritzerland, Plant Variety Protection Act of 1970 involves onlv France, and Japan have provided adequate incen a matter of the time to necessarv reconcile mino'r tives under their intellectual property laws for language differences. \Vith thes~ positive develop de\lclopnlcnt of }Jiotechnolog\!. ,;\}I pro\.'id{~ reason ments, the intellectual property law of the United ably broad definitions of patentable subject mat States may he vie\ved as entering a period of un ter, and most protect plant varieties, even though precedented strength and vitality (4.1). It should these are generally excluded from patent protec play an important, positive role in the develop tion. Animal husbandry does not enjov such wide ment of biotechnology in the United States and spread possibilities fo~ protection. T~ade secrets thereby aid the international competitiveness of are adequately protected. U.S. companies. Some disadvantages or disincentives for the de There are also several \veaknesses in the U.S. velopment of biotechnology can be seen in the system. One is that the patentee is not permitted rigid manner in which many of these countries to maintain sufficient control over samples of approach the subjects of disclosure requirements, deposited cultures. A second is that the U.S. reproducibility, and culture deposits. In Switzer system provides less protection for process inven land and, to a large extent in the Fedpi'al Republic tions than foreign systems, because the U.S. sys of Germany, micro-organisms per se are not pro tem allovvs competitors to practice a patented tectable. This may not be a serious prohlem, at process invention outside the United States (e.g., least not at tl1is st~lge of til(; techil01()g.y', in \liel\t in a jurisdiction where patent protection may not of the other vvavs in \c\rhich an invention can be be available) and import the product into the claimed (e.g., as' a process using the micro-orga- United States, thereby lowering the value of the 11isnl). 'l~he practice in Europe al1d Japan of re 11.S. process patent. This may prove to be partic quiring access to deposited cultures upon the ularly relevant to the field of biological process publication of unexamined applications can be inventions, especially those inventions in connec vievved as a disincentive; and it may foster a tion with which the patentee is obliged to pro greater reliance on trade secret prote~tion. This vide to competitors with a culture sample. The could restrict the novv of information and thereby U.S. process patent holder has a remedy in the retard the devplopment of the technology. form of a proceeding before the U.S. International Trade Commission, but its usefulness has been questioned.

Findings

Although there is a large degree of uncertain tel' in the Held ot microbiology, even though plant ty in most countries over what kinds of biotech and animal varieties are excluded from patent nological inventions can be patented, much of this ability. This broad interpretation will make it uncertaint,}' has been resolved in the United possible to patent under the EPC most of the tech States, the United Kingdom, the Federal Republic noogy dealing with the techniques of genetic of Germany, Switzerland, France, and Japan. Of manipulation. The EPC has affected or will ulti the six countries, the United States has the mately affect the law of the Federal Republic of broadest interpretation of patentable subject mat Germany, the United Kingdom, France, and Swit tel' for biotechnology. The EPC has adopted a zerland. Switzerland now diverges from EPC broad interpretation of patentable subject mat- practice, however, by not permitting micro- 402 ● Commercial Biotechnology: An International Analysis

organisms per se to be patented. A major depar- ard have been encountered up until now in con- ture from U.S. law under the EPC and in Japan nection with many biological inventions. This is the exclusion from patentability of therapeutic situation has led to the practice of requiring a and diagnostic methods. culture deposit of new micro-organisms used to carry out an invention or forming the subject mat- Japan appears to be moving in the direction of ter of the invention. The Federal Republic of Ger- providing significant patent protection for bio- many has refused to grant patent protection on technology products and processes. One possible micro-oganisms themselves in those cases where obstacle, however, is that Japan has strict health disclosure of a reproducible method for produc- and safety guidelines regarding genetic research, ing the micro-organism cannot be given apart which may bar patenting of genetically manipu- from a culture of the micro-organism itself. lated organisms viewed as hazardous,

The concept of utility in the patent laws of most In those countries that publish unexamined pat- foreign countries is based on industrial (including ent applications (all but the United States and Swit- agriculture) applicability, which differs in inter- zerland of the six competitor countries), a serious pretation from the utility standard in the United problem for owners of biological inventions is the States. In countries with the former concept, in- fact that deposited cultures can become publicly cluding the five foreign countries discussed in this available before any patent rights are granted. chapter, even products and processes of scientif- Although the access to deposited cultures usual- ic research satisfy the utility requirement, as long ly is granted with some safeguards in the form as the basic endeavor falls into the broad category of assurances given by the recipient, these safe- of industry; however, therapeutic and diagnostic guards often do not adequately protect the valid methods do not. In the United States, certain interests of the technology owner (e.g., they usu- chemical products and processes of research inally are not geographically limited or do not terest only are considered not to satisfy the util- restrict the activities of the recipient to only ex- ity requirement. The fact that utility under U.S. perimental use). In fact, it may be desirable to law includes utility in the therapeutic and diag- have some restrictions on access even after the nostic fields, however, helps U.S. competitiveness patent grant, in view of the fact that the patentee in biotechnology. must furnish a “working model” of the invention, which patentees in other fields are not required The four European countries studied here have to do. an absolute novelty standard, with no grace period for either oral or written disclosures of Because of the nature of biotechnology, special an invention by the inventor before the date he problems are faced by patentees in the enforce- or she files an initial patent application covering ment of their rights. Apart from the general prob- the invention. The United States has a l-year lems of policing for infringement, the possibilities grace period, and Japan has a limited 6-month for disguising the use of a biological invention by grace period for presenting scientific papers genetic manipulation will present difficult ques- before filing a patent application. In all of the tions of law and fact. The law and practice of countries, the novelty defeating disclosure must claim interpretation in this field are in their in- be enabling. Thus, the notion that any disclosure fancy. In the present state of the technology, it before filing a patent application will bar patent- is likely that patent-granting authorities generally ability is incorrect. will limit claims to the specific organisms or parts thereof disclosed in patent applications. Most countries have a disclosure standard for inventions based on the concept of enablement. All of the countries studied provide some ele- This standard typically includes an aspect of re- ment of legal protection for trade secrets. Most producibility, i.e., an invention must be repeat- aspects of biotechnology lend themselves to pro- able with a fair degree of certainty and the results tection via the trade secret route, and owners of must not be merely randomly achievable. Particu- such technology may rely on trade secrets when lar problems in satisfying the disclosure stand- patent rights are uncertain or when they judge Ch. 16—intellectual Property Law ● 403

trade secrecy to be more advantageous in a par- est scope of biological subject matter, especially ticular case. because of the 1980 ruling by the U.S. Supreme Court in the Diamond v. Chakrabarty case (21) With the major international and national ef- that the inventor of a microorganism could not forts regarding plant variety protection, culminat- be denied a patent solely because the invention ing in the 1978 UPOV treaty, there is a trend was alive. The United States also offers some of toward providing such protection without requir- the best procedural safeguards for inventors, in- ing satisfaction of any enablement standard. The cluding the l-year grace period and no publica- nature of the protection for plant varieties is dif- tion of the patent application before patent grant. ferent from traditional patent protection in that In addition, the United States offers a choice of it protects basically against derivation and protection to plant breeders. Finally, the trade copying. secrecy protection “offered in the United States The U.S. intellectual property law system appears is as good as that offered in most countries, with to offer the best protection for biotechnology of the exception of the Federal Republic of Germany any system in the world. In general, it appears and Switzerland. that the United States offers protection for broad-

Issue and options

ISSUE: How could Congress improve U.S. ownership rights in biological inventions. The ex- competitiveness in biotechnology by isting U.S. patent law was developed primarily for strengthening U.S. intellectual prop- inanimate objects and processes. Living organisms erty law? are fundamentally different. Unlike a machine, Option 1: Pass a statute specifically covering living a living organism reproduces itself and occasional- organisms and related biological inventions, ly mutates during its lifetime. Furthermore, a living organism is extraordinarily more complex The advent of the new biotechnology has raised than any machine. Although the inventor of the questions in the United States regarding what in- most complex machine knows all of its parts and ventions will be patentable, under what condi- understands completely how it functions, no one tions, and what the scope of protection will be. knows all of the components of the simplest Although the Diamond v. Chakrabarty case in micro-organism or understands completely how 1980 answered in the affirmative the basic ques- it functions. Finally, many biochemical pathways tion of whether Iiving organisms would be patent- in an organism are not unique to that organism; able, other questions remain. because there are many different ways to pro- A statute specifically covering living organisms duce a product, a patent on one of the ways may and related materials could help resolve this un- provide only limited protection. In the case of certainty. Greater certainty would allow com- biological inventions, therefore, there may be panies to plan their R&D and marketing strategies problems in meeting the enablement and written better and in some cases would lower the finan- description requirements, in securing an adequate cial risks involved. The result should be increased scope of protection for inventions, and in polic- innovation. The alternative is to rely on case-by- ing for infringement. case developments in the U.S. Patent and Trade- The complexity of living inventions will make mark Office and the courts. Patent litigation is ex- it difficult to fully describe them, Although depos- tremely expensive and may be unaffordable for iting a microorganism in a culture collection may small, new biotechnologgy firms. circumvent these difficulties with regard to en- Another argument in favor of a special statute ablement, it may be of little help in establishing is that it could help patentees to secure better novelty and the bounds of patent protection. Mi - 404 . Commercial Biotechnology: An International Analysis

crobial taxonomy is an imprecise art. Micro- acteristics of a new plant variety in order to organisms have different characteristics in dif- distinguish it from others and that only these ferent environments, and taxonomists often dis- characteristics need to be stable through succeed- agree on their classification and description. Thus, ing generations. In addition, PVPA defines in- it may be impossible to distinguish sufficiently a fringement to include unauthorized reproduction. micro-organism for patent law purposes from If this approach were taken, the plant acts could similar ones created by other inventors or from be subsumed in the new statute. ones existing in nature. There are several arguments against this option. The fact that organisms reproduce may require First, any new technology raises questions about a change in the definition of infringement. The the scope and nature of patent protection, and law currently defines infringement as the un- many of these will only be able to be resolved on authorized making, using, or selling of the pat- a case-by-case basis rather than by statute. Sec- ented invention. If someone took a patented or- ond, most patent attorneys argue that the patent ganism from a public depository, reproduced it, laws are flexible enough to accommodate any new and gave it away to many users, would this be technology, including biotechnology. Third, de- infringement? One could argue that the person spite the possible limitations in applying the pa- did not “make” the invention. tent law to living organisms, utility patents actually may provide the patentee with the greatest The fact that organisms mutate may cause prob- degree of protection when compared to the pro- lems with respect to the scope of the claims and tection provided by a statute like PVPA. One of infringement, For example, if a patented organism the principal reasons is that a multiplicity of subsequently mutated, it might no longer be with- claims is permitted for utility patents, which could in the scope of the claims. Also, if the deposited cover components of organisms, whereas just the organism is the standard against which infringe- plant itself (and its seeds) is covered by a plant ment is measured, a patent holder may have dif- variety protection certificate. Fourth, many ex- ficulty enforcing the patent if the organism perts would argue that since the Chakrabarty case mutated after it had been deposited. On the other resolved the fundamental issue—the patentability hand, culture deposits generally are preserved by of living organisms —there is no need to under- freezing, so mutations may not be much of a take the major effort needed to pass legislation problem. to solve more minor problems. In addition, since Finally, there is the problem of adequately pro- there is some degree of public sentiment against tecting a product that can be made many different patenting living organisms, the fundamental issue ways, only some of which may be known at the also would be raised again. Finally, a new statute time the patent application is filed. For example, would create its own new issues and questions because of the degeneracy of the genetic code, of interpretation. a particular protein can be made by various base sequences. Claiming a particular sequence will Option 2: Allow patentees to place restrictions on provide insufficient protection, and claiming the micro-organism cultures supplied to third protein will not help if the protein is not novel. parties. Claiming the novel organism is one solution, but U.S. patent law requires complete and enabl- others can easily construct different organisms ing disclosure of an invention in order to place to produce the same product. it in the public domain. In the case of patented These problems have been addressed in PVPA micro-organisms, the patentee is in effect re- (and to a lesser extent in the Plant Patent Act), quired to turn over more than his or her inven- which could be used as a model. For a plant varie- tion—the micro-organism is virtually a complete ty to be protected under PVPA, for example, it “factory” ready to begin production. For this must be distinct, uniform, and stable. The defi- reason, inventors may be more inclined to rely nitions of these terms embody the concept that on trade secrets than on patents, and the public it is necessary only to know the important char- will not gain the benefits of the new knowledge Ch. 16—Intellectual Property Law . 405 embodied in their inventions. This problem is United States hya process patented in the even greater for process patents involving micro l rnited States without the authorization of organisms, vvhich are difficult to police. Reason the patent owner, able restrictions on micro~rganism cultures sup The four \Vestern European countries and plied to third parties, designed not to prevent Japan grant extraterritorial effect to their process public access to the culture deposits but to pre patents in the way that is envisioned by this op vent patent infringement, would be consistent tion. Although U.S. la\\' provides a different rem \vith the aims of the U.S. patent system. For ex edy to the situation-an action for unfair competi ample, restrictions might be placed on ho\v the tion before the International Trade Commission organism is used and subsequent transfers of the many attornpys believe this remedy leaves much organism. The other countries surveyed, particu to be desired. This option would strengthen the larly the Federal Republic of Germany permit cer patent system by providing an additional way for tain restrictions on culture deposits. patentees to protect their rights. Although the ef A dravvback to the option might be that the re fect of this option would not he limited to hiotech strictions could hinder the dissemination of infor nology, it \Nould be important to this technology l .... oP'"111CO r'\f tho. n"}'C'o ,,,,ith 1.4.rhi,. .... h TY'tIl£"T'r1ro r.T'rl'lY'\lcY'Y\C' mation, one of the fundamental goals of the pat U'-A,au.:>~' VI lln' c;u.:>'-, "Illi •• IJ1L-IlllJ1L-IV,,",,15UIJ1.:>11l.:> ent law. Hovvever, those who support such re used in patented processes can be acquired and strictions argue that they can be devised so as not used by overseas competitors, l\1any companies to hinder the dissemination of information yet using biotechnology and their patent attorneys prevent infringement, another important goal of see this option as a potentially important part of the 1(1\v. their program to protect the results of their R&D efforts. Option 3: Amend section 2 i 1 of Title 3.') of the United A bill to implement this option (H.R. 3577) was States Code to define as infringement the introduced on July 14, 1983. importation of il product made outside the

Chapter 16 references*

1. American La\\' Institute, Restatement of Torts, sec. Boyer Patent No.2 Exposes No. 1 to Possible In 7S7 comment 0)) (Chicago: 1939). validation," Aug. 16, 1982, p. 4. 2. American Law Institute, Restatement of Torts, sec. 8. Blum, U. D. E., "Del' Patentschutz fur l\1ikrobiolo 7S9 (Chicago: 1939). gische Erzeugnisse" (Patent Requirements for Mi 3. Application of Bergv, 596 F.2d 952 (C.C.P.A. 1979). crobiological Inventions), Dissertation Ver/ag Ost 4. Aronson v. Quick Point, 440 U.S. 257 (19791. schweiz AG, University of Zurich, 1979, pp. 5. Biotechnologv Laa' Report, "Patent Office \I\'ith 114-120. draws Cohen-Boyer Plasmid Patent From Sched 9. Boeters, H. D., "Erfahrungen bei del' HinterIegung uled July 13th Issue and Rejects All Claims," 1:76, von Gevvebekulturen," Mitteilungen del' deutschen 1982, Patentwalte, 1982, pp. 73-74. 6. Biotechnologv Law Report, "Board of Appeals Deci 10. Bomse, S., "Rights in the Products of Biotechnology: sion on Abbott Laboratories Patent Application Issues and Strategies/' Industrial Applications of Takes Tough Stance on Enablement of Microbio Genetics Engineering: The Legal and Regula tory logical Inventions," 2:66, 1983. Regime (Philadelphia: American Law Institute, 7. Biotechnologv Newswatch "Rejection of Cohen- American Bar Association, 1983), 11 Bossung, V., "Stand del' Technik and eigene VOl' '\otl'~: ('.CP.;\. = Court of Customs and Pal!~nt Apppab F 2d = Fpdl~ral Hppor·tPI', SI'('oIHl SI'I'jp, vedautharung in internationalen, europaeischen Ill. App. 2d = Illjnoj~ Apppllatp Court Hl'porh, SI'('oIHI Sprip, und nationalen Patentrecht," Geu'erblicher \ .E.2d = \orth Ea,tprn Hl'portl'r, SI'('oIHl S(~rjl'~ \. S = \'S SUpl'l'lIl1' Court Hq)()rh Rechtssclwtz und Urheberrecht International Part, \. S I'q = \'.S I'att'nt (~uartl'rl\'. 1978, pp, 381-398, —

406 . Commercial Biotechnology: An International Analysis

12. Brenner v. Manson, 383 U.S. 519, 153 U. S.P.Q. 45 34 Jet Spray Cooler, Inc. v. Crampton, 282 N.E.2d 921, (1966). 925 (1972). 13. Brunswold, B., “Analysis of the United States In- 35 Jungerson v. Ostby & Barton Co., 335 U.S. 560 ternational Trade Commission as a Forum for In- (1949). tellectual Property Disputes, ” J. Pat. Off. Society 36 Kayton, I., “Copyright in Living Genetically Engi- 60:505, 1978. neered Works, ” Geo. Wash. L. Rev. 50:191, 1982. 14. Budapest Treaty on the International Recognition 37. Kayton, I., The Crisis of Law in Patents (Washing- of the Deposit of Microorganisms for the Purpose ton, D. C.: Patent Resources Group, 1970). of Patent Procedure, Officia/ Gazette 961:21-16, 38. Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 Aug. 23, 1977. (1974). 15. Cooper, I. P., “Arzberger Under the Microscope: 39. Kiley, T., “Learning To Live With the Living Inven- A Critical Reexamination of the Exclusion of Bac- tion,” APLA Q.J. 220:228, 1979. teria From Plant Patent Protection, ” Pat. & T.M. 40. Kiley, T., “Speculations on Proprietary Rights and l?ev. 78:59, 1980. Biotechnology,” Banbury Report 10: Patenting of 16. Cooper, 1. P., Biotechnology and the Law, sec. 11.02 Life Forms (New York: Cold Spring Harbor Lab- (New York: Clark Boardman & Co., 1983). oratory, 1982). 17. Cooper, 1. P., “Patent Strategies for Biotechnology 41, Milgrim, R. M., Trade Secrets, sec. 2.02(2) (New Products,” presented at a conference on Biotech- York: Mathew Bender, 1981). nology: Drugs, Biologics, Medical Devices, Institute 42. Ostrach, M., and Nyari, L., “Arrangements With for Applied Pharmaceutical Sciences, East Bruns- Respect to Transfer of Biological Materials.” Indus- wick, N.J., 1983. trial Applications of Genetic Engineering: The 18. Corning Glass Works v. Brenner, 175 U. S.P.Q. 516 Legal and Regulatory Regime (Philadelphia: (D.C. Cir. 1972). American Law Institute, American Bar Association, 19. Daus, D. G., Bond, R. T., and Rose, S. K., “Micro- 1983). biological Plant Patents,” IDEA 10:87, 1966. 43. Rauh, P. A., Patent Attorney, Munich, personal 20. Dawson Chemical Co. v. Rohm & Haas Co., 448 communication to Richard Schwaab, OTA con- U.S. 176 (1980). tractor, Aug. 3, 1982. 21. Diamond v. Chakrabarty, 447 U.S. 303 (1980). 44. Rowland, B., ‘(Are the Fruits of Genetic Engineer- 22. Diamond v. Chakrabarty, 447 U.S. 310 (1980). ing Patentable?” Banbury Report 10: Patenting of 23. Diamond v. Diehr, 450 U.S. 175 (1981). Life Forms (New York: Cold Spring Harbor Lab- 24. Ex parte Jackson, 21? U. S.P.Q. 804 (1983). oratory, 1982). 25. Feldman v. Aunstrup, 517 F.2d 1351, 186 U. S.P.Q. 45. Schwaab, R., Jeffery, D., and Conlin, D., “U.S. and 108 (C. C.P.A. 1975). Foreign Intellectual Property Law Relating to Bio- 26. Graver Tank & Mfg. Co. v. Linde Air Products Co., logical Inventions,” contract report prepared for 339 U.S. 605, 85 U. S.P.Q. 328 (1950). the Office of Technology Assessment, U.S. Con- 27. Great A&P Tea Co. v. Supermarket Equipment gress, 1983. Corp., 340 U.S. 147 (1950). 46. Tegtmeyer, R., “Patenting of Genetic Engineering 28. Hoffmann-La Roche, Inc. v. Go/de, Civ. No. 80-3601 Technology,” speech presented to the National A.J.Z. (N.D. Ca].). Academy of Sciences’ Convocation on Genetic En- 29. Halluin, A., “Patenting the Results of Genetic En- gineering of Plants, Washington, D.C., 1983. gineering Research: An Overview,” Banbury Re- 47. U.S. Congress, Office of Technology Assessment, port 10: Patenting of Life Forms (New York: Cold Impacts of Applied Genetics: Microorganisms, Spring Harbor Laboratory, 1982). Wants, and Animals, OTA-HR-132, Washington, 30. In re Angstadt, 537 F.2d 498, 190 U. S.P.Q. 214 D. C., April 1981. (C.C.P.A. 1976). 48. U.S. Department of Commerce, “Industrial Advi- 31. Zn re Argoudelis, 434 F.2d 1390, 168 U. S.P,Q. 99 sory Subcommittee Report on Patent Policy,” Ad- (C.C.P.A. 1970). visory Committee on Industrial Innovation: Final 32. Zn re Jo@, 576 F.2d 909, 153 U. S.P.Q. 45 (C. C.P.A. Report, Washington, D. C., 1979. 1967). 49. U.S. Department of Commerce, Patent and Trade- 33. In re Kirk, 376 F.2d, 936, 153 U. S.P.Q. 48 (C. C.P.A. mark Office, Manual of Patent Examining Pro- 1967). cedure, sec. 2105, Washington, D. C., 1980. Ch. 16—Intellectual Property Law ● 407

50. U.S. Department of Commerce, Patent and Trade- 52. Whale, A., “Patents and Genetic Engineering, ” mark Office, Manual of Patent Examining Pro- Intellectual Property L. Rev. 14:93, 1982. cedure, sec. 608. Ol(p), Washington, D. C., 1980. 53. Yoder Brothers, Inc. v. California-Florida Plant 51. Vendo Co. v. Stoner, 105 111. App. 2d 261, 245 Corp., 537 F.2d 1347, 1365 (5th Cir. 1976). N.E.2d 263 (1969). Chapter 17 University/Industry Relationships

25-561 0 - 84 - 27 Contents

Page Introduction ...... 411 The Effectiveness of University/Industry Relationships in Biotechnology Transfer . . . . . 413 Why are University/Industry Relationships in Biotechnology Being Formed? ...... 414 Are the Relationships Working Smoothly? ...... 414 Has the Way University Research Is Done or the Quality of University Research Been Affectedly the Relationships ...... 414 Has Collaboration Among University Researchers Been Affectedly the Relationships ...... 414 Has the Quality of Education Students Receive Been Adversely Affectedly the Relationships? ...... 414 Are There Lessons to be Learned from University/Industry Relationships in Fields Such as Microelectronics?...... 415 What Forms are University/Industry Relationships in Biotechnology Taking and What are the Associated Issues? ...... 416 Are University Policies With Respect to University/Industry Relationships Being Formulated? ...... 418 What is the Likely Future of University/Industry Relationships in Biotechnology?. . . . 422 How Effective is University/Industry Technology Transfer in Countries Likely to Compete With the United States in Biotechnology...... 422 Findings ...... 427 Issue ...... 429 Chapter 17 References ...... 430

Table Table No. Page 66. License and Patent Activity at IO Leading Research Institutions ...... 412 Chapter 17 University/Industry Relationships —

Introduction ———— -—— —. ———

The recent spectacular advances in molecular sities, although the percentage of industrial fund biologv in the United States have arisen from basic ing in some departments of universities may be research, most of \,vhich is federally funded and much higher or lower (19). It is unlikely that in carried out in university laboratories. Led by the dustrial support will ever equal Federal support promise of biotechnology's commercial potential of university research, but increases in industrial and the need for technical expertise, U.S. and for funding could have significant effects on the types eign companies have been deveioping closer ties of research performed, especiaHy in high-tech \vith universities, thus intensifying the process of nology areas such as biotechnology. university/industry technology transfer. At least American universities can expect some finan in the United States, concerns have been raised cial benefit from royalties derived from the licens about industrial sponsorship of university re ing of patents, although it is unlikely that royal search (1,4,8,13,25,26). Some of these concerns ty inconle will ever be a significant portion of sup are actually not nevv. \Vhat is ne\v is that biology, port. The \IVisconsin Alumni Research Foundation rather than chemistry or engineering, is suddenly (W ARF), for example, has been instrumental in commercially promising. generating royalty income for the University of This chapter focuses on university/industry re \Visconsin. It should be noted, ho\vever, that 39 lationships as a factor influencing the competitive of the 58 income-producing inventions assigned position of the United States vis-a-vis other coun to WARF since 1925 have earned less than tries in the commercialization of biotechnology. $100,000, and only 7 have earned more than $1 Issues in university/industry relationships are not million (3,9). As shown in table 66, royalty income confined to relationships in biotechnology, so the as a proportion of total Federal support is far less chapter also includes some discussion of broader at nine other leading research universities in the university/industry issues that have implications United States than at the University of \Viscon for competitiveness in biotechnology. The resolu sin. If Public Law 96-517, the 1980 law that allows tion of issues in U.S. university/industry reiation universities and smaH businesses to retain patent ships in biotechnology is extremely important be rights for federally funded research, encourages cause the manner in which these issues are re the development and marketing of products, U.S. solved \vili help deiermine ihe paiiern of basic universities' royahy income may increase. Stan and applied research in the field for the next dec ford University and the University of California ade or so. Furthermore, research is likely to be at Berkeley have already benefited from royalties critical to the development of biotechnology for (approximately $2 million) for the Cohen-Boyer some time. patent for the basic recombinant DNA (rDNA) process. However, university income from bio Closer ties between universities and industry technology may be more dependent on whether can be advantageous to the institutions involved the firms developing and marketing biotech and are important for the national innovative nological products or processes rely primarily on process. Industrial research questions can enrich patents or on in-house research. * If the more the university research process, and there are fi usual operating mode becomes in-house industrial nancial benefits from increased industrial funding research, then royalty income to universities nlay of university research. Industrial support of uni not be significant. versity research and development (R&D) in the United States currently represents about 6 to 7 "The advantages and disad\'imtages of I'I~lying on patf'nts 01' trade secrets to protect intellectual p['()perty aI'l~ discussed in Chaptf'r 16: percent of the total research budget of univer- Intellectual Property Law,

411 ———— .—

412 ● Commercial Biotechnology: An International Analysis

Table 66.—License and Patent Activity at 10 Leading U.S. Research Institutions

Current annual Current annual Fiscal year 1980 Federal R&D support number of royalty income Institution Total ($000) Life sciences ($000) Type of activity disclosures (thousands of dollars) 1. Johns Hopkins ...... $239,869 $60,275 Licensing program 20 $90 2. MIT ...... 141,011 24,200 Licensing program 164 1,500 3. Stanford University . . . . . 104,011 43,712 Licensing program 140 2,500 4. University of Washington ...... 100,567 54,968 Research foundation 28 120 5. University of California, San Diego...... 90,703 37,327 Licensing programa 320a 1 ,700a 6. University of California Los Angeles...... 87,073 52,606 Licensing programa 7. Harvard University . . . . . 83,997 53,962 Licensing program 60 50 8. Columbia University . . . . 81,361 49,383 — 20 Minimal 9. University of Wisconsin . 80,460 43,342 Research foundation 75 6,000 (with investment income)b 10. Cornell University . . . . . 74,761 37,900 Research foundation 50 1,300 ~University of California system. Investment income is the substantial portion SOURCE: G. S Omenn, “University-Corporate Relatlons in Science and Technology: An Analysis of Specific Models,” Parfrrers irr the Research Errterprise, T, W, Langfitt, S. Hackney, A. P. Fishman, et al. (eds.) (Philadelphia: University of Pennsylvania Press, 1983)

There are potential disadvantages to closer uni- ty are pursued in a relatively open environment versity/industry relationships, but some problems that allows the exchange of ideas and unrestricted can be avoided if participants are aware of poten- publication of research findings. This does not tial difficulties and adequate safeguards are in mean that there is no competition among schol- place. One potential disadvantage of closer rela- ars, nor is it to deny that secrecy can accompany tionships might be a tendency to increased secre- the desire to be first to announce a discovery (31). cy on the part of university faculty; it should be Similarly, it does not mean that the pursuit of noted, however, that some secrecy has always ex- knowledge for its own sake cannot be diverted isted when a particular faculty member is close by the funds currently available for particular to a new discovery. A second potential disadvan- kinds of endeavors (e.g., a “war on cancer” or tage is the danger that basic research in univer- secret government research). Generally, however, sities will be directed toward profitable lines of the pursuit by universities of the principles of inquiry instead of toward interesting questions openness, aided by generous Federal funding for raised by past or recent findings. This might oc- basic research, has enabled the United States to cur if there were a precipitous decline in Federal build the greatest research capability in the world. support for research in universities and univer- In contrast to the purposes of universities, the sities had to turn increasingly to industry for goal of industry is to make a profit, and the mode financial support. A third potential problem is that of achieving this goal is competition. Industry is some universities might be associated with prod- output oriented, i.e., industry aspires to the effi- ucts and processes linking them to lawsuits for cient production of goods and services. When a damages, causing subsequent impairment of the company pays for research, it may expect owner- universities’ impartiality and credibility, Finally, ship of the results long enough to justify the in- there is the danger that universities that tradi- vestment to bring the product to market. In an tionally have competed for the best faculty might industrial setting, there is less willingness than compete instead for the most lucrative industrial there is in a university setting to share research contracts. materials; such materials are often kept as trade In general, the purposes of universities in the secrets. The reason for greater secrecy in indus- United States are education, the conservation try is that development of a product is often risky, of knowledge, and the pursuit of unrestricted costly, and fraught with many obstacles along the knowledge. The ends of a university and its facul - route to success. Although the costs of develop- Ch. 17—University/lndustry Relationships ● 413

ing and marketing a product vary among indus- determine if technology is being transferred in tries and products, the development of a pharma- a spirit of cooperation and without compromis- ceutical product in the United States can cost ing the goals of two very different institutions. from $50 million to $75 million, with no guarantee E. David has described the fundamental char- of profit (27). Thus, in industry, achieving a com- acteristic of optimal technology transfer between petitive edge in a market necessitates guarding universities and industry as a two-way synergistic communication and intellectual property, an oper- process between equal partners (6). Basic re- ating mode quite opposite from that of univer- search, usually carried out in universities, is essen- sities (6,13). tial to the process. It is important to note, how- Industries and universities undertake partner- ever, that basic science itself cannot progress ships in biotechnology for a variety of reasons, without advances in technology, which often is ranging from the desire by industry to gain ac- developed by industry. Just as, for example, Gali - cess to new technology, to gain a lead time in basic leo and Newton could not have made their con- knowledge, or to obtain trained personnel, to the tributions to astronomy without the invention of need by universities to fill shortfalls in funding. the telescope, the recent advances in molecular Ultimately, it is hoped, the effect of the partner- biology could not have been made without ad- ships in the United States will be to facilitate and vances such as the electron microscope, X-ray speed up the process of domestic technology crystallography, radioisotope Iabeling, and chro- transfer, since this is critical to the maintenance matography. Thus, universities and industry alike of a competitive position by the United States. Ex- must accept the requirements of the other institu- amining U.S. university/industry relationships in tion and enter into agreements that maximize the biotechnology is necessary in order to gain insight ability of each to maintain its standards and goals. into the process of technology transfer and to

The effectiveness of university/industry relationships in biotechnology transfer

Since most of the university/industry relation- ● What forms are university/industry relationships in biotechnology are new, it is difficult to ships in biotechnology taking and what are ascertain how effective the relationships in the the associated issues? United States will be in transferring the technol- ● Are university policies with respect to uni- ogy between universities and industry. An esti- versity/industry relationships (e.g., patent and mate of their effectiveness can be made however, royalty agreements, handling of tangible re- by considering the following questions: search property, and conflicts of interest) being formulated? ● Why are university/industry relationships in ● What is the likely future of university/indus- biotechnology being formed? try relationships in biotechnology? ● Are the relationships working smoothly? ● And finally, how effective is universit,y/indus- ● Has the way research is done in university try technology transfer in countries likely to laboratories or the quality of university re- compete with the United States in biotech- search been affected by the relationships? nology? ● Has collaboration among university researchers been affected? At the request of OTA, two contractors inter- ● Has the quality of education been affected? viewed university administrators, faculty, and ● Are there lessons to be learned from univer- graduate students (principally in biotechnology) sity/industry relationships in fields such as from the University of California, Berkeley, the microelectronics? University of California, San Francisco (UCSF), 414 ● Commercial Biotechnology: An International Analysis

Stanford University, Harvard University, Massa- Has the way university research is chusetts Institute of Technology (MIT), and Johns done or the quality of university Hopkins University, and representatives from 15 research been affected by the companies (a mix of new biotechnology firms and relationships? other companies moving into the biotechnology area) to obtain their opinions. Although this sam- Respondents in OTA’S survey were asked to ple was not statistically representative, it included consider two potential effects of university/indus- some of the major U.S. companies and research try relationships on U.S. university research: ef- institutions working in biotechnology; thus, the fects on the way research is done (its focus or opinions came from individuals active and knowl- methodology) and effects on the quality of the edgeable in the field. research. Nearly 85 percent of those responding believed that university/industry relationships in Why are university/industry biotechnology have had no effect on the way re- relationships in biotechnology search is done, and virtually all believed there has being formed? been no change in the quality of research.

OTA found an almost unanimous consensus Has collaboration among university among both university and industry representatives in the United States that universities are researchers been affected by the seeking money from their relationships with in- relationships? dustry, motivated in part by a reduction or fear Almost 85 percent of the respondents in OTA’S of reduction in Federal funding. Industry repre- survey who had an opinion about this issue be- sentatives believe that universities want to gain lieved that university/industry relationships in bio- more real-world exposure for faculty and stu- technology have had no substantial effect on the dents and offer them a look at “economic reali- exchange of information or the collaboration that ty” (18), In addition, some faculty stated that in- has existed among U.S. university researchers. dustrial funding requires less administrative work Most respondents believed that there is only and is longer term than Government-funded re- limited collaboration in rapidly evolvring areas of newable grants. science anyway and that levels of communication vary. among faculty.. Industry. representatives Are the relationships commented that faculty having consulting ar- working smoothly? rangements should keep proprietary information confidential (18). The perception of most of the respondents in OTA’S survey is that university/industry arrangements in the United States are working well. The Has the quality of education students initial administration of agreements between uni- receive been adversely affected by versities and industry in the area of biotechnology the relationships? was inefficient, because new policies were being formulated and new players (biologists, in con- Slightly more than half of those who responded trast to engineers or chemists) are now involed to this question said there has been no change in interactions with industry. In addition, some in the quality of education students receive, The research administrators have had to learn how others said that if there has been any effect, it to administer technology transfer agreements has been to enhance the quality. Two forces will (18). Some individuals have speculated that agree- probably keep the quality of education at Ameri- ments are working well because there are almost can universities unaffected by university/industry no biotechnology products yet. Disagreements relationships in biotechnology. First, the goal of may arise, especially in limited partnerships, the faculty and university administrators to pro- when product sales revenues are generated (18). tect and maintain standards of academic excel- Ch. I7-Unlverslty/lndustry HelatlOnshlps • 47tJ — ——

lence will continlH~ to influence the arrangements tronics program \vere employees of local industry that universities make \vith industry. Second, \vho attended Stanford on a part -time basis and .;tudents themselves can be expected to monitor \vhose education \vas paid for by private company the situation and act to prevent any deterioration contributions. :\ioreover, members of Stanford's n the quality of education they receive. Some stu electrical engineering facult.v sat as directors :lents ha\'{~ encountered problems at the l iniver on the boards of 13 corporations (including one -iit.v of Caiifornia, Davis and Stanford l iniversity board chairman and one half-time compan.v presi ::ampuses, for example, and seminars and meet dent). Nearly all of the 3D-odd electrical engineer ,ngs have been held to add['ess them. Faculty and ing faculty members spent one-half to 1 day per

lI ... ,,...,,rt.l,. F'''''''''C''1I111+i...... "rl f'". ... "' W'""'\ ..... ~"#""}trl i ...... 1'111cfp" 1\/Irl.''''o£"""OT' Jniversiiy administrators have been involved in V\'Ct;!'. LUII;:'UllllI5 lUI l-'llvnl~ 1l1UU"Hl.~'. nl\..1l LLlVLI , ~fforts to address the problems and to ensure that four or five faculty members were virtual million -itudents' education is not compromised. aires as a result of equity participation in com panies \vith which they \vere associated as either board members or consultants. During the inten Are there lessons to be learned from sifying Cold \Var atmosphere surrounding the

J ') 11 n £' h ; n'" r\ f "n 11 t n ; l- ; nth n I 'I t t> 1 (l ~ (l 'c TTl II C tin _ university/industry relationships in l'-lUJl\..JJIJllf) VI Ut.JUlllln 111 Ll1'-~ Jtt .. \..) ~ ... ~'-I\'II..'J JJJ'-J' ... ,.I. .1..1.. fields such as microelectronics? dividuals in academia, government, or industry \vere not troubled hy these overt cooperative ties The developo1ent of the lJ .S. semiconductor in between the semiconductor industrv and univer dustry is often suggested as a comparison for the sity electrical engineering depar'tm'ents. ~either deveiopment of biotechnoiogy (see Appendix C: the quality of the education nor academic free A Comparison of the [l.S. Smniconductor IndustI:\f dom appeared to suffer substantially; in fact, all and Biotechnology). \/irtually all of the basic re \\'ere probably enhanced (2). search in eiectronic engineering carried out by The impact of Federal research funding at uni U.S. universities during the 19S0's and 1960's \vas versities during the 19S0's and 1960's thus had supported hy the Federal Government. In addi intended and unintended effects. Federal moneys tion, IHnvever, a specific program in electronics purposefully developed the research and train research \vas funded by the Joint Services of the ing infrastructure at universities necessary to feed U.S. Department of Defense (DOD). DOD's pro industrial growth, and, in turn, laid the basis for gram had four specific aims: widespread but largely unintended collaborative • extending basic kno\vledge in electronics; ties between American universities and the U.S. • strengthening the scientific qualifications of senliconductor industry. I\lajor universities seized electrical enf,tineering faculty; on Federal funds to become the concentrated 10- • training students to enter research positions caiionai foci for the rapid growth of the dynamic, at industrial, government, and university lab new U.S. sen1iconductor industry. However, fmv oratories; and semiconductor innovations emerged directly from • developing ne\v ideas that could be exploited federally funded university research. in the development of new systems and de The potential industrial applications of biotech vices in applied research and development nology I by contrast, have en1erged directly from labs. publicly funded academic bion1edical research. Because of the infusion of capital from DOD's As biotechnology has been moving to the mar program, there developed at LJ .S. universities a ket, universities have been buffers in commer research and training infrastructure that facili cializing the fruits of public funding, because they tated the gro\vth of the U.S. senuconductor indus are virtually the sole source of basic know-ho\\'. try. From the mid-19S0's on, this infrastructure l\lany of the new firms in the field of biotech generated increasingly open cooperative ties be nology have sprung out of academia, whereas in tvveen university electrical engineering depart the sen1iconductor field, ample DOD procurement ments and private companies. By 1961, nearly half helped to create industrial know-how and en of the 400 graduate students in Stanford's elec- couraged industrial spinoff. In the area of biotech- 416 ● Commercial Biotechnology: An International Analysis

nology, the traditionally distinct roles of the uni- and speaker programs. Issues arise most often versity as source of research and training and with regard to consulting arrangements. of industry as source of commercialization are blurred. Though the consulting arrangements, CONSULTING ARRANGEMENTS equity arrangements, and research contracts be- Consulting is important for several reasons. It tween U.S. universities and industry in the field allows direct technology transfer between univer- of biotechnology resemble in form the coopera- sities and industry that goes in both directions. tive ties that emerged between U.S. universities Academicians agree that consulting keeps them and industry in the field of semiconductors, their apprised of new innovations in industrial R&D timing, substance, and scale are significantly dif- and that their knowledge can be applied to new ferent (2). kinds of problems related to, but outside of, their on-campus research. University faculty who con- What forms are university/industry sult publish more than faculty who do not con- relationships in biotechnology sult (this may be a chicken and egg situation); they taking and what are the associated also do more research and participate as active- issues? ly in their administrative duties as faculty who do not consult (17). Furthermore, consulting plays The major issues in university/industry relation- a significant role in faculty salary supplementa- ships, though derived in part from the differences tion: 44 percent of calendar year faculty at doc- between the two institutions, are also set in a con- toral granting institutions in the United States text of broader social and economic issues. Thus, report that consulting is their first or second the discussion of types of university/industry ar- largest source of supplemental income (17). Con- rangements below is set in this context of broader sulting relationships have led to longer term in- issues. First a caveat: industry and universities are dustrial support of U.S. university research such not monolithic institutions. The variability within as that provided by Monsanto to Washington Uni- each of these two institutions is as least as great versity (see below) and Harvard and that provided as, if not greater than, the variability between by Exxon to MIT. them. This diversity is essential to the health of Industry views consulting arrangements with both and must be borne in mind in any discus- university faculty essentially as having an expert sion of university/industry arrangements, because on retainer. Most U.S. universities have policies no two arrangements are identical. on consulting, but the policies vary. Some exam- In the following discussion, five broad types of ples of university policies on consulting are university/industry arrangements in biotechnol- presented in appendix H. ogy are considered: University consulting policies typically have pro- ● consulting arrangements, visions regarding conflict of interest, time regula- . industrial associates programs, tion, disclosure, and policy enforcement. In most . research contracts, cases, policy enforcement is based on an honor ● research partnerships, and system; each faculty member who consults is per- ● private corporations. sonally responsible for adhering to this. Although some faculty members may not always observe Additional information about specific university/ the rules, with incentives to carry on good re- industry relationships in biotechnology is pre- search, train graduate students, and publish find- sented in Appendix H: Selected Aspects of U.S. Uni- ings, most university faculty are not motivated versity/Industry Relationships in Biotechnology. to pursue consulting activities to the point where By far the most common form of interaction conflicts of interest occur on a regular basis. Dis- is personal interaction among scientists. Personal closure policies are of interest for public access interactions can include consulting arrangements, to objective scientific information. An argument personnel and publication exchanges, seminars, could be made that because the public has sup- Ch. 17—University//ndustry Relationships ● 417

ported research in universities, it has a right to RESEARCH CONTRACTS know whether a particular university faculty University research contracts with industrial member who is giving testimony, for example, has sponsors have been and continue to be an impor- a consulting relationship with a company that tant type of university/industry relationship in manufactures a particular potentially harmful biotechnology. Research contracts differ from chemical. The negative side of disclosure policies consulting arrangements in that the industrial is that “objective” information maybe judged “sub- sponsor is usually paying for a specific piece of jective” because of guilt by association. If a facul- research or supporting general research activities. ty member’s consulting arrangement with indus- Contractual arrangements often grow out of con- try is declared openly, it is not necessarily the case sulting or industrial associates programs and are that his or her testimony is biased. In fact, the usually motivated by industry’s need for research expert may have a more objective view because that complements research being done in-house he or she understands both the research and de- or for some expertise in a new area. velopment aspects of the technology. Several of the university research contracts INDUSTRIAL ASSOCIATES PROGRAMS with industrial sponsors in biotechnology have been large and have elicited questions regarding Industrial associates programs usually involve issues such as commingling of funds, patent entire university departments or groups of spe- rights, and disclosure of equity or other finan- cialists within a department. Companies pay a set cial arrangements between the industrial spon- annual fee that allows them to participate in sor and the principal investigator. The larger seminars, interact with graduate students and agreements have received extensive press cover- faculty, and preview publications. age. Industrial associates programs allow university/ Issues of conflict of interest, invention rights, industry contacts and at the same time avoid con- commingling of funds, and university policies re- flict of interest problems and patent agreements. garding the processing of contractual arrange- These programs exist at several U.S. universities, ments are all important. It is interesting to note and some ongoing programs now include biotech- that MIT, which traditionally has had a close rela- nology. At MIT, for example, the Industrial Liaison tionship with industry and has a relatively larger Program has begun to include biotechnology as (7 percent) share of industrial sponsorship than a subject of its symposia and seminar series. One other American universities, has the most explicit of Stanford’s 19 industrial affiliates programs is guidelines for consulting, disclosure, and proc- a program in biochemistry. And Pennsylvania essing of industry-sponsored contracts. other State University has just initiated a Cooperative universities, notably, Johns Hopkins, Harvard, and Program in Recombinant DNA Technology. the University of California, are moving toward Industrial associates programs facilitate tech- more explicitly stated policies. See appendix H for nology transfer between universities and indus- descriptions of selected university policies on try, open up opportunities for further consulting sponsored research and patents. and contract arrangements, provide funding for graduate students and faculty research, and give RESEARCH PARTNERSHIPS industry access to graduate students for future employment. Industrialists generally view these Another type of university/industry arrange- programs as useful. However, some industrialists ment taking place in biotechnology is the joint es- believe that a few university programs tend to tablishment of a research foundation, institute, give the impression that research results are be- or long-term collaborative arrangement by an in- ing sold to members only. Exclusivity is not the dustrial sponsor and a university. Three recent purpose of these programs; rather, their purposes ones, further described in appendix H, are well are support of research activities and continuing known: the Hoechst/Massachussetts General Hos- open lines of communication of research results. pital agreement, the Monsanto/Washington Uni- 418 ● Commercial Biotechnology: An International Analysis

versity agreement, and the Whitehead Insti- PRIVATE CORPORATIONS tute/MIT agreement. These arrangements raise Innovative approaches to connecting university several issues, some of which are pertinent to only research to commercial developments in biotech- one or two of them, others to all three. nology are being initiated. The establishment of Engenics (with Stanford and the University of The agreement between the West German com- California, Berkeley) and the establishment of pany Hoechst and Massachusetts General Hospi- Neogen (with Michigan State) are examples of two tal, for example, raises the issue of foreign invest- different approaches. For descriptions of these ment in and foreign benefit from U.S. Govern- arrangements, see appendix H. ment-funded research. This agreement also raised the issue of commingling of funds (see below). For The Engenics arrangement is funded by six cor- both the Hoechst and Whitehead Institute agree- porations, with money flowing through the simul- ments, faculty selection is an issue because of the taneously established nonprofit Center for Bio- need for balance in subdiscipline in biology in technology at Stanford. The Center for Biotech- Massachusetts General Hospital’s medical school nology funds contract research on the campuses and MIT’s biology department, respectively. Other of the University of California, Berkeley, and Stan- issues raised by these agreements are external ford (and also funds one contract at MIT) and will peer review of projects and controls on rights to funnel royalty income back into the university to publish. Another issue is the terms of termina- fund more research. Neogen was established to tion of the agreements and whether adequate utilize limited partnerships and tax benefits as a notification provisions have been made for the vehicle to allow Michigan State University facul- university to seek other support. ty to remain on campus and simultaneously allow entrepreneurial ideas to flourish. Neogen’s royal- In the Hoechst/Massachusetts General Hospital ties are funneled back to the university through agreement, the company will pay for all equip- the nonprofit Michigan State University Founda- ment and other expenses in order to ensure that tion. there will be no Federal support of the research. Questions will arise if faculty cooperate with It is too early to evaluate the Engenics and Neo- other researchers who are funded, for example, gen arrangements. It should be noted, however, by the National Institutes of Health. Provisions that potential challenges could arise with respect have been made in both the Hoechst and White- to adequate mechanisms for peer review of proj- head agreements to separate faculty selection and ects, applied research being done on campus, con- consulting. Choice of directions of research is the flicts of interest of professors, and a private com- responsibility of the Whitehead Institute’s direc- pany doing the same type of work as is being done tors and scientific board, all of whom have high on campus with the on campus principal investi- academic reputations. Provisions for termination gator having ties (equity, consulting, board mem- of the agreements vary, but they have been clear- bership) to the company. ly stated.

Several States have established institutes for bio- Are university policies with respect to technology development that encourage inter- university/industry relationships actions between industry and universities. The being formulated? North Carolina Biotechnology Center and the Molecular Biology Institute in Michigan have The control of intellectual property, commingl- already been established; other States are in the ing of funds, tangible research property, and con- process of establishing such centers. * flicts of interest are issues that cut across all university/industry arrangements and ultimately affect technology transfer and the U.S. com- ● h’or ~ list of State gmwrnment initiatives for high-techno]ogv in- petitive position in biotechnology. University pol- dustrial development, see ‘Z’echrlo/o@’, hmo~’ation, and Regional Eco- nomic De\’elopment: Censos of’ State Government Im”tiatives for High- icies with respect to these issues are addressed ‘1’erhnolog}’ Industrial Development-Background Paper (28). in the discussion that follows, and additional in- Ch. 17—University/industry Relationships ● 419

formation about university policies is presented (SAES) and Pajaro Dunes Conference guidelines in appendix H. are presented in appendix H. In some cases, an exclusive license is given to allow time for develop- INTELLECTUAL PROPERTY ment of the product. There is a division of opin- Different traditions have developed in the ion on whether exclusive licenses should be United States to deal with different kinds of prop- granted on all discoveries that result from univer- erty. Although some U.S. universities allow the sity research funded by an industrial sponsor: faculty member who developed the invention to some university representatives believe that an retain any patent rights, most require those rights exclusive license should be granted, while others to be transferred to the institution. Created works believe that the university should provide a non- are subject to copyright laws. Most institutions exclusive royalty free license (see Pajaro Dunes assert that ownership, but universities do not Conference guidelines in appendix H). Most agree, assert rights to books written by faculty (14). however, that if a faculty member’s research is being sponsored by a company in which the facul- Patent&—Issues relating to patent agreements ty member has substantial interest and/or equi- can be divided into two kinds: those dealing with ty, the university should grant only a nonexclusive retention of rights to an invention and those deal- license. In most of the major multimillion dollar ing with decisions regarding exclusive or non- university/industry agreements being struck in exclusive licenses. biotechnology, the corporate sponsor is receiv- The rights of small businesses, universities, and ing some exclusive rights to inventions developed other nonprofit organizations to inventions made as a result of the funding. In all arrangements be- under research sponsored by the U.S. Govern- tween industry and universities, it is essential that ment are addressed in the 1980 U.S. patent law, the patent issues be carefully thought out in Public Law 96-517. An Office of Management and advance. * Budget (OMB) circular, Circular A-124, “establishes a standard Patent Rights clause to be COMMINGLING OF FUNDS included in all Government grants and contracts Since one of the purposes of the 1980 U.S. pat- with such organizations, which gives these invent - ent law (Public Law 96-5 17) is to foster coopera- ing organizations the right to retain title to the tive research arrangements among Federal Gov- inventions. The Circular also requires agencies ernment agencies, universities, and private in- to modify existing regulations to bring them into dustry, one question that immediately arises is conformity with the Circular” (7). Public Law the potential for commingling of funds. Currently, 96-517 was passed with the recognition that the for agreements struck after 96-517 became law, public interest can in most instances be promoted no exemption for Government de minimus pro- by allowing exclusive licenses under those circum- visions has been made. Where the Government stances. In a competitive economy, private enter- has funded a small percentage-even 1 or 2 per- prise will not invest funds to develop ideas that cent of direct costs—then the provisions of Public can be duplicated with impunity. Without ex- Law 96-517 and OMB Circular A-124 apply. clusive licenses, important investigations made at The Comptroller General of the United States, Government expense would remain undeveloped in his reply to Congressman Albert Gore concern- because development costs are high. Thus, these ing the possibility for commingling of funds in the inventions would never be available to the public Hoechst/Massachusetts General Hospital agree- (lo). ment stated, “MGH must account separately for The consensus expressed in recently developed all expenses leading to an invention, including the university guidelines for industrial sponsorship cost of research itself as well as indirect or of academic research is that granting of exclusive overhead costs, t. be able to show that the or nonexclusive licenses will be on a case-by-case basis to the corporate sponsors of research. Sum- “ F’or- a discussion of ~~!ent issues in surh agrcem[’nts, see 1]. l{utl, maries of State Agricultural Experiment Stations “( I[ll\,(, mit\/(:or])OI.: it(~” ” Research Agrfmnent-s” ( 10) 420 . Commercial Biotechnology: An International Analysis

expenses were paid with funds provided by dential disclosure agreement will be executed Hoechst” (23). After reviewing the terms of the with that person. contract, the Comptroller General ruled that it is ● The receiver will not commercially utilize the possible for Massachusetts General Hospital to material or any part thereof without written consent of WARF or prior to entering into a separate the funds properly. licensing arrangement with WARF.

TANGIBLE RESEARCH PROPERTY Recently, a dispute over the ownership of a cell line that produces interferon arose between the A basic principle among scientists is that re- University of California and the Swiss company search findings should be communicate prompt- Hoffmam-La Roche. The University of California, ly to the scientific community by written and oral as the institutional home of the scientists who cre- means. Written and oral processes, however, are ated the cell line, claimed ownership of the cell not sufficient to disseminate tangible products of line and the right to future royalties. Hoffmann - research such as the antibody-producing cell lines La Roche also claimed ownership on the grounds and plasmids used in biotechnology. that it had funded the university research that Stanford University developed in March 1982 increased interferon production by the cell line a specific policy on tangible research property and filed a patent application covering this in- (TRP), defined as “tangible (or corporeal) items terferon production process. Lawyers from the produced in the course of research projects, ” in- university sued the company, arguing among cluding items such as “biological materials, com- other things that the firm had made unauthor- puter software, computer data bases, circuit dia- ized use of the material, taking commercial ad- grams, engineering drawings, integrated circuit vantage of the open exchange of information and chips, prototype devices and equipment, etc.” (16). material among academic scientists. This suit was Stanford’s policy was promulgated to protect the settled out of court, but the settlement has not university’s ownership in such property consist- been made public. ent with the policy of promoting the prompt and Another recent case has left unresolved the is- open exchange of TRP and associated research sue of ownership of a cell line (24). H. Hagiwara, data with scientific colleagues outside the in- a visting Japanese researcher at the University vestigator’s immediate laboratory. Controlling the of California, San Diego, took, without permission, distribution of TRP, subject to provisions of ap- a hybridoma fused from cancer cells taken from plicable grants or contracts and university policy, his mother and used the resulting monoclinal is the responsibility of the principal investigator. antibodies to treat her for cancer. Although the Such control includes determining if and when usefulness of the treatment has not yet been eval- distribution of the TRP is to be made beyond the uated, the cell line may have commercial poten- laboratory for others’ scientific use. tial, so the issue of ownership is important. The WARF has developed a confidential disclosure University of California sued Hagiwara, stating agreement in order to disseminate or license in- that, as the research institution, it owned the cell tellectual property, tangible or intangible proper- line. This case has been settled with the Hagiwara ty, and products arising from work conducted at Institute of Health (Hagiwara’s father is the direc- the University of Wisconsin. In order for the re- tor) obtaining exclusive license in Japan and other ceiver to obtain the materials, the following con- Asian countries and the patent rights assigned to ditions must be met (3): the University of California. Some argue that a hybridoma is a newly created entity, so the donor ● The materials will be received and held in con- has no rights of ownership; others contend that fidence by the receiver. Only persons within cell donors should automatically be given a share the receiver’s organization and only those of any subsequent profits (24). essential in the evaluation of the materials will be permitted access to the materials. CONFLICT OF INTEREST ● If opinions or services of other persons outside the receiver’s organization are needed, then Conflict of interest situations have both finan- the receiver will notify WARF and the confi- cial and intellectual components. A potential con- Ch. 17—University/industry Relationships ● 421

flict of interest could arise if a university held Valentine, have part-time employment at the sta- equity in a company in which a faculty member tion. Calgene, a company Valentine founded, is of the university also held equity interest as a line undertaking for profit the same kinds of activities officer. This situation arose in a Harvard proposal as the SAES undertakes for growers. Thus, there to establish a firm to commercialize the research is a potential source for conflict and for taking of one of its professors. The proposal was subse- the results of work off campus and marketing quently withdrawn, and Harvard President Derek them through the company. Bok described the potential problems with the ar- University conflict of interest policies and con- rangement (l): sulting policies vary, but university policies are becoming more explicit, in part because univer- ● The administration could be exposed to disagreements not only with the faculty partners sities are responding to developments in biotech- but also with other nonpartner faculty who nology. It is interesting to note that MIT, which might also want support. has traditionally had extensive contacts with in- ● Commercial ventures could impose responsi- dustry, has explicit policies on industrially spon- bilities on the university it doesn’t have when sored research. In addition, several organizations its endowment invests only in shares of many are setting guidelines for industrial sponsorship companies. of academic research (see app. H). ● Conflicts could arise if the university were associated with particular products and a public At the request of Representative Albert Gore, that expects high standards from the universi- the American Association of Universities (AAU) ty were dissatisfied with the standards of reviewed the ethical dilemmas posed by increases marketing or the products. in industrial support for research. AAU suggested ● The arrangement could inevitably change and that it serve as a clearinghouse and monitor ac- confuse the relationship of the university to its tivities at the major American universities with professors. A faculty member who joins with regard to the formulation of policies. AAU decided the administration in founding a new company not to develop policies, because “conditions exist is no longer valued merely as a teacher and [in the universities] for intelligent and thoughtful scholar; he becomes a source of potential income to the institution. decisionmaking on these issues and policies that ● There could be more doubt concerning deci- are informed by wide experience and that are tai- sions made with respect to qualifications for lored to individual circumstances are preferable tenure, extra leave, larger laboratory space, to injunctions broady enough cast to cover the more graduate students, salaries, etc. multitude of local circumstances that exist among ● Professors might become so involed with the many universities” (15). challenges of seeing an enterprise grow and develop that their work commitment to univer- Also, representatives from universities, indus- sity duties might be diminished. The universi- try, and the legal community are now meeting ty would be in a prejudiced position regarding to review issues and communicate more effective- assessment of that person’s performance of ly. Recent meetings have been hosted by Colum- work since that person’s commercial success bia University, the Gulf Universities Research Con- would be linked to that of the university. sortium, the Industrial Biotechnology Association, ● Participation would increase the risk of secre- Florida State University, Harvard, and the Bar of - cy, and the university could have a stake in sup- the City of New York, and a meeting in Philadel- porting that secrecy. phia in December 1982 was hosted by eight major research universities (15). A potential conflict of interest and commitment arises when a professor holds equity within a It is clear that recent activities to formulate ex- company that engages in the same type of activi- plicit policies are advantageous in helping to de- ties as the university. This issue has been raised fine the role of the university and ultimately facil- in the activities of Calgene. The State Agricultural itating effective technology transfer between uni- Experiment Station (SAES) at Davis helps develop versities and industry. Technology transfer will new varieties of plants for California growers. be most effective if both sides are strong, vibrant, University of California professors, including Ray creative, and have something to offer each other. 422 . Commercial Biotechnology: An International Analysis

What is the likely future of regulated. At the level of individual professors, university/industry relationships however, there is considerable opportunity for in biotechnology? interaction. A second distinction is between the basic and applied sciences. The distinction and A comparison of the responses to OTA’S survey separation of basic and applied science depart- of university and industry groups in the United ments at Japanese universities is strong. Japanese States shows that both groups see the future of professors in disciplines such as biology, bio- university/Industry relationships in biotechnology chemistry, and medical science are proud of their as depending largely on the success of biotech- independence from industry. Professors in ap- nology companies in getting products into mar- plied disciplines such as bioprocess engineering, kets. There was divergence of opinion among the on the other hand, have ongoing contacts with respondents, however, on what kind of research industry. Japanese professors in applied science assistance—broad basic research or more special- departments are considered to have a moral ized research-industry would seek from univer- obligation to place their students as employees. sities, In biotechnology as in other fields, an in- Consequently, they tend to maintain good rela- crease in the actual number of industry/univer- tionships with industry. Furthermore, because sity relationships and an increase in the total former students are members of industry, infor- amount of funding made available by industry can mal contacts continue. be expected to develop over the short term (18). Even though Japanese professors in applied sci- U.S. university/industry relationships in biotech- ences have contacts with industry, the level of nology will most likely follow the same pattern exchange of information between universities and that they have in other high-technology areas. industry in Japan is not as high as that in the First, scientific breakthroughs generate a period United States. Japanese professors at the national of hyperactivity in university/industry relation- universities are forbidden to take other positions ships. This hyperactivity phase is characterized simultaneously with their university work, and by the promise of “big bucks,” which leads to a all donations toward their research must be made short-term faculty and post-graduate drain. After through formal university channels. No fees for the industry goes through its initial phases, an consulting can be accepted, and offers of stock equilibrium state is reached and a fairly healthy options are unheard of. Japanese professors were symbiotic relationship emerges. not allowed to hold patents or collect royalties until 1981. Because of the restrictions on both professors and industry, Japanese professors How effective is university/industry often quit their posts to work in industry or technology transfer in countries private laboratories where facilities-and salaries likely to compete with the are better than in the universities. They do this in spite of the fact that there is a great deal of United States in biotechnology? social prestige attached to being a professor.

The countries identified in this assessment as There are only two mechanisms through which being the most likely major competitors of the Japanese industry can channel funds to a univer- United States in biotechnology are Japan, the sity. One of these, the “itakuhi,” is commissioned Federal Republic of Germany, United Kingdom, research on a particular topic. The company sup- Switzerland, and France. plies a researcher and some funds, usuaIly only $500 to $1,000 (Y 125,000 to * 250,000), to a JAPAN university professor. This mechanism allows the Japan has a mixed situation with regard to uni- company to have its researchers trained by the versity/industry relationships in biotechnology. professor and the professor’s staff; the professor, First, a distinction should be made between in- in turn, gets extra help in doing his research. The stitutions and individuals. At the national univer- second mechanism, the “shogaku kifukin,” is a sities, which are at the top of the Japanese univer- scholarship grant donated to a specific universi- sity hierarchy, institutional ties are very strictly ty researcher but not for a specific topic. The Ch. 17—University/industry Relationships . 423

grant money must be used only for equipment Information Development and Normura Research and other direct costs, not personnel costs; no Institute have been used for background research overhead is charged by the university, and there in biotechnology. is no limit on the amount. Money for these grants In addition, the Japanese Government is build- must be channeled through the Ministry of Educa- ing two biotechnology centers, each with a P4- tion. Within this framework, there are a number level laboratory facility: one in Tsukuba (a new of administrative obstacles in terms of hierarchy university research community) and one at osaka of approvals necessary, different policies on pat- University. The P4 facilities will be available to ents among departments, etc. In spite of the tight private sector corporations via contacts with uni- control of channels of funds and lack of consult- versity professors. Four other universities were ing opportunities for Japanese professors, about designated by the Ministry of Education to have 10 percent of all university funding for research P3 level facilities and received $640,000 ( * 160 in Japan does come from industry. Most of this million) in fiscal year 1981 to help build them: 1) is probably channeled to applied research (22). Tokyo University Medical Research Institute; 2) Kyoto University Chemistry Research Institute; The Science and Technology Agency (STA) has 3) osaka University Microbial Disease Research established the New Technology Development Institutes; and 4) Kyushu University Medical De- Fund in order to subsidize Japanese companies partment. These large-scale biotechnology facili- that develop and commercialize university re- ties administered by the Japanese Government search findings. The fund will probably be used will provide a place for university professors, to transfer technology between applied science Government researchers, and company research- departments and industry, which already have ers to work together. good relations, rather than between basic science The applied science departments of Japanese uni- departments and industry. versities have been instrumental in Japan in providing training and information exchange in biotechnology. At present, university basic research Another STA program is designed to cross tradi- in Japan is peripheral to Japanese industrial ac- tional barriers between university basic science tivities. If Japan intends to develop a greater basic departments and industry and between the Minis- research capacity that industry can draw on, try of Education and the Ministry of International funding for basic research will have to be in- Trade and Industry (MITI). Research responsibilities creased and mechanisms to increase communica- in STA’S program are allocated between univer- tion between researchers and industry will have sity and corporate laboratories. The success of the to be implemented, Japanese companies look to program will depend in part on getting MITI, the other countries to make up for the weaknesses Ministry of Education, and basic research depart- in the technology transfer from Japanese univer- ments to work together. Basic researchers have sities. Whether the Japanese will have a com- already asked the Ministry of Education to super- petitive edge in biotechnology will rest, in part, vise the project, so there is some doubt as to on the differences in industrial relationships whether the program will be successful. If super- in applied and basic research. If biotechnology vision stays in Ministry of Education, the link with develops such that most research moves into in- industry will be weakened. dustry, then the present system will be adaptive. If strong basic research and effective domestic Research in Government institutes makes up for technology transfer by universities is important the lack of technology transfer from the heavily to the development of biotechnology and if inter- regulated Japanese universities. In almost every national technology transfer proves ineffective, major industrial sector in Japan, there are a num- then the Japanese system will have to change (22). ber of governmental research institutes that do background research for MITI policy makers and FEDERAL REPUBLIC OF GERMANY where professors, industry representatives, and Biotechnology research in the Federal Republic Governrnent officials meet for discussion. Mitsui of Germany is carried out at the federally sup- 424 . Commercial Biotechnology: An International Analysis

ported, private Max Planck institutes as well as Other sources of funding for biotechnology in in German universities. * Critics have charged that universities include the Fraunhofer-Gesellschaft the Max Planck institutes may be depriving the and the Volkswagen Foundation, as well as private universities of talent by drawing away promis- industry. Relations with industry in the past have ing researchers and that they are “ivory towers” largely taken the form of contracts or consulting conducting research of little relevance to the na- agreements between individual professors and in- tion’s technological well-being. The Federal Minis- terested firms. Hoechst’s arrangement with Mas - try for Research and Technology (BMFT, Bundes- sachusetts General Hospital (see app. H), however, ministerium fur Forschung und Technologies) has prompted BMFT to seek more systematic uni - would like to see closer connections between the versity/industry collaborations within West Ger- Max Planck institutes and industry. One success- many. One product of BMFT’s initiatives in this ful outcome of its strategy is the recent coopera- area is an agreement between the German chem- tive agreement between the Max Planck Institute ical company BASF and the University of Heidel- for Plant Research and Bayer Leverkusen. berg whereby the chemical company will give the university $450 000 per year for research over The university system is in flux. Beginning in ) a 5-year period. BASF’S commitment is more the 1960’s, West German universities were sub- modest than Hoechst’s support for Massachusetts jected to a series of reforms that left the system General Hospital. Nevertheless, it marks an im- in turmoil. According to one recent analysis (11): portant step in the German Government’s effort The underlying trouble is that West Germany to engage the private sector in building up fun- has sought to reconcile several irreconcilables— damental research in biotechnology inside Ger- the principle of open access to any university in many. the country, the doctrine that all universities are equal, the practice that the universities are run Among the factors cited to explain West Ger- by the ministries of culture in the Lander in many’s slow entry into commercial biotechnology which they happen to be sited, and the phenom- is an educational system that prevents the kind enal increase in the demand for higher education of interdisciplinary cooperation that is viewed by in the past twenty years. most experts as essential to the development of The result is a university system in which litiga- this field. In particular, the traditional separation tion about the rights and duties of students and of technical faculties from their arts and sciences faculty sometimes seems to take precedence over counterparts means that process technicians, research and teaching, usually located in the technical schools, rarely come into contact with colleagues holding univer- A lack of money has recently added to the ad- sity appointments in biochemistry or microbi- ministrative and legal conflicts created by the ology. West German university reforms. Biotechnology in the universities, both because of financial cut- One of BMFT’s professed aims since the adop- backs and because it is a new discipline, depends tion of its performance plan for biotechnology has on outside sources of funding. Probably the larg- been to bridge this institutional gap.** A signifi- est single source of funding is the German Re- cant contribution toward meeting this objective search Society (DFG, Deutsche Forschungsge- is made by the German Society for Chemical En- meinshaft), a nonprofit institution that serves as gineering (DECHEMA, Deutsche Gesellschaft fur a German National Academy of Sciences and as chemisches Apparatewesen). DECHEMA played a conduit for Government funding of basic re- a crucial role in the original formulation of BMFT’s search. The approval by DFG of a “special col- biotechnology program. Its working group on laborative project” on bioconversion in Munich “technical biochemistry” was charged in 1971 will give a boost to academic work in this area. with preparing a study on biotechnology that established the framework for the BMFT program.

● For a description of Federal applied reseamh carried out through the Society for Biotechnological Research, GBF, see Chapter 13: Gov- “ ● BMFT’s performance plan, Leistungsplan: Biotechnologie, is dis- ernment Fun&”ng of Basic and Applied Research. cussed in Chapter 20: Targeting Policies in Biotechnology. Ch. 17—University//ndustry Relationships ● 425

DECHEMA continues to further interdisciplinary million). Celltech currently maintains a staff of exchanges through a variety of means. Its expert 130 persons, two-thirds of whom are scientists. group on biotechnology is a standing body that It is likely to increase this number to 180 persons brings academics and industrial scientists into in the near future. regular contact at seminars on biotechnology for In an arrangement similar to that of Celltech, small groups of experts. Attendance at these is the British Government, through BTG and two by invitation, and one of their functions is to fur- private concerns (Ultramar and Advent Eurofund), ther a fruitful dialog between industry and aca- recently established the company Agricultural Ge- demia. The confidential character of these meet- netics. The objective of this company is to com- ings permits research scientists to discuss their mercialize basic research results in nonconven- results at prepublication stages. At the same time, tional plant breeding, microbial resistance factors, industry representatives can present their own and biological control products originating from problems with the hope of interesting academic research in the Agricultural Research Council. Ag- groups in their resolution. Finally, DECHEMA also ricultural Genetics has the right of first refusal organizes continuing education courses in various on all work in the Agricultural Research Coun- aspects of biotechnology, such as the use of im- cil. Though only about $1.2 miIlion (685,000) has mobilized enzymes or measurement and control been invested to date, the total initial capital prom- of bioreactors (11). ised approaches $28 million ( 16 million).

UNITED KINGDOM To encourage direct links between academia A traditional weakness in the united Kingdom and manufacturers, the Cooperative Research has been a gap between university research and Grant Scheme has been initiated under the Sci- industry. This gap in the area of strategic applied ence and Economic Research Council (SERC). research has been termed the “pre-development SERC will support the academic side provided that gap.” Them is consensus that the National Enter- the company in a particular arrangement makes prise Board set up to foster university/industry substantial contributions in effort, materials, and relationships failed. The National Enterprise expertise. Patent rights, subject to a small royal- Board is now called the British Technology Group ty, will be assigned to BTG. The number of proj- (BTG), and measures have been taken to improve ects in biotechnology under this scheme increased its efficiency. Also, new institutions for biotech- from 3 to 14 in the last 6 months of 1982. nology have been developed. Furthermore, direct Industrialists are also beginning to invest in contacts between British universities and industry university centers. At the University of Leicester, have recently increased, in part because of eco- four companies have put up $1.7 million YI mil- nomic conditions. lion) to establish a new biotechnology center. To stimulate the transfer of university basic sci- SERC is granting $316,000 (#180)000) for capital ence research in health-related fields to industrial equipment. applications, the British Government and four in- Another program has been started by industry dustrial partners created a new company, Cell- to help academics in British universities develop tech, Ltd., in 1981. In the original agreement, Cell- their ideas into commercial realities. At the ini- tech received the right of first refusal* on all tiative of Monsanto (U. S.) and including the Uni- work in hybridoma technology conducted by the versities of oxford, Cambridge, and St. Andrew, Medical Research Council. Celltech also plans to the Imperial College in London, and the Nuffield commercialize the results of basic research in Foundation, $17.5 million (10 million) initial rDNA technology. Currently, the British Govern- capital has been raised (Monsanto contributed ment owns 28 percent of the company and pri- half). The program will include most fields of high vate companies hold the other 72 percent. Cell- technology as well as biotechnology. tech’s initial capitalization was $20 million (<11.4) Imperial College in London, in order to transfer “’I’his is the right to choose whether to produce any good or sern- its technology to industry, has launched a private ice without hak’ing to bid competitively. company to exploit the pilot plant built at Imperial

25-561 0 - 84 - 28 426 . Commercial Biotechnology: An International Analysis

College in the 1960’s. The plant is in good condi- contracts between professors in the biotechnol- tion, but has been underused because of lack of ogy department and industry. Joint funding by funds. Imperial College has reserved 20 percent industry and the Commission for the Encourage- of the time of the plant for its own use in lieu ment of Scientific Research provides another of shares. Thus, there will be a continuing con- avenue for collaboration with the private sector, tact between research workers, the associated Im- one that has been actively utilized by the ETH bio- perial Biotechnology Center, and industrialists. technology group. Imperial Biotechnology’s first major contract is The Swiss firm Biogen S.A. is closely linked to with the Swiss firm Biogen S.A. to scale-up the the Swiss university research system and has built firm’s interferon production to 3,000 liters. an important share of its competitive strength on Engineers in British universities have tradi- the productivity of these ties. Two members of tionally done consulting for industry; biologists the company’s scientific board, Drs. Weissmann in British universities are now adopting the same and Mach, have done seminal work for the com- practice. The extent of this phenomenon is not pany in the Universities of Zurich and Geneva, known, but all the large British companies in- respectively. Finally, the city of Basel, as the foun- volved in biotechnology are using the services of tainhead of Swiss research in the chemical and consultants in the universities. No general rules biological areas, provides unique opportunities for apply to consultancies in British universities; ar- communication and collaboration between the rangements are left to individual institutions and academic and industrial sectors, a potential that to the consciences of the individuals involved. the BaseI-based pharmaceutical corporations There is some concern on the part of the British clearly recognize and are prepared to exploit (12). Government, however, that foreign companies are making more use than domestic companies FRANCE of British biotechnology experts. Universities in France are generally regarded as teaching institutions and not looked to for their Most authorities agree that the United Kingdom research capabilities. Highly regarded research has an excellent basic research base with well- in France is usually funded by the National Center trained researchers. Traditionally, however, the for Scientific Research (CNRS, Centre National de United Kingdom has had a problem translating 1a Recherche Scientifique) or the National Institute this expertise to industry; the next 5 years will of Health and Medical Research (INSERM, Institut determine how effective the new British measures National de la Sante et de la Recherche Madicale). to effect domestic technology transfer are (30). Both of these are Government research institutes (grands organisms). CNRS operates its own lab- SWITZERLAND oratories, which are usually associated with uni- The field of molecular biology is highly devel- versities. INSERM is concerned with the applied oped in Swiss universities, particularly in relation aspects of medical research. French universities to the size of the population. Centers of excellence that are important in biotechnology are those at include the universities of Basel, Geneva, and Zur- Toulouse, Strasbourg, Marseille, Line, Monte- ich. The quality of research in these institutions pellier, ParisOrsay, Grenoble, and Nancy. A new- is all the more remarkable in view of the fact that er university, the Technical University at Com- they are under cantonal jurisdiction and thus de- plegne (modeled after the American university rive support primarily from local revenues. structure), which is an important center for enzymology and bioprocess technology, has concen- The channels for transfer of knowledge from trated on some of the disciplines underlying bio- the Swiss universities to industry appear well es- technology and has developed good relations with tablished in the area of biotechnology. The presi- industry. dent of the Federal Institute of Technology (ETH, Eidgenossiche Technische Hochschule), which es- There is divided opinion in France as to tablished a department of biotechnology in 1976, whether relationships between academics and infor example, has endorsed the practice of direct dustrialists should be encouraged. The December -.

Ch. 17—University/industry Relationships . 427

1980 Pelissolo report concluded that relations (this kind of transfer is generalIy much more com- formerly were poor; this situation has changed, mon in France than in, for example, the United however, and the problem now is not whether Kingdom (29). university research results should be transferred Despite the absence of formal constraints on to industry, but how best to accomplish the relationships between academics and industrial- transfer (29). ists, there remains a problem in France in the ex- There are no formal constraints in France on ploitation of the results of public sector research relationships between academics and industrial- by industry. Except for large companies, industry ists. The National Agency for the Funding of Re- has an insufficient number of qualified person- search [ANVAR, L’Agence Nationale de la Valorisa- nel to seek out opportunities, and French research tion de la Recherche) is an independent organiza- scientists as a whole have not been very active tion that stimulates the transfer of public research in the pursuit of commercial opportunities (29). results to industry and encourages applied re- The French Government has recently taken search in industry. ANVAR does not have any steps to encourage cooperation between the rights of first refusal on the results of public grands organisms and French industry. The in- research, which includes university research, and stitutes participated through the Committee for apparently encourages direct links between uni- the Organization of Strategic Industries (CODIS, versities and industry by offering general advice Comite d’Orientation des Industries Stratdgiques)* on suitable contract terms and on patenting prob- in the establishment of the French pharmaceutical lems. Large French companies such as Elf Aqui- firm, Immunotech. More generally, in the recent taine and Rhone Poulenc have organizations to law reforming these institutes, there are provi- keep in touch with and seek out public sector uni- sions for them to form profitable liaisons with in- versity research of interest and appear to have dustry (up until now they have been Iimited to no problems developing and maintaining these contract research). This change is very recent, so links (except for occasional conflicts between the it is impossible to judge its practical effect. But firms’ desire for secrecy and the researchers’ CNRS, in a change of statutes published on No- legitimate desire to publish). In addition, some vember 25, 1982, has for the first time appointed companies are locating their new biotechnology a scientific director of “Funding and Application facilities near universities in order to benefit from of Research. ” proximity (e.g., Elf Aquitaine at Toulouse and Transgene at Strasbourg). The University of Com- Fields related to biotechnology have not at- piegne is situated in an agricultural region and tracted large numbers of French researchers in works closely with the local foodstuffs industry. the past. Government policies and funding changes Also, according to ANVAR, a phenomenon similar have been promulgated to change and to foster to the involvement of American professors in U.S. university/industry relationships. It is too early venture capital firms is developing in France, to determine the effectiveness of these policies. although along more traditional lines—top French —— scientists are either acting as consultants to pri- *CotlIS mobilizes State funds from multiple sources to produce vate firms or leaving the public sector for industry packages for projert dmwlopment in strategic industries,

Findings .

The [Jnited States has the most effective and tern and the freedom of faculty to pursue re- dynamic university/industry technolo~ transfer search. It is also facilitated by the many mecha - process of the six countries being examined in this nisms by t~’hich the process can occur. These assessment. The process in the United States is include dissemination of publications, profes - facilitated by the openness of the uni~ersity sys - ional meetings, consulting arrangements, con- 428 ● Commercial Biotechnology: An International Analysis

tract research, cooperative research agreements, Biotechnology has spawned a new kind of ar- and institutes within universities funded by in- rangement in university/industry relationships: dustry. All these mechanisms are being exploited for-profit companies established with nonprofit in biotechnology. U.S. universities and industry buffers to funnel contract research money and are benefiting from the present arrangements, royalty payments between the university and the and diffusion of knowledge is occurring. company. One arrangement (Neogen) takes advantage of new U.S. tax laws that permit funding of University and industry representatives in the R&D through limited partnerships. The other (En- United States agree that Federal support of basic genics) is built on the support of six major cor- research is essential. Even if industrial support porations that are funding the research and have of university R&D were to rise to 15 percent of invested in the company. It is too early to predict universities’ R&D budget, it could never replace whether these approaches will be viable. Federal funding. Furthermore, since the goals and philosophy of industry are different from those Biotechnology is being transferred between in- of universities, the focus of research in industry dustry and universities in the United States; most is different from that of research in universities. of the arrangements are working well. Some indi- Of necessity, industry is mission oriented; the em- viduals have noted potential problems and admin- phasis in industry is on applied research leading istrative bottlenecks; these should lessen as in- to products. By contrast, the purpose of univer- dividuals on both sides gain more experience and sity basic research is to extend knowledge itself. policies are formulated to standardize administrative procedures within universities. Some in- Universities in the United States are formulating dividuals believe that problems may arise when and implementing policies that are more consist- sales revenues are generated as a result of some ent across disciplines and more specific with re- of the limited partnership agreements. gard to consulting, conflict of interest, and disclosure than policies formulated in the past. There The early history of the U.S. microelectronics have been some cases of potential conflict of in- industry can serve as a comparison for the com- terests with researchers who have consulting or mercialization of biotechnology. The U.S. semi- contract arrangements with firms in which they conductor industry was fueled by and developed hold equity. University administrators, faculty, in a milieu of DOD support for basic research and and students appear to be taking measures to retraining at universities, DOD procurement of the duce the potential for conflicts of interest and en- industry’s products, and DOD’s need for increas- sure quality research and education. ingly more sophisticated products from that industry. In the history of the U.S. semiconductor Although funding of large agreements between industry, relationships between universities and U.S. universities and industry in biotechnology industry were very close. Many professors had has occurred, the consensus is that, after the ini- equity in companies located close to campuses, tial excitement has dissipated and companies have and consulting was extensive, It appears that edu- developed in-house capabilities, most of the uni- cation in this field did not suffer; in fact, it was versity/industry arrangements in biotechnology probably enhanced, and students gained an un- will be consulting and contract research as in derstanding of industrial career paths. The cur- other fields with close university/industry ties. rent leveling of Federal support for biology combined with the lack of consensus that biotechnol- Universities are looking for financial support, ogy is a strategic industry (as was microelectron- but the promise of patent royalties from biotech- ics in the instance of the space race) leads to the nology may be premature. Especially if biotech- perception of more “potential conflicts” in indus- nology becomes a rapidly moving process field try/university relations in biotechnology than ac- where research is carried out primarily in indus- tually exist. try, research in biotechnology will have to move off campus and royalty income to universities In countries other than the United States, there may not be significant. are varying degrees of cooperation between uni- Ch. 17—University//ndustry Relationships . 429

versities and industry. In Japan, the ties between been few in the past, but are now being encour- university applied science departments and in- aged by the Government. The British Government dustry have always been close. Most people ack- helped to establish two firms, Celltech and Agri- nowledge that Japan already leads the world in cultural Genetics, to capitalize on British univer- bioprocess engineering research, and the close sity research in animal and plant molecular biol- relationships that already exist between Japanese ogy . industry and university applied research depart- In Switzerland, the field of molecular biology ments benefit the commercialization of biotech- is highly developed, and patterns of interaction nology in that country. Currently, the Japanese between individuals in universities and industry Government is implementing new policies to en- are well established. ETH established a depart- courage closer ties between university basic ment of biotechnology in 1976 and endorses the researchers and industry. practice of direct contracts between professors In the Federal Republic of Germany, BMFT is in the biotechnology department and industry. encouraging domestic university/industry con- In France, an ambitious program is underway tacts, especially in light of Hoescht’s agreement to tie universities and industry closer together. with Massachusetts General Hospital. After that One problem in France is that the country lacks agreement was announced, some West Germans a cadre of experts in molecular biology, because were concerned because they felt that research this field has not been considered an important money was being fumeled into American univer- one. sities instead of into German universities.

The United Kingdom has an excellent basic research base. University ties with industry have

Issue

ISSUE 1: Should Congress set guidelines for In addition, in a report of joint hearings on uni- university policies on industry-spon- versityfindustry relationships in biotechnology, sored research? the Subcommittee on Investigations and Oversight At the request of Representative Albert Gore, and the Subcommittee on Science, Research, and the American Association of Universities (AAU) Technology of the Committee on Science and reviewed ethical dilemmas posed in the United Technology of the U.S. House of Representatives States by increases in industrial support of univer- made the following recommendations: 1) university research. A select committee drawn from the sities should prepare guidelines for industrially AAU membership suggested that the AAU could sponsored research that require open disclosure serve as a clearinghouse and monitor of activities of all faculty consulting and contractual agree- at major universities with regard to the formula- ments; and 2) full-time faculty should be discour- tion of university policies on industrially spon- aged from holding equity or directing such firms. sored research. Because one policy formulated by The subcommittees further recommended that the AAU or Congress would have to be broad there be continued review by universities, indus- enough to cover all circumstances, it might be too try, and the Federal Government of the benefits general to be useful. Furthermore, as the com- and problems resulting from large-scale corporate mittee noted, informed decisionmakers within support for and involvement in university re- universities are formulating policies that fit each search programs in biotechnology. university’s needs. 430 . Commercial Biotechnology: An International Analysis

Chapter 17 references

16,

17.

18.

19,

20.

9, 21.

10. 22

11, 23

24. 12. 25.

13.

14. 26. 15.

, LA, . . ., Ch. 17—University/industry Relationships 431 —

committee on Science, Research and Technology, tives for High-Technology Industrial De\relop House CAJmmittee on Science and Technology, June ment-Background Paper, OTA-BP-STI-21, Wash 16-17, 1982 (Washington, D.C.: u.S. Government ington, D.C., May 1983. Printing Office, 1982). 29. Vaquin, M., "Biotechnology in France," contract 27. U.S. Congress, Office of Technology Assessment, report prepared for the Office of Technology As H'orld Population and Fertility Planning Technol sessment, U.S. Congress, February 1983. ogies: The Next 20 Years, OTA-HR-157, V\lashing 30. Vaquin, M., "Biotechnology in Great Britain," con ton, D.C., February 1982. tract report prepared for the Office of Technology 28. U.S. Congress, Office of Technology Assessment, Assessment, U.S. Congress, February 1983. Technology, Innovation, and Regional Economic 31. Watson, J., The Double Helix (New York: Athene De\'elopment: Census of State Government Initia- um, 1968). Chapter 18 Antitrust Law Contents

Page Introduction ...... 435 Antitrust Implications of Research Joint Ventures ...... 436 Antitrust Aspects of Technology Licensing ...... 437 A Review of Relevant U.S. and Foreign Antitrust Laws...... 438 United States...... , ...... 438 European Economic Community ...... 441 Federal Republic of Germany ...... 442 United Kingdom ...... 443 France ...... , ...... 444 Switzerland ...... 444 Japan ...... 445 Applicability of Antitrust Law to Biotechnology Research Joint Ventures...... , . . 446 Application of Antitrust Law to Biotechnology Licensing Agreements...... 447 Findings ...... 448 Issue ...... 449 Chapter 18 References ...... 449 Chapter 18 Antitrust Law

Introduction

Antitrust laws in the United States date back ventures and thereby. retards innovation and the to 1890, when they were first passed to counter competitiveness of U.S. firms in world markets. the concentration of industrial power. Their fun- The second issue is whether current U.S. antitrust damental goal is to prevent the distortion of com- law inhibits the legitimate exploitation through petitive market forces, and thus ensure more pro- licensing arrangements of the technology created ductivity, innovation, and lower prices. The as- by R&D efforts. sumption underlying the laws is that competition These issues are relevant because biotechnol- between industrial units generates more con- ogy is very much in the R&D phase of its develop- sumer benefits than a cartelized or managed in- ment, despite some well-known examples of prod- dustry. * ucts being marketed. That phase is likely to con- Today) there is much public debate about tinue for some time, and R&D will always be im- whether U.S. antitrust laws do, in fact, accomplish portant for many new and established companies these goals in all cases. Some commentators have using biotechnology, even when they are engaged claimed, for example, that U.S. antitrust restric- in production and marketing. Similarly, technol- tions, uncertainties about their scope and appli- ogy licensing is and will continue to be important cability, and substantial penalties for violations for many of these companies. As discussed in serve to discourage research and development Chapter 4: Firms Commercializing Biotechnology, (R&D) joint ventures that could actually stimulate much of the current research in biotechnology rather than retard innovation. * * In addition, is being funded by large, established companies there are claims that antitrust restrictions have with well-developed marketing capabilities. In hampered the ability of many U.S. companies to return for their funds, these companies have re- compete in world markets against foreign compa- ceived, among other things, rights to market the nies that face significantly less stringent restric- fruits of the research being conducted by new tions under the antitrust laws of their countries biotechnology firms (NBFs), * Moreover, even if (see, e.g., ref. 21). a new or established company were to develop certain technology on its own, it might be in the Antitrust law creates no issues or problems company’s best interest for various reasons to unique to biotechnology; it embodies broad eco- license the technology to others rather than to nomic principles and affects or potentially affects exploit the technology itself. virtually any business enterprise. Much of the debate on antitrust is essentially a general debate This chapter will first examine why and how on economic policy and high technology that is research joint ventures and technology licensing beyond the scope of this report. Two issues in agreements come within the scope of antitrust the debate, however, are particularly relevant to law. Second, the chapter will compare and con- biotechnology. One is whether current U.S. anti- trast the relevant antitrust laws and policies of trust law discourages the formation of R&D joint the United States, the European Economic Com- munity (EEC), the Federal Republic of Germany, ‘See ,\’urthern Pacific Raihia.}f [.’0, v. Lrnited States, 3.56 U.S. 1, 4 ( 1958), t~here \fr. Justice Black wrote that “[tlhe Sherman Act the United Kingdom, France, Switzerland, and ~~’as designed to be a comprehensive charter of economic liberty Japan (the “competitor countries”). Third, the aimed at preserving free ancl unfettered competition as the rule of trade. ” “ IUBR, as defined in Chapter 4: Firms Commercializing * ● See, for example, the testimony of Peter ~fc{:loskey, Malcolm Biotechno/ogv, are firms that have been started UP specifically to Baldridge, V$’illiam Norris, and Admiral B. R. tnman in hearings be- capitalize on biotechnology. The relationship between NBFs and es- fore the Senate Judiciary Committee, June 29, 1983 (34). tablished companies is further explored in that chapter.

435 436 . Commercial Biotechnology: An International Analysis

chapter will examine the current impact of these of whether congressional action on antitrust law laws on biotechnology-related R&D and the licens- is needed to promote U.S. competitiveness in bio- ing of the results of that R&D. Finally, the issue technology will be addressed.

Antitrust implications of research joint ventures —

A joint venture is a form of association between Thus, research joint ventures can increase R&D separate business entities that falls short of a for- and promote innovation. It is precisely because mal merger, but that unites certain agreed on re- of these potential benefits to society that the anti- sources of each entity for a limited purpose. The trust authorities in both the United States and form of a joint venture may range from a purely Europe have set forth official policy statements contractual agreement to take joint action, to an assuring companies that research joint ventures agreement where any participant acquires cer- are viewed very favorably under the antitrust law tain assets of another, to the creation of a separate and rarely raise significant questions. entity in which at least one participant acquires Despite the general encouraging attitude that an equity interest, Joint venturers often agree that antitrust authorities have taken towards joint they will share the management and control of R&D activity, there are potentially anticompetitive the joint activity’s results. effects of R&D joint ventures. Because R&D joint Reasons for entering an R&D joint venture are ventures may involve market-dominating technol- as varied as the companies and individuals in- ogy, may be conducted by competitors or poten- volved. The reasons must be strong enough to tial competitors, or may involve restrictive agree- overcome the powerful disincentives among in- ments concerning the use of the results, such ven- dividual companies of sharing management and tures can give rise to antitrust concerns (36). In profits. Three reasons stand out in particular: its Antitrust Guide Concerning Research Joint Ventures, the U.S. Department of Justice iden- ● Small firm limitations. Often small firms have tified three kinds of effects on competition (36): the capability of inventing a process and obtaining a patent but are unable to develop or ● when the association itself would lessen ex- market the product without the assistance isting or potential competition between the of a larger company. participating firms, ● Interdisciplinary technological areas. Com- ● when the joint venture agreement or related panies of any size may need to draw on ex- agreements contain restrictions that restrain pertise outside their own. It maybe cheaper competition, and and faster to tie up with another company ● when limitations on participation or access than to develop the new expertise them- to the results of research create or abuse selves. market power. ● Economies of scale in R&D. On certain large The first concern is straightforward. When re- and complex technological problems, even search ventures include most or all of the major large companies may not be able to achieve competitors in an industry, they could reduce the economies of scale in research if they under- competitors’ separate efforts and thereby reduce take the R&D themselves. innovation. The incentive to finance research and From the perspective of antitrust policy, the last rapidly develop the results is diminished when reason is the most important, since one goal of the participants know that any invention is avail- the antitrust laws is to enhance economic efficien- able for everyone to use. As Assistant Attorney cy. In addition, joint ventures could allow certain General William Baxter stated, “Rivalry, in short, high-risk, costly R&D to be undertaken that might is important in research as it is in any other com- not be undertaken otherwise by individual firms. mercial activity” (4). There may be cases, however, Ch. 18—Antitrust Law 437

where an industrywide effort is clearly the most would allow the participants to dominate the mar- efficient means to perform the research success- ket. Such domination could create significant anti- fully (36). competitive effects. Market domination itself, however, is not necessarily illegal; what is impor- In practice, the second antitrust concern is tant is how that market power is exercised. In more common. Joint ventures in R&D often con- any event, the antitrust law must balance these tain restrictions on the use of the technology once anticompetitive effects with the reasonable desire it is developed. Such restrictions may have anti- of the participants to be rewarded for the risks competitive effects. and costs incurred by entering the joint venture. Finally, a joint venture may create an important or even revolutionary new technology that

Antitrust aspects of technology licensing

An inventor’s ability to protect his or her inven- patent is granted to encourage inventions that tion long enough to reap sufficient benefits to might not occur if a patent were not available. make the inventor’s investment of time and capital Inventions benefit the public by creating new worthwhile will have a major impact on the in- products or more efficient means of making old ventor’s decision to undertake R&D in the first products. Thus, the creation and introduction of place. Both the patent laws and laws permitting inventions is an important form of competition. an inventor to license* a product, process, or The exploitation of the patent right involves its discovery serve the social goal of promoting R&D. use by the owner or its use by other parties via By protecting the inventor from interlopers who a licensing agreement whereby these parties pay would otherwise benefit at little or no cost from royalties to the owner. The antitrust laws do limit the inventor’s labor, ingenuity, or financial in- the exploitation of the market power resulting vestment, these ‘(legal monopolies” help ensure from patents. The patent owner is naturally in- that invention is both encouraged and sufficiently terested in obtaining the greatest possible eco- rewarded. nomic return from that market power. In patent Although they may at times appear to conflict, licensing agreements, therefore, the owner/licens- the U.S. patent laws (see Chapter 16: Intellectua] or may attempt to place certain restrictions on Property Law) and the U.S. antitrust laws have the licensee that are designed to enhance that eco- virtually identical goals—the fostering of competi- nomic return. (For example, the licenser may tion and innovation. Competition and innovation want the licensee to use a patented process only improve the allocation of scarce resources so that with materials supplied by the licenser. ) However, the maximum type and quantity of goods are pro- these restrictions are not always compatible with duced at the lowest cost. The patent “monopo- society’s goal of maximum production of goods ly,” which is expressly recognized by the U.S. Con- at the lowest cost. Thus, patent licensing agree- stitution, is essentially a property right—the right ments may violate the antitrust laws. * to exclude others from making, using, or selling an invention for a limited period of time. A patent may or may not provide an economic monop- *In addition to the antitrust laws, the doctrine of patent misuse oly. But even the existence of an economic mo- also serves to limit the patent owner’s exploitation of the patent. It is a~raildble as a defense in a patent infringement case, and, if es- nopoly based on a IawfulIy acquired patent is not tablished, it renders the patent unenforceable. It is established by of concern under the antitrust laws, because a facts that do not establish an antitrust violation and is available even to a defendant who is not affected by the misuse (27). The doctrine ● A license is a contractual right granted by the owner of the tech- has been criticized as tague, subjective, and mostly detrimental to nology to another part-v to use the technology. It is one way the inno~’ation (5). An extended discussion of the doctrine is beyond owner can exploit the in~’ention. the scope of this chapter. 438 . Commercial Biotechnology: An International Analysis

For similar reasons reflecting both the concept appropriate circumstances, then, know-how of proprietary interest and the concept of reward- licensing is a legitimate procompetitive action that ing invention, trade secrets and other forms of promotes research and product development. know-how may receive protection against im- Know-how licensing, however, will be subject to proper disclosure. * And, like patents, they may antitrust scrutiny. be exploited through licensing agreements. Under Whether a particular form of patent or know- how licensing is anticompetitive is a determina- *Know-how may be defined as technological information relating tion that is fact specific and requires a detailed to manufacturing processes not protected by a patent, not gen- analysis of the terms of the agreement and the erally known or accessible, and of competitive advantage to its owner markets involved, The courts have developed vari- (20). Legal protection of know-how is based on a theory of breach of trust and misappropriation. To the extent know-how is known ous principles to guide the analysis, which will only by its owner, the owner holds a limited monopoly. be discussed in greater detail in the next section.

A review of relevant U.S. and foreign antitrust laws

Antitrust laws and policies relevant to biotech- of Justice and the Federal Trade Commission have nology in the United States are described below. the power to investigate agreements or actions Also discussed are the laws and policies of the for anticompetitive effects. Violators of the anti- EEC, the Federal Republic of Germany, the United trust laws face criminal penalties or injunctions. Kingdom, France, Switzerland, and Japan, In addition, “injured” private parties can sue for violations of the law, which supplements Govern- ment enforcement. Under section 4 of the Clayton United States Act (15 U.S.C. $15), a private plaintiff* may sue for treble damages or seek injunctive relief. While Four provisions of the U.S. antitrust laws are in many instances private antitrust lawsuits follow most relevant to this discussion. Section 1 of the successful Government litigation, private lawsuits Sherman Act (15 U.S.C. $1) prohibits “[eJvery con- can be the sole action challenging a given prac- tract, combination . . . or conspiracy, in restraint tice (32). The threat of private antitrust enforce- of trade or commerce among the several States ment, coupled with the treble damages remedy, or with foreign nations . . .“ Section 2 of the Sher- is a significant adjunct to U.S. Government en- man Act (15 U.S.C. $2) condemns monopolization, forcement and an important deterrent to anti- attempts to monopolize, or any combination or competitive behavior. conspiracy to monopolize “any part of the trade The U.S. antitrust laws are very different from or commerce among the several States, or with foreign nations . . .“ Section 7’ of the Clayton Act most other statutes because they do not provide a checklist of specific, detailed statutory require- (15 U.S.C. ~18), as amended in 1980, prohibits partial or entire corporate acquisitions “ . . . by any ments, but instead set forth very broad principles. person engaged in commerce or in any activity This approach requires private parties, Govern- ment prosecutors, and the courts to consider the affecting commerce . . .“ where “the effect of such acquisition may be to substantially lessen com- ● Since enactment of the Clayton Act in 1914, Congress has twice petition or to tend to create a monopoly .“ Section amended $4 to qualify the rights of certain plaintiffs bringing ac- 5 of the Federal Trade Commission Act (15 U.S.C. tions under its provisions. New subsection (b) of 15 U.S.C. $15 limits $45 prohibits unfair methods of competition, monetary recovery in successful actions brought by foreign corporations to actual damages unless the plaintiff meets each of four Taken together, these four statutory provisions specified tests. Other additions limit the time in which lawsuits maJ’ be filed to 4 years and establish rights and procedures governing prohibit any behavior that results in a substan- parens patriae actions and instituted by Federal and State attorneys tial lessening of competition. The US. Department genera], See 15 U, S.C,A. $$15, 15a~,f,g (1983 Supp.), Ch. 18—Antitrust Law ● 439 overall purpose and effect of a business arrange on their own. "If the cost and risk of the re ment. Most arrangements are evaluated under a search in relation to its potential rmvards are "rule of reason" test first enunciated by the lJ.S. such that the participant" could not or would Supreme Court in 1911 (28). Under this test. re not have undertaken the project individual straints on competition are evaluated by a full fac ly, then the venture will have the effect of tual inquiry as to whether they will have a signifi increasing rather than decreasing innova cant adverse effect on competition, what their jus tion." tification is, and whether that justification could ● The number and size of conJpetitors in the be achieved in a less anticompetitive \vay. Terms relevant market, as well as the le\'el of exist of an agreement may restrict some cOInpetition, ing competition. 'The greater the number of yet be permitted, provided the restriction is clear actual and potential competitors in an indus ly ancillary to some legitimate purpose and is ap- try, the more likely that a joint research proj ~ ____ ~_ ~ _ ~ _ 1_ _ 1 ~ __ !.& _ -.1 ! _ ~ _ _ _ _ '''l ~ \. "'"1'1- ~ __ ...... ,...... prupnalelY llIIllleu 111 ~cupe \.)~J. 1 Ile Ilece~~dl'y ect will not unreasonably restrain competi vagueness of this test can create uncertainty tion." The Justice Department has stated a about the legality of business arrangements, and preference for a series of several competing fl.,,;~ lI11Y"1ortr.T"Tfrl,;Y'\." TY'1Irt" rl~C'C'11'1rln cnTl1C} t"nac nf 1I11" UJJL>CJ lallJl)' JJJa.y UJ""uauc; "Ville l.Y pL~ VJ joint research projects, rather than industry arrangements. wide joint ventures, though the latter may be justified due to necessity. Some types of agreements are not evaluated by ● The nature of the research. "In general, the the rule of reason test; instead they are consid closer the joint activity is to the basic research ered illegal per se. Agreements between existing end of the spectrum-i.e., the farther re or potential competitors to fix prices or to allocate moved it is from substantial market effects Inarkets or customers, for example, are consid and developmental issues-the more likely it ered illegal per se. For such agreements, experi is to be acceptable under the antitrust lavvs." ence has established that their "pernicious effect ● H The scope of the research joint venture (fW\\' on competition and iack of any redeeming virtue it is limited in time and subject nJc1tter). "The makes an "elaborate inquiry as to the precise narrower the field of joint activity and the harm ... or the business excuse" generally not more limited the collateral restraints in worth the effort (22). volved, the greater the chances that the proj To assess the competitive impact of R&D joint ect \vill not offend the antitrust laws." Any ventures, the U.S. courts generally have used the ancillary restraining agreement is viewed rule of reason test. Under this test, a fact-intensive more favorably if it is an important additional analysis is undertaken in which numerous fac factor necessary to assure the venture's suc tors are considered and their pro- and anticom cess. petitive effects are balanced to assess the legali The U.S. Department of Justice has procedures ty of certain behavior. The number of factors that for reviewing and giving advice on the proposed ~ust be assessed is often large. In United States business joint ventures before they are under v. Penn-Olin Chemical Co. (38), for example, the taken (28 C.F.R. §50.6). Though the grant of im Supreme Court listed 15 factors to be considered munity is not guaranteed, approval through this in determining whether a joint venture violated procedure almost always is an effective grant of section 7 of the Clayton Act. immunity from subsequent Government prosecu In assessing the legitimacy of research joint ven tion. From 1968 to 1978, the Department of Jus tures under the antitrust laws; the U.S. Depart tice considered 29 specific requests for advice ment of Justice indicated in its Guide to Research concerning proposed research joint ventures. Joint \'entures the most relevant considerations Utilizing the procedure, the Department fully to be the following (36): cleared 90 percent of the research joint ventures considered (14). Of all ventures granted clearance, • H'hether the individual joint venturers would none have been subsequently sued by private have undertaken the same or similar R&D plaintiffs. 440 . Commercial Biotechnology: An International Analysis

There have been few Justice Department ucts, restrictions on the resale of the patented enforcement actions with respect to R&D joint product, and tying arrangements. * Restraints may ventures. In fact, a pure research joint venture take several other forms, such as territorial without ancillary restraints has never been chal- restraints, field-of-use restrictions, and grant- lenged by the Antitrust Division (9). In the past backs. * * Similar restraints also exist for know- 15 years, the Justice Department has formally how licensing. Factors relevant to assessing the challenged only one joint research arrangement, legitimacy of such restraints are as follows: and only because it involved patent pooling and whether they are ancillary to a lawful main pur- ancillary restraints that hindered the coventurers pose of the agreement, have a scope and dura- from undertaking the R&D themselves (8,24 ).* tion no greater than that reasonably required to achieve that purpose, and are not part of some Of the few private suits in the United States at- larger pattern of anticompetitive restriction (36). tacking R&D joint ventures, one recent case is the most significant. In Berkey Photo, Inc. v. Eastman There is relatively little case law on the subject Kodak CO. (7), the plaintiff, Berkey, contended that of know-how restrictions, but the existing cases Kodak had extracted secrecy agreements from state that the same type of ancillary-restraints General Electric (GE) and Sylvania, its coventurers, analysis will be followed in this area as well. This that precluded other camera manufacturers from is not to say that the outcome will be the same competing to produce cameras that could be used as for patents, since there are differences be- together with the certain new flash devices made tween patent and know-how licensing. * * * Recog- by GE and Sylvania. The court noted that Kodak nizing these differences, particularly the fact that and GE were not direct competitors and that know-how lacks the legislative status of the pat- Kodak and Sylvania were potential competitors ent system, the U.S. Department of Justice at one at best. However, because of Kodak’s market pow- time took the position that “know-how licenses er over cameras in general, the court found an will in general be subject to antitrust standards exclusionary potential. The court recognized that which, if anything, are stricter than those applied if several substantial companies in an industry to patent licenses” (36). Further, the Justice undertake joint research on a scale unattainable Department took the position that restraints in by the remaining companies and those remain- know-how licenses should not last longer than the ing companies are not permitted to join the group, time necessary for the licensee to develop equiva- the coventurers might gain a decisive and unjus- lent know-how for itself, “a reverse engineering tified advantage over the others. While the court had found market power to be a significant fac- ● A tying arrangement requires the licensee to purchase unpat- tor in assessing the joint venture’s legality, it had ented materials from the licenser. been necessary for the plaintiff also to demon- * “Territorial restraints are restraints that limit the licensee’s use of the invention to specified geographical areas. Field af-use restric- strate that Kodak was gaining competitive advan- tions limit the use of the invention to something less than all of its tages which were not the pure products of tech- potential applications. For example, if Stanford licensed the Cohen- nological improvement (30). Boyer recombinant DNA process patent to a company only for making specialty chemicals but not for making pharmaceuticals, that Like joint ventures, technology licensing agree- would be a field af-use restriction. A grantback is an agreement by the licensee to give back to the licenser (the owner of the basic pat- ments are generally evaluated by the rule of rea- ent) rights to any improvement patent. son when they contain terms that may restrict ● ● *Some of these differences are the following: 1) all the patent competition. Examples of license provisions that claims must be definite in scope while know-how is usually of an amorphous character and cannot be described precisely; 2) patent have raised antitrust concerns are limitations on protection is limited to the territory of the country granting the how much the licensee can charge or sell, restric- patent, while know-how could be protected, at least in theory, wher- tions on the licensee’s dealing in competing prod- ever the domestic law of the forum protects trade secrets; 3) patents are limited to the 17-year period of protection, while know-how is protected for as long as it does not become generally known; 4) *The challenged R&,D venture involved an alleged agreement be- a patent grant protects its owner from a duplicative independent tween auto manufacturers to delay installation of existing emission invention, but the character of know-how can be destroyed by an control devices or stall the improvement of such devices. The case independent invention; and 5) know-how content changes as new was ultimately settled and it enjoined the defendants from prevent- information is incorporated, and old information becomes public- ing or delaying the development or installation of these devices (37). ly known (29). Ch. 18—Antitrust Law . 441

period” (23). The rationale for the concept of the of eliminating competition. A notification proce- reverse engineering period appears to be that a dure has been created which allows the Commis- restraint limited to the length of time necessary sion to review agreements for which an article to invent around the licensed know-how “does 85(3) exemption is claimed. The grant of an ex- not eliminate competition which would have emption by the Commission is binding on the taken place in the absence of the licensing agree- national authorities and courts of the member ment” (12). The current policy is to be more flex- states. * Thus, clearance by the enforcing agen- ible on these restraints (2). cy is much more important in the EEC than in the United States. European Economic Community The articles in the Treaty of Rome give the Com- The Federal Republic of Germany, United King- mission of European Communities broad authori- dom, and France are members of the European ty to prohibit: 1) R&D joint ventures that have Economic Community (EEC). The EEC, or Com- the potential to eliminate competition between mon Market, was created in 1958 by the Treaty major companies, and 2) ancillary restrictions of of Rome, One of the goals of the treaty was the R&D joint ventures that could restrain competi- “establishment of a system ensuring that competition. The criteria that the Commission has shown tion in the common market is not distorted. ” The to be important in judging whether a venture result has been a two-tiered system of antitrust comes under the first category have generally law in the Common Market. EEC law coexists with been similar to those of the U.S. Department of the national systems of antitrust law and is con- Justice, i.e., the market share of the relevant com- sidered part of the national law of each member panies, the ability of other enterprises to perform state. If there is any conflict between the national the research, and the extent to which the re- law and the law of the EEC, the latter prevails. search is applied as opposed to basic. In the sec- Responsibility for enforcement of EEC law rests ond category, restraints ruled illegal usually have primarily with the Commission of European Com- been restrictions on the ability of the participants to compete with the joint venture itself and re- munities (“Commission”). The Court of Justice, located in Luxembourg, reviews the formal deci- strictions concerning distribution of the joint venture’s end results. sions of the Commission.

Articles 85 and 86 of the Treaty of Rome govern Though 15 years ago the Commission published anticompetitive practices. article 85(1) prohibits an official notice intended to reassure enterprises “all agreements . . . and concerted practices . , . of the legality of most R&D agreements (in partic- which have as their object or effect the preven- ular ventures with R&D as the “sole object”)) later tion, restriction or distortion of competition with- decisions of the Commission have showed some in the common market . , . .“* Article 86 prohibits of its statements of leniency to be unreliable (6). abuses by one or more enterprises “of a domi- For example, in 1972, two of the largest manufac- nant position within the common market)” such turers in the oligopolistic European soap industry as ‘(limiting of production, markets, or technical created a joint, equally owned subsidiary in Swit- development . . . .“ zerland to conduct research into soap products. Article 85(3) of the Treaty of Rome provides for exemptions from article 85(1) for certain agree- ● In addition to the ability to petition for article 85(3) exemptions, an enterprise can request the Commission to rule that, based on ments or practices such as those that promote the information supplied, it will not challenge the agreement under economic and technical progress and do not im- article 85(l). Such a ruling is provided for under article 2 of regula- pose ancillary restrictions or afford the possibility tion 17 and is called a negative clearance. The grant of a negati~’e clearance means that article 85( 1) does not apply to the agreement at all. [n practice, applications for negative clearance are often ac- “Article 85 will apply to an agreement only if it “may affect trade companied by requests for an exemption, so that if the commis- between Member States. ” ‘1’hus, if a contract only affects internal sion finds a \’iolation of article 85(1), it can consider whether to grant trade of one nation, trade between nonmember nations, or trade an exemption, Failure to disclose all pertinent facts or a subsequent between a member and a nonmember nation, it is not cotr~red b~~ change in the factual situation may result in cancellation of an ex- article 8.5 regardless of its impact on competition (~()). emption or a negatil~e clearance.

25-561 0 - 84 - 29 442 . Commercial Biotechnology: An International Analysis

The Commission found that the agreement elimi- way limited or controlled joint research agree- nated competition in research and therefore vio- ments, in most cases with respect to their col- lated article 85(1) (18). lateral restrictions. Since 1968, the Commission has modified at least eight cases involving joint Since the Commission may not grant an exemp- research and subjected others to reporting obligation in the absence of a notification of the agree- tions or otherwise limited the exemption granted ment and its provisions, the EEC legal system in time or scope of coverage. * has ensured that most major research ventures among European companies of different nationali- Considering the list of cases that have been ty are filed with the Commission. * The soap case modified and the mandatory notification require- mentioned above was in fact notified and granted ment, it appears that in practice the EEC is at least an exemption because the commission ruled that as tough as, and probably tougher than, the the joint research would promote economic and United States on joint research, particularly with technical progress, The exemption was subject to respect to collateral restraints. The Commission the condition that the companies inform the Com- has not hesitated to impose reporting obligations mission of all license agreements emanating from and to review periodically whether a joint ven- the results of the joint research. ture may become anticompetitive in future years. The Commission will also exempt anticompeti- Patent and know-how licenses are agreements tive collateral restraints on the basis of article that may come within the scope of article 85. EEC 85(3). In one case, an agreement between two law and the law of the member countries general- enterprises for joint R&D work on a new type ly follow the traditional doctrine that restrictions of electrically powered bus was granted an ex- on the licensee are valid if they do not expand emption, even though its provisions prohibited the scope of the patent. A body of law has devel- cooperation with third parties within the field oped, based mainly on Commission decisions, covered by the agreement (19). with regard to what kinds of restrictions in licensing agreements are legal and what kinds are not. * * The Commission’s decisionmaking process dif- The Commission has also issued a proposed ex- fers substantially from the U.S. adjudicatory proc- emption from article 85(1) for two-party patent ess in the sense that it is much less formal and licensing agreements (10). The proposed exemp- less procedurally oriented. Before giving approval, tion is very narrow and has received substantial the Commission is willing to negotiate and, wher- criticism (40). ever necessary, mandate conditions that will guarantee that the parties will remain competitive Federal Republic of Germany once the joint research venture has terminated. * * It is rather frequent that harmful collateral In the Federal Republic of Germany, the Act restrictions are found, which usually can be Against Restraints of Competition (GWB, Gesetz- eliminated or redrafted without prohibiting the gegen Wettbewerbsbeschrankungen) prohibits joint venture itself. Although there have been no restrictive business practices and is concerned Commission decisions to prohibit research joint with maintaining competitive market structures. ventures, many recent decisions have in some

*Article 4(2) of regulation 17 provides that certain classes of agree- ● See ACEL/Berliet, 1968 C. M.L.R. D35 (1968) (modification); ment need not be notified to the commission in order to obtain an HenkeUColgate, J.O. 1972, L, 14/14 (1972) (reporting obligation, ex- exemption. W means merely that they are eligible to be considered emption limited to 5 years); SOPER:EM/Rank, 1975-1 C. M.L.R. D72, for the grant of an exemption under article 85(3) even if notifica- (1974) (modification, reporting obligation, exemption limited to10 tion has not been filed. Though agreements which have as their years); Vacuum Interrupters, 1977-1 C.M.L.R. D67 (1977) (reporting “sole object . . . joint research and development” do not have to be obligation, exemption limited to 8 years); General Electric/Weir, notified [(Article 4)(2) (iii)(b)], R&D agreements with any sort of an- 1978-1 C. M.L.R. D42 (1977) (modification, reporting obligation, ex- cillary restraints must be. emption limited to 12 years); SOPELEM/Vickers, 1978-2 C.M.L.R. 146 ● ● An example of this was the ICIA%fontedison case (17) where the (1977) (reporting obligaton, exemption limited to 5 years) modified, Commission proposed to mandate an obligation that would insure 1982-3 C.M.L.R. 443 (1981) (exemption extended until 1991); Beech- that “on the termination of the agreement, Montedison should be am/Parke Davis, 1979-2 C. M.L.R. 157 (1979) (modification, repor- in a position to continue as an independent producer of a line if ting obligation, exemption limited to 12 years). it wished, thereby increasing competition in an oligopolistic market.” * ● For information on particular kinds of clauses, see (40). Ch. 18—Antitrust Law 443

This law is intended expressly to promote ‘(com- substantially impaired. Thus, the approach of petition based on efficiency” and is regarded as West Germany is similar to that of the United the “constitution” of the German social market States in terms of having a general prohibition economy (31). Section 1 of the law establishes a against agreements that extend the scope of the general prohibition against agreements made for patent, but German law gives the antitrust author- a common purpose by enterprises that restrain ities discretion to exempt agreements on a case- competition, production, or market conditions, by-case basis, which makes the German system Thus, this section can preclude a research joint more flexible. venture having anticompetitive market effects. United Kingdom Section 5b permits small- and medium-sized firms to form rationalization cartels)” assuming The U.K. antitrust law is contained in several no substantially adverse effect on competition and statutes. The ones most relevant for R&D joint assuming that the result promotes the firms’ over- ventures and technology licensing are the Fair all efficiency. Such cartels may include coopera- Trading Act of 1973 and the Competition Act of tive R&D ventures. 1980.

The application of German law by Government Under section 76 of the Fair Trading Act, the authorities appears to have been at least as tough Director General of Fair Trading has the duty to as in the United States in regard to research joint be generally informed about all mergers and to ventures. Between 1979 and 1980, the German decide whether to recommend to the Secretary Cartel Office caused the abandonment of two of State referral to the Monopolies and Merger agreements involving joint research. A proposed Commission. Not all joint ventures are affected venture between Siemans AG and VDO Adolph by the legislation. The Fair Trading Act does not Schindling to develop, produce, and market liquid apply if the joint venture is merely the result of crystal gages for use in automobile instrument an investment of capital by the coventurers in a panels was prohibited, because the arrangement jointly owned company. In most instances, a re- already jointly held 80 percent of the market for search joint venture will not involve the type of automobile instruments (13). Another proposed agreement constituting a merger under the Fair joint venture between Takeda Chemical of Japan Trading Act. and Bayer AG of Germany to develop, test, and market pharmaceutical products in the Federal Should a “merged” R&D venture be referred Republic of Germany was prohibited because it to the Monopolies and Mergers Commission, its would have represented a combination of two of legality is assessed on the basis of whether it will the world’s eight largest pharmaceutical compa- operate in the public interest. The five factors nies and eliminated Takeda as an independent po- considered are whether the merger will promote: tential competitive force in West Germany (13). 1) effective competition, 2) the interests of con- sumers, 3) reduced costs and the development With respect to technology licensing agree- of new techniques and products, 4) a balanced ments, GWB section 20(1) is relevant. It nullifies distribution of industry and employment, and agreements covering the acquisition or use of 5) competitive activity in British markets. Even if patents or protected seed varieties to the extent a proposed research joint venture were subject they impose restrictions on the business conduct to the Fair Trading Act’s reporting provisions, it of the acquirer or licensee that go beyond the is likely to be characterized as activity helping to scope of the protected right. However, German develop “new techniques and products” and cartel authorities may grant an exemption to this therefore not violate the Fair Trading Act. provision under GWB section 20(3) if the economic freedom of the licensee or other company is The Competition Act was designed to provide not unfairly hurt and market competition is not a comprehensive approach to anticompetitive practices not already covered by existing statutes. “A rationalization cartel is one formed to improve efficiency of Generally, the act applies to all activities that pre- production through concerted action. vent, restrict, or distort competition. Thus, it 444 . Commercial Biotechnology: An International Analysis

would apply to R&D joint ventures and to tech- nomic progress, particularly through enhanced nology licensing agreements. productivity.

Generally, the antitrust regime in the United There is no French antitrust law that applies Kingdom is relatively loose, and enforcement ac- specifically to technology licensing, but the Com- tions on joint R&D ventures and licensing agree- petition Commission has taken the position that ments have been few. But U.K. companies formu- articles 50 and 51 apply to intellectual property lating agreements with companies of other Euro- rights. However, there is very little case law in pean countries must take into account the EEC this area (25). laws. French antitrust law is of recent origin and is still developing. It is unlikely to be applied to a France biotechnology R&D joint venture. How it will be applied to biotechnology licensing agreements is The relevant statutes in France are Title II of somewhat unclear at this point. Act No. 77-806 and Articles 50 and 51 of Price Ordinance No. 15-1483. Under title II, the Min- ister of Economic Affairs may act against a “con- Switzerland centration” * that is “of such a nature as to pre- Joint ventures and licensing agreements in Swit- vent adequate competition in the market.” Articles zerland are governed under the provisions of the 50 and 51 apply to concerted actions or agree- Federal Cartels Act. The mere creation of a joint ments that prevent, restrain, or distort competi- venture would not trigger liability under this act. tion. If the venture dominated or exercised a determin- R&D joint ventures could be prohibited under ing influence on a product market, however, the title II if they involved major French companies. act would apply. Unless major companies joined However, an anticompetitive concentration may a biotechnology R&D joint venture, the act would be exempted under section 4 when the concentra- not appear to apply. tion is found to make “a sufficient contribution Exemptions to the Federal Cartels Act are out- to economic and social progress” to compensate lined in article 5. Activities that are otherwise for its restraints on competition. A determination prohibited by the act may be permitted on the on this point considers the international compet- “grounds of overriding legitimate interests” if itiveness of the companies concerned. A biotech- competition is not prevented “to a degree that is nology R&D joint venture among large companies excessive. “ “Overriding legitimate interests” in- would likely be exempted under this provision, clude those aimed at: 1) establishing reasonable and such a joint venture among small firms is requirements as to training, skill, or technical unlikely to raise problems in the first place. knowledge for a particular occupation or indus- Ancillary restraints which accompany many try; and 2) promoting an economic or occupation- joint R&D agreements would come under para- al structure that is desirable in the general in- graph one of article 50 ) which prohibits concerted terest. Thus, even if a biotechnology research ven- actions or agreements that may prevent, restrain, ture interfered with competition to a limited or distort competition and specifically mentions degree, it would appear to be exempt under ar- impeding technological advance. However, arti- ticle 5. cle 51 provides for an exception where the anti- Swiss law appears to favor R&D joint ventures. competitive practices further contribute to eco- There apparently have been no specific cases dealing with R&D joint ventures, and there has *A ‘(concentration” is defined as, “the result of any legal act or transaction . having the object or effect of enabling one enter- been no general treatment of the subject in Swiss prise or a group of enterprises to exercise an influence, directly legal periodicals (9). or indirectly, on one or more other enterprises which is of such a nature as to direct or even orientate the management or work- The Federal Cartels Act would apply to licens- ings of the latter. ” ing agreements in situations involving market .

Ch. 18—Antitrust Law ● 445

dominance. For example, a requirement that a li- With the end of the occupation in 1951, Japan’s censee undertake no research in the same area antimonopoly law was ineffectively enforced by as a patented invention would be objectionable JFTC; its relatively severe antimonopoly restric- under the act. Similar objections would be raised tions and prohibitions against cartels drew consid- if a licensee were obligated to assign any improve- erable hostility from the Japanese Government, ments on the licensed technology to the licenser. and JFTC virtually languished between 1952 However, cooperative agreements to exchange re- and 1969 (15). In the meantime, Japan’s Min- search results appear to be lawful. istry of International Trade and Industry (MITI) often implemented a procedure known as ‘(administrative guidance” in which persuasion would be Japan used by MITI to influence businessmen within its oversight. In some instances, administrative guid- Japan’s antimonopoly law—the Act Concerning ance functioned to foster cartelization either by Prohibition of Private Monopoly and Maintenance restricting production or investment, or other- of Fair Trade (Japanese Law 54 of 1947)—was first wise influencing prices —all circumventing the enacted in 1947 during the U.S. occupation and antimonopoly law. was revised three times subsequently, in 1949, 1952, and 1977. Enforcement procedures were The last decade, however, has seen a marked established in the Japanese Fair Trade Commis- increase in JFTC’S enforcement activities. In 1980, sion (JFTC), an independent five-person regula- for example, JFTC completed 62 cases, 24 of tory body modeled after the U.S. Federal Trade which involved price-fixing. It has also ordered Commission. Section 25 of the law allows private 279 businesses to pay a total of $10 million in fines companies the right to sue for damages, but only and has prosecuted a wide variety of unfair busi- after JFTC has found a violation. ness practices (33).

The basic provisions of Japan’s antimonopoly Despite the increase in enforcement activity, the law are quite rigorous. Article 1 explains that the Japanese Government has to date not prosecuted purpose of the law is to “eliminate unreasonable any R&D joint ventures. The Research Associa- restraint of production, sale, price, technology, tion Law, passed in 1961 and amended in 1963, and the like . . . .“ Revisions in 1977 reflected a provides an important perspective on the Japa- concern for controlling large corporations so that nese Government’s competition policy as opposed the revitalized market structure could function to its enforcement of its antimonopoly laws. This more efficiently. Sections 3 and 6 of the 1977 revi- law allows several companies to undertake long- sions preclude entrepreneurs from engaging in term R&D or to pool financial, personnel, and any unreasonable restraints of trade or entering capital resources. In almost all such instances, the into international agreements with terms that approved association involves R&D in which some might be unreasonable trade restraints. Research Japanese Government ministry or agency partic- joint ventures could qualify, since section 2(6) ipates. Rather than being anticompetitive, these defines ‘(unreasonable restraints of trade” as: research associations often serve to undermine “business activities by which entrepreneurs . . . collusive behavior by increasing entry into ad- mutually restrict or conduct their business activ- vanced industries and helping to diffuse new tech- ities in such a manner as to fix, maintain, or en- nology (26). Pursuant to the Research Association hance prices, or to limit production, technology, Law, the Ministry of Finance has specifically products, facilities, or customers or suppliers.” recognized the recently created Biotechnology The act also prohibits private monopolization. Research Association.

Several provisions in articles 21 through 24 of There is one significant difference between the the antimonopoly law specifically permit certain Japanese and U.S. antitrust perspective on re- types of legal cartels, including research joint ven- search joint ventures. In Japan, there would be tures. In total, there are 39 laws permitting busi- no objection in the case of a new technology if nesses to form legal cartels exempt from the anti- all the companies involved were to join in the monopoly laws (26). same venture. In the United States, such a ven- 446 ● Commercial Biotechnology: An International Analysis

ture would raise serious antitrust problems. trade or unfair business practice.” On July 23, However, if the Japanese joint venture restricted 1982, section 6 was amended to require that inter- entry into or subsequent use of the technology national agreements that may constitute unrea- by competitors, then it would probably violate the sonable restraints of trade or unfair business antimonopoly law. practices be filed with JFTC. Technology licensing and joint venture agreements are among those Japan’s antimonopoly law creates a mechanism required to file. JFTC has promulgated a regula- for Government oversight of international tech- tion covering patent licensing agreements (3). nology transfer. Section 6 of the law prohibits a Thus, JFTC can monitor these agreements for re- firm or entity from “enter[ingl into an interna- straints on competition. tional agreement or contract which contains such matters as constitute unreasonable restraints of

Applicability of antitrust law to biotechnology research joint ventures

The use of joint ventures in biotechnology, as lin” were first provided by the NBF Genentech discussed in Chapter 4: Firms Commercializing (U. S.) over 5 years ago. Lilly sponsored both the Biotechnology, is prevalent. The capital markets research and the marketing and agreed to pay have not funded all the long-term, high-risk R&D Genentech royalties (see Chapter 5: Pharmaceu- that NBFs wish to undertake. Joint ventures have ticals), The commercial success of this product, been used as an important source of revenue by however, remains uncertain. In clinical trials, NBFs until they can develop the production and Humulin@ has not shown any special advantages marketing capabilities to distribute their own over naturally produced porcine insulin and has products. Large, established companies have been found to cause immune reactions similar to entered into several different kinds of joint ven- the porcine product. Furthermore, production tures with NBFs, in most cases to obtain access difficulties may have caused Eli Lilly to have run to the new technology until their own in-house short of the drug during clinical trials. Finally, ac- capabilities can be developed. cording to some critics, a newer and cheaper method of producing human insulin may already Joint research ventures in biotechnology cur- be available (11). rently run very little risk of violating either the U.S. or foreign antitrust laws. Two factors in par- Eli Lilly’s experience with Humulin” demon- ticular support this assertion. One is the very high strates that the commercial development of bio- risk of biotechnology R&D. For example, total technology products may take several years and sales of biotechnology products reached $20 mil- may generate products that may become rapid- lion in 1982 and are projected to range from $150 ly outdated. Combined, these factors indicate a million to $3 billion in 1987 (16). This huge range very high level of risk. When the risks are as reflects the considerable uncertainty and risk at substantial as they currently are in biotechnology, this time over the size of future markets, a fac- enforcement authorities are far more tolerant of tor that depends on the number of commercial- joint ventures. ly available products (16). The second reason joint research ventures in The track record of the first rDNA product, the biotechnology do not currently raise antitrust human insulin product Humulin”, provides an in- concerns is the decentralization of biotechnology structive example of the risks involved in com- R&D. At the end of 1983, there were about 200 mercializing biotechnology. The microorganisms companies using biotechnology in the United used to produce Eli Lilly’s (U. S.) product Humu- States. The major thrust of all systems of antitrust Ch. 18—Antitrust Law ● 447 law is to prevent dangerous trends towards con- products and measurable market shares become centration and monopolization-conditions that apparent will joint research activities among ma- could signal a downturn in innovation. Although jor companies invite major antitrust challenge. the point where dangerous concentration in R&D Antitrust law has come under much scru- occurs varies from case to case, the biotechnology tiny recently, and the trend in the U.S. De- field remains far from that point today. partment of Justice is toward a policy that an ac- Because of the reconcentration of biotechnol- tion is unlawful only if the injury to competition ogy R&D, research joint ventures are essentially outweighs the benefits. For instance, the Depart- procompetitive, assuming the absence of ancillary ment of Justice recently gave preliminary approv- restraints. Most established companies that have al to the formation of one of the largest cooper- participated in joint ventures with NBFs are also ative research arrangements in U.S. industrial his- undertaking in-house R&D. The revenue earned tory—an amalgam of 12 major computer firms by joint ventures for NBFs is sustaining the viabil- called the Microelectronics Computer Corp. (MCC) ity of a larger number of competitors. (39). Although the Department of Justice press release gave little guidance on the antitrust as- Thus, joint ventures in biotechnology R&D in pects, the decision not to challenge MCC’S forma- the United States (and most likely foreign coun- tion at least demonstrates that a carefully struc- tries as well) currently face virtually no signifi- tured R&D joint venture can include most of the cant antitrust restraints. The absence of measur- U.S. competitors without being considered anti- able product markets and the lack of R&D con- competitive. centration means that reseach joint ventures are not reducing competition. only when successful

Application of antitrust law to biotechnology licensing agreements

The preceding survey of the antitrust laws of nology is arguably no more than 17 years, i.e., the competitor countries in biotechnology in- the term of the patent. For know-how, however, dicates that most restraints on competition in the useful life is not so easily defined. At least two licensing agreements will be evaluated by a rule commentators have suggested that most know- of reason test. The authorities of the various coun- how can be reverse-engineered in 3 to 5 years tries have applied this test to various types of pro- and that restrictions exceeding 5 years should visions in licensing agreements, including grant- therefore be considered in the United States per backs and field of use restrictions. Other provi- se unreasonable unless the licenser can provide sions, such as tying arrangements, are generally a special justification (1). On one hand, this view treated under per se rules. It is not useful to ex- may make sense for biotechnology know-how, amine these in detail, since virtually none of them given the pace of technological development. on raises any unique issues with respect to biotech- the other hand, many, if not most, production nology. processes for biological products, i.e., the organisms themselves, are not capable of being re- One type of factor relating to restrictions may verse-engineered because of their complexity, have unusual significance for biotechnology. As Thus, the rigid and unthinking application of a a general rule, restrictions extending beyond the 5-year rule would unfairly and unnecessarily life of the technology being licensed are consid- hinder licensers in their ability to exploit their ered suspect. For U.S. patents, the life of the tech- technology. 448 . Commercial Biotechnology: An International Analysis

Findings

U.S. companies using biotechnology face no ma- United Kingdom appear to have less stringent an- jor antitrust compliance problems. Nevertheless, titrust enforcement than the United States, Euro- there is some degree of uncertainty about the pean company activity across national boundaries scope and applicability of the antitrust laws to of member states comes under EEC law. R&D joint ventures and to licensing agreements. This uncertainty, plus the expense of litigation Japan has probably been more tolerant than the United States toward anticompetitive aspects of and the threat of treble damages, could discourage some activities that might lead to innovation R&D joint ventures. The highly publicized re- in biotechnology and could limit the ability of U.S. search associations sponsored by the Japanese companies to commercially exploit their technol- Government best exemplify this attitude. How- ogy. Furthermore, the rigid application of certain ever, this attitude may be changing, as indicated by the growing number of antitrust enforcement per se rules in the area of licensing may actually lead to anticompetitive results. Thus, the current actions in general. antitrust laws in the United States may have some At the present time, companies applying bio- modest adverse effect on biotechnology. technology both in the United States and foreign The antitrust laws of the United States, the Fed- countries face virtually no significant antitrust eral Republic of Germany, the United Kingdom, compliance problems with research joint ven- France, Switzerland, and Japan are generally tures, excluding blatantly anticompetitive activi- similar in that they all prohibit restraints of trade ties like price-fixing. In biotechnology, there is a and monopolization. Unlike the U.S. laws, how- lack of concentration of industry research and ever, the foreign laws generally provide for ex- an absence of measurable markets. only when emptions and vest much discretion with the en- biotechnology-related industries develop increas- forcement authorities. Most of the kinds of ar- ing concentration, successful products, and meas- rangements that would be of interest to firms urable market shares will R&D joint ventures be using biotechnology would be evaluated under exposed to the antitrust statutes. a rule of reason test, but others are now per se Technology licensing agreements are reviewed illegal. by the governmental authorities under the gener- Under U.S. antitrust law, the legality of a real principle that the agreements should not ex- search joint venture is judged on the basis of a tend the scope of the patentor know-how in ways balancing of its procompetitive v. anticompetitive that are on balance anticompetitive. The only effects. Factors considered important are whether issue unique to biotechnology raised by the ap- the individual joint venturers would have under- plication of the antitrust laws to these agreements taken the same or similar R&D on their own, the relates to the length of time of permissible restric- number and size of competitors in the relevant tions on competition. The rule that such restric- market, the scope of the research (basic v. ap- tions should not extend beyond an arbitrarily de- plied), and the scope of the research joint ven- termined useful life of the licensed technology ture (how it is limited in time and subject matter). may not be especially relevant to biotechnology, and its application may hinder the exploitation It is by no means clear that more favorable of inventions through licensing. treatment is given to R&D joint ventures by the laws and enforcement authorities of European Despite the fact that U.S. antitrust law is not countries. Authorities in the EEC and the Federal likely to be a major concern with respect to bio- Republic of Germany in particular have caused technology R&D joint ventures or licensing, there the abandonment or modification of a larger num- will be some degree of uncertainty regarding the ber of joint R&D ventures than their U.S. counter- antitrust implications of any corporate activity in parts have. Though Switzerland, France, and the this area. The degree of uncertainty is less in for- Ch. 18—Antitrust Law . 449

eign countries than in the united States because violations. Lessening the uncertainties under U.S. these countries have more well-defined proce- law could be expected to have a positive effect dures for prior review of transactions by govern- on the development of biotechnology in the ment authorities and less onerous penalties for United States.

Issue

ISSUE: Should Congress change U.S. antitrust distinguished from other areas of technology. In laws to encourage more joint research fact, the impact will probably be less for biotech- in biotechnology or to facilitate bio- nology than for more mature technologies, given technology licensing? the current lack of concentration in commercial U.S. companies using biotechnology face no ma- R&D in biotechnology and the absence of meas- jor antitrust compliance problems. For the rea- urable markets for products. Therefore, despite sons discussed in the findings of this chapter, the many proposals to change the law and en- however, current U.S. antitrust laws could have forcement procedures now being discussed, no some modest adverse effect on U.S. competitive- policy options are discussed here, because their ness in biotechnology. The impact of these laws broad applicability to technology in general is is not particularly unique to biotechnology, as beyond the scope of this report.

Chapter 18 references*

1. Adelman, M. T., and Brooks, E. L., “Territorial] Re- concerning S. 737, S. 568, and S. 1383, Bills Related straints in International Technology Agreements to Joint Research and Development, in Industry After Topco, “ Antitrust Bull. 17:763, 1972. Joint Research and Development Ventures, hear- 2. Andewelt, R., Chief, Intellectual Property Section, ings before the Senate Committee on the Judiciary, Antitrust Division, U.S. Department of Justice, U.S. Congress, June 29, 1983 (Washington, D. C.: ‘(Competition Policy and the Patent Misuse Doc- U.S. Government Printing Office, 1983). trine, ” remarks before the Bar Association for the 6. Bellamy, C., and Child, G. D., Common Market Law District of Columbia, Patent, Trademark, and Copy- of Competition (New York: Mathew Bender, 1973). right Section, Washington, D. C., Nov. 3, 1982. 7. Berkey Photo, Znc. v. Eastman Kodak, 603 F.2d 263, 3. ‘( Antimonopoly Act Guidelines for International cert. denied, 444 U.S. 1093 (1980). Licensing Agreements (Fair Trade Commission, 8. Brodley, J., “Joint Ventures and Antitrust Policy, ” 1968), ” app. H to G. Rose, “EEC and Other Foreign Harv. L. Rev. 95:1521, 1982. Antitrust Law as Applied to Licensing,” Technology 9. Cira, C., and Kolb, C., of Foreman and Dyess, “Re- Licensing, vol. 1, T. Arnold and T. Smegal, Jr. (eds.) port on Antitrust and Biotechnologv,” contract re- (New York: Practicing Law Institute, 1982). port prepared for the Office of Technology Assess- 4. Baxter, W. F., Assistant Attorney General, Antitrust ment, U.S. Congress, April 1983. Division, U.S. Department of Justice, speech to the 10. Commission of European Communities, “Proposal National Association of Manufacturers, Washing- for Commission Regulations on Article 85(3) of the ton, D. C., May 20, 1983. Treaty to Certain Categories of Patent Licensing 5. Baxter, W. F., Assistant Attorney General, Antitrust Agreements,” Official Journal of the European Division, U.S. Department of Justice, statement Communities 22(C58):12, Mar. 3, 1979. 11, Economist, “A Shaky Start for Genetic Engineer- “ ,Notf’ (’ D (hl = (kmtral Dtstrwt of (’all forma ing’s First Drug, ” Sept. 25, 1982, pp. 103-104. F Sllpp = Federal Supplement [‘ 5 = [ 1 S Supreme Court Reports. 12< Farmer, D. A., Jr., Special Assistant to the Assist- F 2d = k’ederal Reporter, Second Srrws. ant Attorney General, Antitrust Division, U.S. De- 450 ● Commercial Biotechnology: An International Analysis

partment of Justice, “An Overview of the Justice ent, ” Banbury Report 10: Patenting of Life Forms Department’s Guide to International Operations, ” (New York: Cold Spring Harbor Laboratory, 1982). speech to the Council of the Americas, June 8, 28, Standard Oil Co. of N.J. v. United States, 221 U.S. 1977, reprinted in Trade Regulation Transfer Bind- 1 (1911). er: Current Comment, 1969-1983, 12th ed. (CCH) 29, Stedman, A., “Legal Problems in the International 50, 325, p. 55, 690. and Domestic Licensing of Know-How,” A.B.A. An- 13 Federal Republic of Germany, Tatigkutsbericht des titrust Section Rep. 29:247, 1965, Bundeskarte/lamt (Report of the German Cartel 30 Stein A., statement in Japanese Technological Ad- Office), N. 9/565 at 63, 68 (1979). vancement and Possible U.S. Response Using Re- 14 Ginsburg, D., Antitrust Uncertainty and Tech- search Joint Ventures, hearings before the Sub- nological Innovation, 28 (Washington, D. C.: Na- committees on Investigation and Oversight and Sci- tional Academy of Sciences, 1980). ence, Research, and Technology, House Commit- 15. Hadley, E., Antitrust in Japan (Princeton, N. J.: tee on Science and Technology, June 30, 1983, Princeton University Press, 1970). p. 3, U.S. Congress (Washington, D.C.: US, Govern- 16. Hochhauser, S., ‘(Bringing Biotechnology to Mar- ment Printing Office, 1983). ket,” High Technology, February 1983, p. 60. 31. Stockman, K., and Strauck, V., “Germany,” World 17. ICIJWontedison, 7th Report on Competition (EEC), Competition Law, J. O. von Kalinowski (cd.) (New point 156-159 at pp. 117-119 (1978). York: Mathew Bender, 1979), 5:202(1], at pp. 2-5, 18. In re HenkeVColgate, decision of the Commission 32. Sullivan, L., Handbook of the Law of Antitrust $246 of European Communities of 23 December 1971, (St. Paul, Minn.: West Publishing Co., 1977). J.O. 114:14, Jan. 18, 1972. 33. Uesugi, A., “Japanese Antimonopoly Policy—Its 19. Kintner, E., and Joelson, M., An International Anti- Past and Future,” Antitrust L. J. 50:709, 1981. trust Primer (New York: Macmillan Publishing Co., 34. U.S. Congress, Senate Judiciary Committee, Indus- 1974). try Joint Research and Development Ventures, 20. Kirkpatrick, A., and Mahinka, T,, “Antitrust and hearings before the Senate Judiciary Committee, the International Licensing of Trade Secrets and U.S. Congress, June 29, 1983 (Washington, D. C.: Know-How: A Need for Guidelines,” Law& Policy U.S. Government Printing Office, 1983). International Business 9:725, 1977. 35. U.S. Department of Justice, Antitrust Division, An- 21. National Research Council, “International Competi- titrust Guide for International Operations, Wash- tion in Advanced Technology: Decisions for Americ- ington, D.C., Jan. 26, 1977. a,” Washington, D.C., 1983. 36. US. Department of Justice, Antitrust Division, An- 22. Northern Pacific Railway Co. v. United States, 356 titrust Guide Concerning Research Joint Ventures, U.S. 1,5 (1958), cited in U.S. Department of Justice, Washington D. C., 1980. Antitrust Division, Antitrust Guide for Interna- 37. United States v. Automobile Manufacturers Asso- tional Operations, Washington, D.C., Jan. 26, 1977. ciation, Inc., 307 F. Supp. 617 (C.D. Cal. 1969), aff’d 23. Oppenheim, S. C., and Weston, G. E., Federal An- sub nom., City of New York v. United States, 397 titrust Laws: Cases and Comments (St. Paul, Minn.: U.S. 248 (1970) (consent decree), modified sub West Publishing Co., 1968). nom. United States v. Motor Vehicle Manufactur- 24. Pfeffer, J., and Nowak, P., “Patterns of Joint Ven- ers Association of the United States, Inc., 1982-83 ture Activity: Complications for Antitrust Policy,” Trade Cas. f165,175 (C.D. Cal. 1982). Antitrust Bull. 21:315, 1976. 38, United States v. Penn-Olin Chemical Co., 378 U.S. 25. Rose, G., “EEC and Other Foreign Antitrust Law 158 (1964). as Applied to Licensing,” Technology Licensing, 39. Walsh, J., “MCC Moves Out of the Idea State,” vol. 1, T. Arnold and T. Smegal, Jr. (eds.) (New Science 220:1256, 1983. York: Practicing Law Institute, 1982). 40. Wiesen, J., “EEC Antitrust Considerations in Patent 26. Saxonhouse, G., “Biotechnology in Japan,” contract Licenses and Other Technology Transfer Agree- report prepared for the Office of Technology As- ments,” Industrial Applications of Genetic Engi- sessment, U.S. Congress, June 1983. neering: The Legal and Regulatory Regime (Phila- 27. Schlicher, J., “An Introduction to the Antitrust and delphia: American Law Institute, American Bar Misuse Limits on Commercial Exploitation of a Pat- Association, 1983). Chapter 19 International Technology Transfer, Investment, and Trade Contents

Introduction...... 453 Export Controls and Biotechnology ...... 45 . .5 United States ...... $ 455 Japan ...... 458 Federal Republic of Germany ...... 45 . . 8 United Kingdom...... 45. 8 Switzerland ...... 459 France ...... 459 Comparative Analysis ...... 45 . 9 Patent Law Provisions Affecting International Technology Transfer...... 45 . .9 . . . National Security Restrictions on Patent Applications ...... 45. . 9. . Compulsory Licensing of Patents ...... 46 . . 0 Regulation of Technology Imports and Foreign Investments ...... 46 . 1. . . Trade Barriers Affecting Biotechnology Products...... 46. . .3 . Standards and Certification Systems ...... 46. . .3 Subsidies ...... 464 Price Regulation and Government Procurement ...... 46. . .5 . Government Procurement ...... 46 . 6 Customs Classification ...... 46. 7 Trade Laws ...... 467 Section 337 0f the Tariff Act of 1930...... 46. . 7. Section 301 0f the Trade Act of 1974...... 46. . .8 Countervailing and Antidumping Duty Laws ...... 46. . 8. . Findings ...... 468 Issue ...... 470 Chapter 19 References...... 47 . 0

Table Table No. Page 67. Controlson Biotechnology Products Under the Export Administration Act of 1979 ...,.. 456 Chapter 19 International Technology Transfer, Investment, and Trade

Introduction

Intense international research and development fluence access to foreign or domestic markets: ex- (R&D) activities in biotechnology have stimulated port controls, patent laws, compulsory licensing equally intense efforts to diffuse the resulting provisions, investment and exchange controls, knowledge and to sell the products of the re- and trade laws. Export controls on technology and search, both in the United States and abroad. on products have a direct effect on potential de- Academic scientists are racing to publish their mand and may affect the price that technology research results or to share them with colleagues will fetch. Controls also bring delay and red tape at international conferences. Established compa- into export transactions. Patent laws may contain nies and new biotechnology firms (NBFs) * are secrecy provisions that restrict outward tech- funding university research programs to gain ac- nology transfer for security, economic, or foreign cess to potentially valuable new developments. policy reasons. They are similar in purpose and U.S. and foreign patents arising from the increase effect to export control laws. Compulsory licens - in biotechnology R&D and international licensing can be used to force inward technology trans- ing agreements formulated to exploit the patents fer and can diminish return on R&D; where ag- are diffusing the technology and promoting gressively used, it may simply deter foreign and worldwide commercialization. Finally, NBFs in the domestic investment in local R&D. Investment United States and large U.S. and foreign compa- and exchange controls as well as technology trans- nies have undertaken many R&D joint ventures fer controls can be used to reserve national mar- to develop and market new products. kets for locally owned firms and to force inward technology transfer. Nontariff barriers to trade Several other chapters of this report have ex- such as product certification systems that discrim- amined factors basic to the commercialization of inate against imported products, may block ac- biotechnology research (e.g., venture finance and cess to important markets abroad. However, trade patent rights). This chapter focuses on the legal remedy statutes such as section 301 of the Trade environment surrounding the international ex- Act of 1974 offer a means of negotiation for open- ploitation of biotechnology and access to foreign ing markets. markets through international technology transfer, investment, and product trade, Any company generally has three means of ex- Although most companies are not yet marketing ploiting its technology in a worldwide market: biotechnology products, the legal environment surrounding licensing, investment, and trade is . it may license the technology directly to a already influencing the strategic decisionmaking foreign company, of companies commercializing biotechnology— it may invest in a foreign manufacturing sub- strategic decisions, such as negotiations on licens- sidiary or joint venture, or ing, locational decisions for R&D, production, and . it may make the product in its home market clinical trials. and export it. This chapter considers laws that can be employed directly by governments to control or in- Companies may also combine these alternatives, for instance, by licensing technology tied to sales ● FJBFs, as defined in Chapter 4: Firms Commercializing Biotech- nolo~’, are firms that ha~’e been started specifically to commercialize of raw materials, or licensing to a joint venture new biotechnology. Most NBFs are L! .S. firms, abroad.

453 454 Commercial Biotechnology: An International Analysis

At present, most NBFs in the United States have technology transfer, * investment, and trade and licensed at least some of their technology to es- their potential impact on U.S. competitiveness in tablished U.S. or foreign companies, the reason biotechnology. Studies of more mature tech- being that these NBFs lack the capital and exper- nologies only emphasize the difficulties associated tise for full-scale manufacturing and marketing, with estimating the level or direction of tech- much less manufacturing or marketing abroad. nology flow (13). Most observers would agree that Typically, NBFs that license technology to the net flow of biotechnology is outward from established U.S. companies surrender their rights the United States, but such judgments are impres- to the U.S. market in exchange for future royalties sionistic at this time. Also, the net flow of tech- from sales. But a number of NBFs have prefer- nology outward from the United States is likely red to reserve the U.S. market for themselves and to diminish as foreign companies enter the U.S. have made licensing agreements with foreign market (via subsidiaries or foreign manufactur- companies, especially Japanese companies, whose ing operations) bringing with them foreign tech- production and marketing expertise resides in nology. It is not possible to provide reliable foreign markets. These NBFs and the licensers of estimates of the size of the net outflow, nor is it their technology are interested in export controls possible to compare biotechnology with other on technology and other laws that can be more advanced technologies in this respect. employed directly by governments to control or In examining the effects of international tech- influence biotechnology transfer. nology transfer, investment, and product trade, on competitiveness in biotechnology, the first For some NBFs and most established U.S. com- question to be asked is whether biotechnology panies, domestic or foreign manufacturing are raises any new issues at all in these areas. For in- viable options and are particularly desirable to stance, will the growing application of biotech- the extent that the alternative, licensing of technology in many industries create any new prob- nology, confers long-term benefits on foreign lems in these areas, problems that the existing U.S. competitors that are not recouped by the royalties or international legal framework does not ade- and other provisions of the licensing contract. quately cover? The answer to this question de- However, in a situation in which, for instance, a pends largely on whether there will be relevant foreign government makes it difficult or impossi- significant differences between: ble to import biotechnology products into that ● country or to manufacture them there through transfer of biotechnology and transfer of ex- a wholly owned subsidiary, a U.S. firm seeking isting chemical or biological technology; ● to work a patent in that foreign market may find biotechnology investment and other tech- it necessary to license its technology to a local nology investment; or ● company or to enter a joint venture with a local trade in biotechnologically -produced pro- company on terms that reflect the U.S. firm’s lack ducts and trade in the-chemical or biological of market access and therefore favor the local products they supplement or replace. licensee. One NBF has expressed concerns about OTA concludes that biotechnology will raise no this issue concerning its licensing negotiations such significant novel issues for the regulation of with a Japanese company (14). The short-term international biotechnology transfer, product consequence of forced technology transfer is that trade, or investment. Even without truly novel part of the potential return from the technology issues, however, the existing legal framework is transferred from the U.S. licenser to the foreign bears examining, because it will affect access to licensee. The foreign licensee may also receive a foreign markets and ultimately competition in in- valuable technological boost in the short and long dustries applying biotechnology. Furthermore, term. the laws embodying government practices can be changed. Even though there is already substantial diffu- ● Ways technology is transferred include: 1)scientitlc and technical sion of biotechnology itself, via licensing, joint ven- literature, 2) construction of industrial plants, 3) joint ventures, 4) licensing, 5) training, 6) technical exchanges, 7) sale of processing tures, and scientific journals, it is difficult to equipment, 8) engineering documents, 9) consulting, 10) documented quantify and assess the present amount of bio- proposals, and 11) trade exhibits. .

Ch. 19—international Technology Transfer, Investment, and Trade ● 455

Export controls and biotechnology

Export control laws restrict international tech- isters the EAA, may deny permission to export nology transfer, as well as trade in products, for or take a long time to issue the validated license. reasons of national security, foreign policy, or With regard to biotechnology products, two economic policy. From a biotechnology stand- groups on the Commodity Control List are espe- point, the relevant questions are: cially relevant: Group 7 and Group 9. Group 7 in- ● What technologies or products are under cludes chemicals, metalloids, petroleum products, what types of controls? and related materials, including industrial chem- ● What is the framework for controls and how icals obtainable by bioprocessing, such as citric are decisions made on controls? and lactic acids. The compounds in Group 7 re- ● What is the potential impact of export con- quire a validated license for export to communist trols on U.S. competitiveness? countries with the exception of those compounds in a subgroup of Group 7 called “Interpretation Like the United States, Japan, and the four No. 24 compounds” (CCL Category 6799G). These European countries being considered in this latter compounds include DNA, many enzymes, assessment all have some export controls. All but nucleosides, nucleotides, “protein substances,” Switzerland belong to the Coordinating Commit- “prepared culture media,” and pharmaceutical tee for Multilateral Export Controls (CoCom)* and products for humans and animals. These can be are subject to its multilateral export controls. exported to most countries without a validated Although current CoCorn control lists do not in- license. clude biotechnology products as such, CoCom lists on toxicological products and commercial chem- Group 9 (“Miscellaneous”) of the Commodity icals could become relevant to biotechnology. Control List includes four pertinent categories: However, there is no indication that companies 1) “viruses or viroids for human, veterinary, plant, would find CoCom requirements restrictive. or laboratory use, except hog cholera and attenuated or inactivated systems” (CCL Category United States 4997B); 2) bacteria, fungi, and protozoa (except those listed in supplement No. 1 to sec. 399.2, In- In the United States, biotechnology products terpretation No. 28) (CCL Category 4998B); 3) and data are subject to a number of export con- bacteria and protozoa listed in Interpretation No. trols. The most significant are under the Export 28 (which basically covers inactivated, attenuated, Administration Act (EAA) of 1979 (50 U.S.C. App. or relatively harmless organisms); and 4) a catch- Sec. 2401, et seq.).** Under the EAA, export re- all category (CCL Category 6999G), which includes strictions depend on the type of commodity or some medicines. Exports in the first category re- data and its destination. Exporters of any item on quire a validated license for virtually every coun- the Commodity Control List of the EAA regula- try except Canada. This category would include tions must have a “general license” or a “validated viral cloning vectors such as cauliflower mosaic

license” for all exports except most shipments to virus, SV 40) and bacteriophage lambda. Similar- Canada. A general license is essentially an exemp- ly, the second category requires, with certain ex- tion because no application is required. A vali- ceptions, a validated license for export to any dated license, on the other hand, requires an ap- country other than Canada. The third and fourth plication. The Office of Export Administration in categories have few restrictions unless the export the U.S. Department of Commerce, which adminis being made to certain countries like North Korea, Cuba, Vietnam, or Libya. “CoCom is composed of the NATO nations, minus Iceland and Spain, plus Japan, and was formed to deny the Communist coun- Certain bacteria of major industrial importance, tries access to military technology and strategic materials. such as those of the family Streptomycetaceae and * ● The following discussion is based on the EAA that expired on Sept. 30, 1983, but continues in effect indefinitely under the authori- of the genus Lactobaci]lus, fall into Interpretation ty of the International Emergency Economic Powers Act. No, 28 and are therefore exempted from validated 456 ● Commercial Biotechnology: An International Analysis

license requirements. However, several other if an organism should be placed on the list. Finally, types of bacteria commonly used in industry and the Office must formally amend Interpretation 28 research, such as the genera Escherichia, BaciZlus, by rulemaking before it can place new, nonpatho- and Pseudomonas, do not come within Interpreta- genic species of commercially important micro- tion No. 28 and therefore require a validated organisms on the list. license for export to all countries except Canada Data exports * or reexports** to certain coun- (3). For a summary of the controls on biotechnol- tries are also subject to licensing under the ex- ogy products under the EAA of 1979, see table 67.

one commentator has criticized the way in “Export of data occurs whenever data are transmitted out of the which Interpretation 28 (which will provide ma- LJnited States, released in the United States with the knowledge that they will be transmitted abroad, or released abroad (I5 C.F.R. jor exemptions for biotechnology products) was $379. I(?J)(l)). developed (6). First, the Office of Export Admin- * *Reexport of data is the release of data of U.S. origin in a foreign istration did not seek comments from the scien- country with the knowledge that the data will be transmitted to another foreign country (15 C.F.R. $370.2). The recipient of technical tific community before issuing it. Second, the Of- data must provide written assurances that the data will not be re- fice has not clarified the basis on which it decides exported.

Table 67.–Controls on Biotechnology Products Under the Export Administration Act of 1979 Commodity Control List Countries for which a Commodity (CCL) category validated license is requireda Organisms: Viruses CCL 49976 All except Canada Bacteria CCL 49986 All except Canada Human and animal bacterial Interpretation No. 24 (CCL s. z vaccines 6799G) or Interpretation No. 28 Human and animal viral CCL 49976 or All except Canada vaccines CCL 6999G s. z Human and animal peptides Interpretation No. 24 (CCL s, z and proteins 6799G) (Pharmaceuticals). . Human and animal peptides Interpretation No. 24 s, z and proteins or CCL 6999G (miscellaneous) or CCL 5799D P, Q, S, W, Y, Z Recombinant DNA and related Interpretation No. 24 s, z compounds (DNA nucleosides, nucleotides) Human and animal antibiotics Interpretation No. 24 s, z Human and animal diagnostic Interpretation No. 24 s, z agents Amino acids Interpretation No. 24 s, z or CCL 6999G or CCL 5799D P, Q, S, W, Y, Z Vitamins Interpretation No. 24 s, z Enzymes Interpretation No. 24 s, z or CCL 57919D P, Q, S, W, Y, A Pesticides and herbicides Interpretation No. 24 s, z (excluding microbial agents) or CCL 47076 All except Canada or CCL 5799D P, Q, S, W,Y,Z Seeds CCL6999G s, z aT~* ~OUntrle~ ~r~ ~~~u~~d as fOllOW: p. people’s ~public of china; Q - Romania; T - essentially the Western Hemisphere, excePt Cuba and Canada; V - Southern Rhodesia and countries not in any other group (except Canada); W - Hungary and Poland; Y - Aibania, Bulgaria, Czechoslovakia Estonia, G. D. R., Laos, Latvia, Lithuania, Outer Mongolia, and the U. S. S. R.; Z - North Korea Vietnam, Cambodia, Cuba; S - Libya.

Under a recent amendment to the Commodity Control List, the export of “medicine and medical products” to Libya does not require a validated license. SOURCE: Office of Technology Assessment, 1983. Ch. 19—lnternational Technology Transfer, Investment, and Trade ● 457

port control regulations. There are three catego- vised and has not yet been incorporated into the ries of technical data that may be exported to any export control regulations. country under a general license (i e., an exemp- Section 16.8 of the Defense Department’s MCTL tion): 1) data already generally available without is most pertinent to biotechnology because it restriction and at nominal cost, such as in publi- covers “technology for manufacture and dissem- cations or through conferences; 2) scientific or ination of biological and toxic materials. ” It would educational data not directly and significantly cover know-how for: 1) design and production related to industrial applications; and 3) data con- of bacterial, viral, and fungal products, including tained in foreign patent applications (15 C.F.R. $ vaccines, specialized high containment facilities, 379). However, if companies using biotechnology and special instrumentation; and 2) design, pro- choose to protect information as trade secrets or duction, and use of dissemination equipment. It if information has commercial value, these excep- would also cover related equipment, materials, tions will not apply. and goods accompanied by sophisticated know- The U.S. export control regulations do provide how. Although the MCTL has not yet been imple- another limited exemption of greater practical use mented, it appears that such a concept will be infor biotechnology data exports, depending on the corporated into the EAA renewal. destination and the nature of the exported data. In addition, “biological agents adapted for use Broadly speaking, exports of technical data to vir- in war” are subject to controls under the Arms tually all non-Communist countries and, under Export Control Act, as are technical data related more restricted circumstances, to the eastern bloc to biological warfare agents, including ‘(any tech- or the Peoples Republic of China, may take place nology which advances the state-of -the-art or es- under a general license rather than a validated tablishes a new art in an area of significant mili- license. * However, a validated license is required tary applicability in the United States” (22 C.F.R. for technical data related to Group 9 commodities, $ 125.01). Manv pathogenic organisms could be if the data is exported to Communist countries. . viewed as biological warfare agents, yet their ex- Controls on the export of “dual-use” technical port could be for peaceful purposes such as for data (data with both military and civilian uses) research to develop a vaccine. Ultimately, the deci- may become more important to the international sion on what products are “adapted for use in commercialization of biotechnology in the future. war” is left to the discretion of the U.S. Depart- In 1976, the Defense Science Board Task Force ment of State. In addition, the broad definition on Export of U.S. Technology issued a report (the of technical data could include even information Bucy report) which concluded that U.S. export indirectly related to military applications, such controls should focus on design and manufactur- as information relating to cloning of genes for ing know-how for critical technologies rather human neurotransmitters, because many chemi- than on products (7). In the EAA, Congress di- cal and some biological warfare agents act by af- rected the U.S. Secretary of Defense to develop fecting these neurotransmitters (4). On the other a “Militarily Critical Technologies List” (MCTL) and hand, a fairly recent case indicates that the courts to incorporate it into the export control system will interpret the definition of technical data after review by the U.S. Department of Com- much more narrowly (17). merce. The U.S. Department of Defense has de- To sum up, the current impact of U.S. export veloped a broad MCTL, most of which is classified control requirements is minimal except in the case (19). This list covers many technologies, including of microaganisms where the Commerce Depart- ones with primarily nonmilitary applications and ment sees the need for broad controls on national has been criticized as covering virtually all of security grounds. Exports of most products and modern technology (19). The MCTL is being re- technical information to non-Communist countries should be possible without need for a vali- “In man~ instances, the at’ailability of this general license for exports to non-Communist countries is conditioned on assurances dated license under the EAA regulations. How- against unauthorized reexport to a controlled destination. ever, the export of most micro-oganisms to all

25-561 0 - 84 - 30 .

458 Commercial Biotechnology: An International Analysis

countries except Canada will require a validated Japan license unless the microorganisms are inactivated, attenuated, or fall within Interpretation No. Japanese export controls combine trade con- 28 E. coli and some other micro-organisms of cerns with defense and foreign policy objectives. interest to biotechnologists do not fall within In addition, Japan cooperates with CoCom con- Interpretation 28 and therefore require a vali- trols (18). Under the Foreign Exchange and For- dated license for export (unless inactivated or at- eign Trade Control Law of 1949 (most recently tenuated). Controls over micro-organism ship- revised in 1979) and the implementing Export ments and data transfers will have most impact Trade Control Order, Japan’s Ministry of Inter- on those companies that do research abroad. national Trade and Industry (MITI) may require export licenses on the basis of domestic short Although the impact of the current U.S. export supply, export restraints for orderly marketing controls on biotechnology companies appears to reasons, defense, and harm to public order or be fairly modest, the future impact is unclear. The morals. The list of controlled items in the Export EAA expired on September 30, 1983. Although Trade Control order includes blood derivatives, U.S. export controls continue in effect under the fertilizers, and bacterial agents for military use. International Emergency Economic Powers Act, (The policy of the Japanese Government is to ban it is not clear what form the EAA’s successor will all arms exports.) An export license from MITI take. * Many different bills are pending. Some is required to export these commodities to any would strengthen U.S. export controls in general, foreign destination. The licensing process, in prac- while others would liberalize them. Furthermore, tice, involves extensive preliminary consultations even if the broad framework of export controls resulting in informal advance clearances (18). does not change significantly, it is possible that controls could be tightened at the administrative Federal Republic of Germany level. The Undersecretary of Defense for Policy testified before Congress in 1982 that “microbi- Export controls in the Federal Republic of Ger- ology” is one of the technologies that “pose the many are limited to commodities and information greatest risk to U.S. security” (11). Similarly, the directly related to “implements of war)” are April 1982 Central Intelligence Agency publica- limited in nature and scope, and must interfere tion, Soviet Acquisition of Western Technology, as little as possible with freedom of economic ac- identified microbiology, and especially “genetic tivity (l). Except for data and documents concern- engineering,” as one of the major fields of interest ing goods controlled multilaterally by CoCorn, to Soviet and Eastern European visitors to the technical data are unrestricted. Certain biological United States (11). A recent interagency discus- and chemical warfare materials, including some sion paper for the White House Office of Science micro-organisms, are controlled. Thus, export and Technology Policy (OSTP), on the other hand, controls in the Federal Republic of Germany are concluded that more restrictive measures to con- much less restrictive than the controls in the trol the transfer of biotechnology are not war- United States. West Germany’s export controls ranted and may be counterproductive (8). It also should have little or no impact on data or prod- noted that existing export control regulations uct exports by companies using biotechnology in could be clarified and better administered. How the Federal Republic of Germany that wish to much impact this latter report will have in the trade internationally. administration is unknown. OSTP has taken the position that the report is a draft only and will United Kingdom be part of a larger review of technology transfer and national security (4). The United Kingdom controls the export of goods but not technical information under the Im- port, Export, and Customs Powers (Defense) Act. Export licensing decisions are national-security- ● For a complete discussion of the major bills and the various congressional options on export control, see the May 1983 OTA report based. No biotechnology products are on the Technology and East-West Trade: An Update (19). Board of Trade’s list of controlled commodities. Ch. 19—lnternational Technology Transfer, Investment, and Trade ● 459

Switzerland competitor countries, and they are more restrictive with regard to biotechnology. The United Swiss law formerly provided for export controls States is the only country that controls exports in the “national interest” on two categories of bio- of pharmaceuticals for foreign policy reasons and technology products: serums and vaccines, and is the only nation that has perceived a national pharmaceuticals (16). Currently, however, there security interest in controlling the export of are no Swiss controls on biotechnology products microbial cultures generally. The other nations or data. only embargo shipments of biological warfare agents. France U.S. export controls could cause problems for The French export controls appear to be quite U.S. firms using biotechnology due to delays in informal and a product of administrative action the export licensing process or uncertainties in rather than statutory decree. The French Ministry the application of controls. These problems will of Economics and Finance’s list of products requir- occur primarily in the export of micro-organisms, ing export licenses includes biotechnology materi- many of which will require a validated U.S. ex- als usable in biological warfare and their related port license. In contrast, exports of most biotech- technical data. The controlled list does not include nology products and data will not require a vali- antibiotics, other medicinal products, or cultures dated license. If export controls are a significant of nonpathogenic organisms. handicap to U.S. firms’ competitiveness in biotechnology, these controls may lead U.S. firms using Comparative analysis biotechnology to source their exports from affiliates abroad, to first introduce new products U.S. export controls in general are more restric- abroad, or to site their R&D abroad. tive than those of Japan or the four European

Patent law provisions affecting international technology transfer

Patent laws of many countries, including the exist for the review of applications in foreign United States, contain secrecy provisions that re- countries by U.S. parties, and secrecy orders can strict outward technology transfer for security be issued in certain instances. The review period or foreign policy reasons. On the other hand, results in an effective prohibition against foreign compulsory licensing provisions can be used to filings within 3 months of the U.S. filing. French, force inward technology transfer, This section United Kingdom, and West German patent laws discusses these two types of provisions in the pat- have similar provisions. However, the Federal ent laws of the competitor countries. Republic of Germany will issue a secret patent instead of a secrecy order. Swiss patent law pro- National security restrictions on vides for expropriation with compensation; patent applications Japanese patent law does not place any national security restrictions on the application process. The U.S. patent law provides a waiting period after filing for a patent in the United States dur- National security provisions create delay in filing which the U.S. Patent and Trademark Office ing foreign patents for all patent applicants. It is and the U.S. defense agencies may screen the in- too early to tell whether military uses of biotech- vention on national security grounds and with- nology will make patent secrecy orders a sig- hold the grant of a patent. In addition, procedures nificant problem for biotechnology. 460 Commercial Biotechnology: An International Analysis

Compulsory licensing of patents ries to the Convention, and all but the United States have general compulsory licensing statutes In most countries, patent owners who fail to put consistent with the Convention, their inventions into practice in the country within a prescribed period may have their patent In some cases, in the interests of free trade and rights reduced or revoked. Failure to exploit a regional cooperation, the requirement that an in- patented invention in the country is regarded as vention be worked in the country is waived when an abuse of the patent monopoly rights and may the demand for the patented product in the coun- subject the patent to compulsory licensing, revo- try is being met by manufacturing in a cooperat- cation, or automatic lapse (2). Compulsory licensing country. This is the case for the member states ing is the normal remedy employed in these situa- of the EEC. Bilateral agreements also exist be- tions. Proponents of compulsory licensing argue tween Switzerland and the United States and be- that it ensures early applications of a technology tween the Federal Republic of Germany and the and diffuses control over technology. Its oppo- United States whereby the working of a patent nents argue that it discourages public disclosure in the territory of one of the parties is considered of new technology through the patent system, ex- equivalent to its working in the territory of the propriates property rights, and decreases incen- other party. tives to innovate. In the United States, compulsory Specialized compulsory licensing provisions of licensing is generally viewed as inconsistent with interest include United Kingdom and French pro- the patent owner’s right to exclude others from visions for compulsory licensing of pharmaceu- making, using, or selling the patented invention, ticals in certain circumstances. and U.S. law provides for compulsory licensing only in limited instances. Although the U.S. system generally allows the patentee to use or not use the patented technol- Countries with compulsory licensing recognize ogy at will, certain statutes and judicially created that it may be very difficult for a licensee to prac- legal doctrines provide for compulsory licensing tice a patent without the benefit of the patent in limited cases. For example, statutory compul- owner’s continued technical assistance and that sory licensing exists under the Plant Variety Pro- this assistance is unlikely to be forthcoming when tection Act* and the recent statute on ownership unfavorable terms are imposed on the patent of federally funded inventions (Public Law 96- owner. Thus, compulsory licensing can discour- 517). Compulsory licensing also exists de facto age the transfer of know-how in conjunction with where courts do not enjoin patent infringement the license. This may be less of a problem in cases on grounds of patent misuse, antitrust violation, where an organism has been deposited in support or public policy. of a patent. Since the organism is publicly available and is in esence a “factory” for the product, Assessing the impact of compulsory licensing a licensee that obtained a compulsory license may laws on U.S. competitiveness in biotechnology is not need the know-how. In this situation, compul- necessarily speculative at this time. Compulsory sory licensing could be a threat to U.S. biotechnol- licensing of patents could result in transfer of bio- ogy companies because sufficient technology technology and could adversely affect U.S. com- transfer could occur for the compulsory licensee petitiveness in biotechnology. Although compul- to use the invention competitively without any sory licenses apply in theory equally to any com- assistance from the patent owner. pany, foreign or domestic, in practice they could be used discriminatorily against U.S. companies; An international patent treaty known as the standards that provide for licenses “in the public Paris Convention permits any of its member coun- interest” grant wide discretion to the governmen- tries to require compulsory licensing of its patents tal body that decides such cases. after 3 years from the date of issuance, if the patent is not sufficiently worked. However, the Con- ● The act permits the Secretary of Agriculture to declare a pro- vention provides exceptions for reasons such as tected variety open for use for up to 2 years at a reasonable royalty in order to ensure an adequate supply of food, fiber, or feed in compliance with national safety requirements this country when the owner is unwilling or unable to meet the (15). All of the competitor countries are signato- need at a fair price (47 U.S,C. $2404), Ch. 19—International Technology Transfer, Investment, and Trade 461

Regulation of technology imports and foreign investment

Foreign exchange and investment control laws France moved in 1970 from a system requir- are sometimes applied to technology licensing or ing prior review of technology transfer agree- technical assistance agreements or to foreign ments to a system requiring notification after the investment, with the effect of restricting the im- fact. Currently, the French party to an interna- portation of foreign technology or foreign capital tional “industrial property” or “scientific and tech- and helping locally controlled firms retain con- nical assistance” agreement must notify and sub- trol of the local market. * Such restrictions have mit a copy to the Industrial Property Service of two rationales. First, a nation in a precarious the Ministry of Industrial and Scientific Develop- balance of payments position may look askance ment within 1 month after the agreement is con- at what it views as the payment of exorbitant cluded (9). The French party must also submit sums for foreign technology. Second, a nation yearly reports of payments made and reciprocal might act to prevent or modify a transaction for transfers of technology. The submissions are con- political reasons in instances where imported fidential, and compliance is a prerequisite to be- technology or foreign investment might result in ing able to transfer royalty payments (10). increased control of a local firm by a foreign firm. This mechanism appears to be one primarily The United States, the United Kingdom, the Fed- designed to gain statistical information, but one eral Republic of Germany, and Switzerland cur- source indicates that it may have further rami- rently have no significant formal exchange or in- fications (5). The French Ministry of Economy vestment control laws. Although these countries may express reservations if it considers the royal- lack statutory and administrative mechanisms for ty payments to be too high. Such an action could direct control over private international tech- result in the excess amount of royalties being pro- nology transfer agreements, de facto means exhibited from being deducted for tax purposes. ist in the United Kingdom, the Federal Republic Most of the reservations expressed by ministry of Germany, and Switzerland under which these officials have involved contracts in the chemical, governments could block foreign investments in pharmaceutical, and petroleum sectors (5). Thus, those exceptional cases in which it might be the ministry officials may be inclined to express deemed necessary to do so for screening impor- reservations for biotechnology licensing agree- tant investments * (14). France and Japan have in- ments, if those agreements are viewed as not be- vestment or exchange control mechanisms that ing sufficiently favorable to the French party. do affect technology transfers and foreign France’s investment control laws are relevant investment. both to biotechnology transfer and to the ability to invest in the French market. Nonresidents of “Track and in~estment restrictions, together with compulsory licensing pro~!isions can act like pincers to extract a foreign tech- the European Economic Community (EEC) that nology owner’s industrial property rights. The foreign technology plan to invest in France must submit a declara- owner may patent the product in an important market, be blocked tion to the Ministry of Economics and Finance. from using the patent himself, and have to license the patent on pain of losing its benefits, The declaration includes information on the iden- *For example, in the k’ederal Republic of Germany, any enterprise tity of the investor, the business to be invested whether domestic or foreign that acquires 25 percent or more of in, the forms, conditions, rationale, and conse- the shares of stock in a German corporation must notify the provincial banking authorities and the target company when it buys the quences of the investment, and financial informa- shares, Section 23 of the Foreign Trade Law authorizes the Ger- tion on the companies involved. Within 2 months man k’ederal Government to ban the sale of a company to nonresi- following the receipt of the declaration, the dents on national security grounds. While the FederalGo\’ernment has neter had to use this power, its existence makes possible an Ministry may order the suspension of the pro- informal but well-known agreement between the FederalC,o\wrn - posed action. ment and the major banks (which often are major shareholders of companies) that no company nor block of stock be soki without prior Direct foreign investment in certain industries consultation with the (;o\ernment. is not encouraged in France. And in France as in —.

462 . Commercial Biotechnology: An International Analysis

all countries other than the United States, take- The parties to such an agreement must first notify overs of local companies are not favored, partic- the Minister of Finance and the minister in charge ularly takeovers resisted by the local management of the industry involved of the terms of the agree- (14). On the other hand, investments that provide ment whenever they intend to enter into, renew, for capital transfer or technology transfer into or amend such an agreement. The agreement can- France are favored. Given the French Govern- not be concluded until a 30day waiting period ment concerted efforts to stimulate biotechnol- has elapsed. (Normally, the ministries exercise ogy, investments by foreign companies in French their power to shorten this period for trans- companies using biotechnology are likely to be actions not deemed “harmful.”) The ministries carefully scrutinized. review the agreement with respect to a number of criteria, ranging from national security to com- Of the countries under study, Japan has been petition with other Japanese business. The Japa- most restrictive regarding technical assistance and nese Government has a fair degree of control over licensing agreements between foreign parties and technology transfer agreements, although it is not Japanese companies and direct foreign invest- clear whether the control is used to secure bet- ment. In the period 1949-68, all licensing agree- ter contractual terms for Japanese companies, ments and all foreign investments in Japan had particularly terms that encourage biotechnology to be reviewed in advance by the Japanese Gov- transfer to Japan. ernment. Over the years, an increasing range of agreements and investments were given “auto- The greatest significance of Japanese invest- matic approval. ” Finally, the revised Foreign Ex- ment controls for biotechnology products is the change and Foreign Trade Control Law (effective lingering effect of past controls. In strategic in- Dec. 1, 1980) provided that foreign trade and industries where foreign companies’ technology po- vestment is to be free in principle and restrictions sition was strong, liberalization of investment con- are to be exceptional. trols came late. In pharmaceuticals, for instance, 100-percent” foreign ownership was not permitted Under Japan’s revised Foreign Exchange and in Japan until 1975, so non-Japanese drug compa- Foreign Trade Control Law, the Japanese Govern- nies either had to enter a joint venture with a ment has the power to screen investments. Before Japanese firm (or license to a Japanese firm) or a foreign investor can conduct a transaction char- had to forgo the world’s second largest drug acterized as “direct foreign investment, ” the in- market (22). Late liberalization of investment con- vestor must give notice to the Japanese Govern- trols retarded foreign firms’ establishment of their ment. The foreign investor must then wait 30 own marketing and distribution networks in days before proceeding with the transaction. * Japan. Nevertheless, the international pharmaceu- The Minister of Finance and the minister in tical companies have a strong and increasing charge of the industry concerned also have the presence in Japan, and some foreign pharma- power to designate specific companies for special ceutical companies have even acquired smaller controls on foreign ownership. Eleven companies Japanese pharmaceutical firms. Merck’s recent have been so designated, including Sankyo Phar- acquisition of Banyu Pharmaceutical, the number maceuticals (25-percent ceiling on foreign owner- three firm in the Japanese industry, puts Merck ship). in an extremely strong position in the Japanese Articles 29 and 30 of Japan’s Foreign Exchange market. Still, the waiting period for investments and Foreign Trade Control Law deal specifically and for licensing contracts is at the least a nui- with “agreements for importation of technology.” sance to the inward investment or licensing transaction, although other factors such as interlock- ● If certain circumstances are found to exist, then within an ex- ing directorships, cross-holding of stock, and labor tended waiting period, the Government may recommend that the resistance to foreign management may be very agreement be altered; this power has seldom been used in recent years. If this recommendation is not accepted, the Government may significant in discouraging investment entry into suspend the transaction indefinitely by Cabinet Order, the Japanese market through a hostile takeover. Ch. 19—International Technology Transfer, Investment, and Trade 463

Trade barriers affecting biotechnology products _

While firms using biotechnology now trade ucts, because such products are extensively reg- mostly in technology through licensing and have ulated and subject to the regulator’s discretionary in a few cases invested abroad, trade in the prod- determination of whether imported products ucts of biotechnology is just beginning. The tariffs meet applicable standards. Product standards can on biotechnology products are generally low in affect the activities of both exporting and import- the competitor countries and are getting lower ing companies. Biologically produced pharmaceu- (as Tokyo Round tariff cuts are phased in). * Thus, ticals, vaccines, foods, chemicals, and veterinary it is nontariff barriers that are most likely to be products will all be subject in some degree to in- important to trade in biotechnologically produced spection, approval, and/or certification of whether products. they meet local standards of safety and efficacy.

Nontariff barriers to trade include any govern- For a foreign manufacturer, registration and ap- ment intervention affecting competition between proval of a product in a certification process in- imported and domestic goods. The barriers most volves inevitable leakage of technology. Any man- significant for biotechnology products will be ufacturer must explain its technology to local those that affect technology development and regulators to the extent necessary to get its prod- technology transfer: ucts approved. In those countries where marketing approval for an imported product can only ● health and safety standards and certification be given to a locally resident importer, as has been systems; the case in Japan, the technology (including trade ● subsidies; secrets and nonpatentable know-how) that is re- ● price regulation; quired for an application for approval must be ● to a minor degree, government procurement; transmitted to the regulating authority by the im- and porter, whose possession of this information ● least significant, customs classification of new could provide the resident importer with lever- products. age over the foreign manufacturer. This gener- Rather than addressing health and safety reg- alization applies equally to foreign manufacturers ulation per se, the discussion here addresses how in the United States and to U.S. manufacturers such regulation applies specifically to imports. abroad. Leakage of technology may also occur Similarly, rather than considering the specific pro- where a registration scheme involves disclosure duction and R&D subsidies, it considers how of trade secrets, as in the case of disclosure of these programs fit in with U.S. rights under trade chemical identities for registration in the Euro- agreements. For instance, Japan maintained un- pean Inventory of Existing Chemical Substances til very recently a dual safety certification system under the EEC’S Sixth Amendment regulation that discriminated against imports, including im- scheme for toxic chemicals. ported drugs, medical devices (e.g., monoclinal The Agreement on Technical Barriers to Trade antibodies), chemicals, and animal drugs (20). ((’Standards Code”) addresses these problems. The Standards Code, negotiated in the Tokyo Round Standards and certification systems of multilateral trade negotiations, came into ef- Product standard systems are a particularly fect January 1, 1980 and covers all six countries discussed in this report. This code requires the thorny problem for exporters of health care prod- following: 1) national or regional certification ● A11 of the competitor countries belong to the General Agreement systems must treat products of code signatories on Tariffs and Trade (GATT), GAIT is a multilateral agreement signed by 87 governments accounting for over 80 percent of world no less favorably than domestic products, 2) im- trade, GATT serves as a code of rules for international trade and ported products must be treated in a nondiscrim- as an international trade organization. A primary goal of GATT is inatory manner with regard to product testing to discourage the use of nontariff barriers to trade and then to reduce tariff levels through a series of multilateral trade negotiating and certification, and 3) signatories must use the rounds of which the most recent was the Tokyo Round (1973-78), same test methods and administrative procedures 464 . Commercial Biotechnology: An International Analysis

for imports and domestic products and charge turers may now apply for, and be granted, fac- comparable fees. Test results must be made avail- tory inspection and U.S. product type approval. able to the exporter, importer, or their agents, U.S. trade negotiators are now working for Japa- and confidentiality of information must be nese acceptance of factory inspections carried out respected equally for foreign and domestic sup- by U.S. testing firms for this purpose. pliers. The Standards Code does not implement The Japanese Ministry of Health and Welfare, a transnational standards system. It merely pro- which previously refused to accept entirely vides international rules for how individual na- foreign clinical test data because of racial and tional systems treat products of other code dietary differences, agreed in January 1983 to signatories, provides a forum for negotiations, and work toward acceptance of foreign clinical data provides redress against foreign violations of the and to undertake objective studies of racial and code (20). dietary differences. However, as of December 1983 no such studies had been undertaken. In ad- JAPAN dition, the Ministry promised to clarify the line Until recently, one of the most wide-ranging between (regulated) pharmaceuticals and (unregu- barriers to foreign market access in Japan was lated) foodstuffs and to shorten the approval discriminatory certification systems (20). While period for in vitro diagnostics used as medical various product standards were administered devices. The Ministry has also promised to allow under different laws, the framework was remark- approvals to be transferred between importers ably uniform. Each law would provide two tracks: of drugs and importers of medical devices. 1) an approval adapted to high-volume produc- EUROPE tion and sales, requiring factory inspection and product-type approval; and 2) a low-volume ap- U.S. chemical exporters have been concerned proval, involving lot-by-lot inspection. The first about inadequate protection of proprietary data track was legally foreclosed to foreign manufac- in the European registration process, in par- turers. Because the person holding the product ticular, the requirements for disclosure of approval had to be subject to potential sanctions chemical identities of substances. Another long- under Japanese law, that person had to be pres- term concern of U.S. pesticide exporters has been ent in Japan. Furthermore, the product approval pesticide registration procedures abroad, which (and all data to obtain it) was the property of the may diminish the proprietary value of registra- approval holder, who under the second track had tion data by allowing national authorities to use to be the Japanese importer. Transfer of the ap- data submitted by pioneer registrants in deter- proval to another importer (even transfer of the mining the safety of “me-too”* pesticides (20). approval from a joint venture to a wholly owned subsidiary) meant regenerating the data. Subsidies

In response to foreign complaints, the Japanese Subsidies (e.g., loans, grants, tax preferences) Diet, on May 18, 1983, passed legislation amend- are a form of government intervention which, in ing 16 Japanese standards and certification laws, some cases, can provide competitive advantages including the Pharmaceutical Affairs Law (drugs, to domestic producers. There is basic disagree- medical devices), the Agricultural Chemicals Law, ment between the United States and its trading and the Toxic Chemicals Law. The amendments, partners both on how to define a subsidy and on together with their implementing regulations how to measure its effect. The position of the issued soon thereafter, are designed to give United States is that a measure of a subsidy is the foreign producers direct access to certification benefit conferred on the recipient; the position systems, including direct ownership of approvals. of the EEC is that the measure should be the cost Foreign regulated products—such as drugs or to the government or the benefit to the recipient, monoclinal antibody kits—still (as of fall 1983) must be unpacked, sampled, and tested, lot by lot, ● “Me-too” products are generic products equivalent to an already as they pass Japanese customs. Foreign manufac - existing product. Ch. 19—international Technology Transfer, Investment, and Trade . 465

whichever is lower. In any case, subsidies used yields results that are made publicly available are by governments may be important in internation- not legally subsidies. The test of a subsidy in this al competition to commercialize biotechnology. case is wvhether the result of a government- funded research project in biotechnology is pub- One of the most controversial agreements of lished and made available. Loans are deemed sub- the Tokyo Round was the Subsidies Code, which sidized to the extent that the borrower obtains attempts to expand international discipline over a better interest rate for the loan than that which subsidies. Three aspects of the Subsidies Code are would otherwise be available to him for a loan important to firms using biotechnology. First, the of similar size and terms, As for government equi- code prohibits any export subsidies on industrial ty ownership, the U.S. position is that government products. This means that neither the United ownership implies a subsidy only when it is in- States nor its competitor countries can grant ex- consistent with commercial considerations. If the port subsidies on biotechnology products without government buys shares either directly from the violating the code. second, the code recognizes company or the stock market, a subsidy arises that domestic subsidies, which include all existing to the extent the government pays more than the subsidies that affect biotechnology, can be used market price. Given the favorable market for most except in situations where the subsidies: 1) cause biotechnology stocks, even for those issues that or threaten injury to another signatory’s industry, have shown no operating profits to date, it seems 2) cause or threaten “serious prejudice)”” or 3) unlikely that government investment in biotech- nullify or impair GAIT benefits of another signa- nology companies such as Celltech would be clas- tory. Third, the code provides for remedies. Two sified as a subsidy under U.S. practice. methods of obtaining remedies are available: countervailing duties (described under the discussion of U.S. trade law below) and multilateral Price regulation and government dispute settlement. procurement

The Subsidies Code sets limits on both the ex- Price regulation is central in importance to the port subsidy behavior of our trading partners and world market in pharmaceuticals and may be an on what the United States (and other signatories) important means of discouraging foreign suppli- can do to promote industry. The code also author- ers to enter particular domestic pharmaceutical izes national governments to unilaterally impose markets. Thus, price regulation, particularly of countervailing duties * * on subsidized imports to new drugs, will be important to the marketing offset subsidies, where the importing country’s and profitability of biotechnology pharmaceuti- government has found that there are subsidies cals. The basis for price regulation is the local or and that injury to domestic industries is caused national social insurance scheme, which pays for or threatened by reason of the subsidized im- all or part of the beneficiaries’ drug cost. Although ports. the basic motivation for price regulation is health care cost containment, price regulation can be All presently known government promotion used to reward manufacturers for local produc- measures affecting the commercialization of tion, local R&D, and other desired behavior. Thus, biotechnology are either domestic subsidies or in countries where drug costs are paid or reim- other promotional measures that legally do not bursed by the government, in a real sense the gov- qualify as subsidies at all. Under U.S. subsidy and ernment creates the market. Furthermore, inclu- countervailing duty practice, R&D grants and sion on the government list of approved drugs, preferential loans awarded by a government to at a profitable price, is essential to market access finance research that has broad application and for foreign drugs. *Serious prejudice relates to effects of subsidies in third

clear factual case of discrimination, enforcement required but usually happens anyway. For im- of this requirement is straightforward. ported drugs, sales prices abroad are carefully monitored; the Federal Social Insurance Office In the United States, Federal and State funds will allow a 25-percent margin over the selling pay for only 8 percent of out-of-hospital drug price in the country of origin (excluding tax) (22). costs. The Maximum Allowable Cost program instituted in 1979 by the Department of Health, Ed- The Japanese drug distribution system is ucation, and Welfare sets price ceilings on drugs unique. Almost all drugs in Japan are dispensed paid for by federally financed health-care pro- by physicians whose drug lists and markup are grams such as Medicaid. In addition, a growing regulated by the national health insurance system. number of States are instituting open or closed The doctor buys drugs from the wholesaler at a formulary systems (recommended or mandatory price that varies depending on the size of order, drug lists) for prescriptions paid for by State size of clinic, and other commercial factors. The funds (22). doctor then resells the drug to his patients at the regulated price. The difference is the doctor’s In the Federal Republic of Germany, all drugs profit, which averages between 20 to 50 percent are dispensed through the pharmacies or hos- of the regulated price (12). Japan’s price regula- pitals, which are reimbursed by the insurance tion system is used to encourage R&D. The re- plan to which the patient belongs. An official price cently revised (April 1983) method of drug price list is set by the pharmaceutical manufacturers reimbursement allows a larger profit margin de- association, and the Government regulates the pending on desirability and efficacy of the drug; wholesalers’ and pharmacies’ markup. this, in combination with the more generous of- In the United Kingdom, the Government pays ficial prices set for new drugs, may be used to for approximately 90 percent of drugs consumed reward R&D and favor new drug (including bio- (22). Dispensing of drugs is through the pharma- technology drug) development (14). cies, which are reimbursed on the basis of ingredient cost, profit, professional fee, and container allowance. The Department of Health allows a Government procurement larger profit margin for companies that manufacture or perform R&D locally, a provision which Under GATT, governments may buy products may be inconsistent with GATT Article III and the as they wish for their own consumption and tar- Treaty of Rome (21). get their procurement to favor local suppliers. However, the GATT Procurement Code, negoti- In France, drugs are distributed primarily ated in the Tokyo Round reciprocally, opens bid- through pharmacies, and patients are reimbursed ding opportunities on certain procurement and by the social insurance system at a set percentage provides fair procurement procedures. For bio- (40, 70, or 100 percent) of the official list price. technology products, government procurement The Government sets not only the retail price for would have substantial impact only where con- each drug on the official price list, but also the sumption by the government is large relative to markups in the distribution chain. One report the total market or has a significant demonstra- states that health care cost containment concerns tion effect. It is unlikely that government procure- have led to drug prices too low to finance R&D ment will play a role in biotechnology develop- by the local pharmaceutical industry (21). ment comparable to the role of the U.S. Defense In Switzerland, dispensing of drugs is through Department or the Japanese Government in the pharmacies and doctors. Price regulation is the semiconductor industry. While governments do responsibility of the Federal Social Insurance Of- buy pharmaceuticals, many drug companies avoid fice which maintains two lists of drugs for reim- bidding on government tenders for commercial bursement: 1) generic drugs, for which reim- reasons, and in developed countries, procurement bursement is required; and 2) the ‘(SL List,” a list markets are not significant relative to total phar- of specialty drugs for which reimbursement is not maceutical demand. Ch. 19—International Technology Transfer, Investment, and Trade ● 467

Customs classification ucts. If the trading partners of the United States reclassify biotechnology products and raise tar- Customs classification might be a problem only iffs, such strategic protectionism could raise new for those biotechnology products for which clas- barriers around foreign markets. Since only a few sification is an open issue—i.e., either those prod- products developed through biotechnology are ucts that are genuinely new or existing products traded at present, it is not clear whether the com- assigned to a different classification due to their petitor countries will reclassify the biotechnology biotechnologically based production. Over the products under different (higher tariff) categories. next several years, most biotechnology products There is, however, no reason to believe that they with the exception of some vaccines will prob- will be reassigned. ably be replacement products for existing prod-

Trade laws

Trade laws may offer a means to improve the found to be infringing intellectual property rights, competitive position of US. firms using biotech- where such practices injure an efficiently nology. This section reviews the array of trade operated industry in the United States, prevent law actions relevant to U.S. firms using biotech- the establishment of such an industry, or restrain nology and assesses whether biotechnology raises trade. If the U.S. International Trade Commission particular issues as to the adequacy of present (ITC) finds a violation, it may issue either an ex- trade laws. clusion order prohibiting the import of the goods in question or a cease and desist order to pro- While trade in biotechnology products is in its scribe specific conduct by parties over which ITC infancy, some factors will influence the likely in- has jurisdiction. Investigations under section 337 teraction between biotechnology and trade law. are conducted by ITC. The President may disap- First, to the extent that trade in a product is whol- prove such a determination for policy reasons ly under a licensing agreement or is an intracom- within 60 days. pany transfer of a patented substance (or organism), there are likely to be few problems with There are several points to note about section import competition. Second, there is no reason 337. If an import is found to violate section 337, to believe that biotechnology products will trade it can be completely excluded from importation; differently or be classified differently from other ITC need not get jurisdiction over the foreign products; human insulin will have the same dis- manufacturer. Second, section 337 investigations tribution channels as animal-derived insulin, for are faster (18 months maximum) and generally instance. Third, since the efficacy of any type of less expensive than other types of litigation (e.g., import relief is tied to the pace of product obsoles- patent or trade secret infringement litigation). cence, which differs by industry, the import relief Third, where there is multiple-source infringe- concerns of other industries such as the semicon- ment, ITC can issue a general exclusion order, ex- ductor industry will be of limited importance to cluding all infringing products made by any firm. industries using biotechnology. Section 337a (19 U.S.C. j1337a) provides that section 337 can be used to enforce process patents; ITC in past process patent cases has been willing Section 337 of the Tariff Act of 1930 to issue broad exclusion orders, particularly where infringing and noninfringing goods are The U.S. import trade statute most immediate- physically indistinguishable. ly relevant to firms using biotechnology is section 337 of the Tariff Act of 1930 (19 U.S,C. Section 337’s greatest relevance for biotech- 1337), which provides for relief against unfair nology is that at present, section 337 is the most competition in import trade, including imports effective means of enforcing process patents 468 ● Commercial Biotechnology: An International Analysis

against foreign producers. It could, for instance, An investigation under section 301 of the Trade be used to enforce the Cohen-Boyer process Act of 1974 is conducted by the U.S. Trade Repre- patent against imports from firms that have not sentative and is normally initiated in response to taken a license from Stanford (although Stanford a petition by any interested person. * The Trade would run the risk that its patent might be found Representative, with the advice of other U.S. invalid by ITC). Furthermore, a firm need not Government agencies, recommends what action have patented the intellectual property in ques- should be taken by the President. Firms using tion; section 337 applies as well to misappropria- biotechnology can use section 301 to gain U.S. tions of trade secrets. A firm that has elected to Government action against foreign government take the trade secret route instead of patenting actions that restrict market access or violate its research results could use section 337 against GATT, the Standards Code, or bilateral or multi- goods incorporating stolen trade secrets. lateral agreements. For such problems, section 301 is often the best or only formal remedy. A section 337 investigation concerning allega- However, section 301 would not apply if there tions of patent infringement and trade secret were no foreign government involvement (e.g., misappropriations with respect to “certain limited dumping or illegal private cartels). Also, even charge cell culture microcarriers ” is now in without formal section 301 action, the assistance progress. * of the U.S. Government is available for resolving market access problems abroad. Section 301 of the Trade Act of 1974

The other important trade remedy for firms Countervailing and using biotechnology is section 301 of the Trade antidumping duty laws Act of 1974 (19 U.S.C. 2411 ff). Under section 301, firms can petition the U.S. Government to enforce Countervailing duties (19 U.S.C. 1671 ff) are im- U.S. rights under trade agreements or to negotiate posed to offset subsidies found to benefit imports to eliminate foreign government actions that un- into the United States where the subsidized im- reasonably limit market access abroad. Section ports cause or threaten material injury to U.S. in- 301 also provides authority for the President to dustry producing a like product. Similarly, anti- retaliate against any foreign government action dumping duties (19 U.S.C. 1673 ff) are imposed that is “unjustifiable, unreasonable, or discrimi- to offset injurious dumping of foreign merchan- natory” and burdens or restricts U.S. commerce dise in the United States.** The US. Department (14). of Commerce makes preliminary and final findings concerning subsidization or dumping, and “Certain Limited Charge Cell Cuhure Microcarriers, Investigation ITC makes preliminary and final findings concern- No. 337-TA-129, instituted Aug. 17, 1982, concerning allegations of: ing material injury to the U.S. industry. Biotech- misappropriation of trade secrets; refusal to sell sieved beads; false and deceptive advertising; false and disparaging comments about nology products are unlikely to raise novel issues for these laws. complainants; direct, contributory, and induced patent infringement; \ and unauthorized manufacture abroad in violation of process claims of a U.S. patent. Complainants are Flow General Inc. and Massa- ● Interested persons include any person representing a significant chusetts Institute of Technology; respondents are AB Fortia, Phar- economic interest affected by the complained policy or actions. macia AB, Pharmacia Fine Chemical of Sweden, and Pharmacia Inc. * ““Dumping” exists when goods are sold for export below their of New Jersey. cost of production or more cheaply than for the home market.

Findings

Export control laws restrict outward technology the United States is the only country that controls transfer for national security, economic, or for- the export of medicines for foreign policy reasons. eign policy reasons. Of the six countries studied, The United States also has imposed more far Ch. 19—International Technology Transfer, Investment, and Trade ● 469

reaching controls on the export of microorga- hibits its parties from discriminating against im- nisms than have the European nations and Japan, ports in their standards and certification systems. which appear to limit their concern to biological The Subsidies Code prohibits certain forms of warfare agents. With these broader commodity subsidies. All of the competitor countries belong controls come commensurately broader controls to all three of these agreements. U.S. rights under over the export of technical data. These controls these agreements can be enforced through dis- may have a slightly adverse effect on the compet- pute settlement proceedings before an impartial itiveness of U.S. companies commercializing bio- panel of arbitrators. technology because they could cause delays that Biotechnology products may face significant result in sales being lost to foreign competitors. nontariff barriers to trade because of the desira- All of the countries studied, except the United bility of the technology and because of health and States, have compulsory licensing provisions of safety regulation likely to surround the product. general applicability for patents. The United States For instance, certification of safety requirements has special compulsory licensing provisions in may be difficult to gain, especially for imported some statutes, notably the Plant Variety Protec- biotechnology products. Additionally, price reg- tion Act. In addition, compulsory licensing has ulation in important overseas markets such as been imposed in patent misuse cases. It should France and Japan may on occasion significantly have little effect on U.S. competitiveness in bio- impair return on R&D investment for biotechnol- technology. ogy pharmaceuticals.

Exchange controls may delay or limit the remit- The U.S. trade remedy of greatest interest to tance of royalties. Investment controls may ob- U.S. firms engaging in biotechnology is section struct inward foreign investment or licensing and 337 of the Tariff Act of 1930, which provides a technical assistance activities. The United States, remedy against imports that create unfair compe- the United Kingdom, the Federal Republic of Ger- tition, including those that infringe intellectual many, and Switzerland do not have significant property rights. A firm using biotechnology pro- controls. France formerly required prior review ducing a product in the United States can use sec- of investments and licensing agreements but now tion 337 to gain exclusion of infringing imports, requires only notification after the fact. However, even in the case of those made by a process pat- non-EEC residents who plan to invest in France ented only in the United States or where the firm must submit a declaration of their proposed activ- has chosen the trade secret route rather than pat- ity to the Ministry of Economics and Finance, enting. Section 337 proceedings are administrative which may order the suspension of the proposed (before the U.S. International Trade Commission) action. Japan has had a prior notification system and can be much speedier than other types of liti- since 1980. However, both the French and Japa- gation. nese systems give the Government the ability to The other significant trade remedy for U.S. object or order alteration of the transaction. This firms using biotechnology is section 301 of the system may increase the leverage of French and Trade Act of 1974. This statute provides a win- Japanese prospective licensees of biotechnology dow for U.S. parties to get the Government to ne- transfers. It might also provide protection for gotiate to enforce U.S. rights abroad. Antidump- domestic firms against foreign competition in the ing and countervailing duty laws may be of signif- local market. icance in the future as well. For biotechnology products such as pharmaceu- Since trade in biotechnology products has bare- ticals, tariffs are relatively insignificant as a bar- ly begun, it is too soon to assess definitively rier to trade. The significant trade barriers are whether the present trade laws are adequate to nontariff trade barriers, such as standards and address the trade problems of this industry, How- certification systems, subsidies, and the use of ever, since there are no trade issues peculiar to price regulation to discriminate against imports. biotechnology and biotechnology products are Multilateral trade agreements such as GATT likely to trade similarly to other products, biotech- provide rules aimed at eliminating nontariff bar- nology is not likely to raise new issues for trade riers to trade. Similarly, the Standards Code pro- law. 470 . Commercial Biotechnology: An International Analysis

Issue

ISSUE: How could Congress respond to the in- may change as foreign companies enter the U.S. ternational transfer of biotechnology? market (via subsidies or foreign manufacturing Biotechnical knowledge is being rapidly trans- operations) bringing with them foreign technol- ferred both domestically and internationally, but ogy. The long-term effect of what appears to be there is no empirical evidence showing the an outward flow of technology on the interna- amount and net direction of the transfer. Much tional competitiveness of U.S. companies apply- of the new knowledge is being generated in the ing biotechnology is unknown. United States, primarily in research universities Although certain laws affect the international and NBFs, and because of the openness of the uni- technology transfer and will therefore affect the versity scientific establishment and the many joint transfer of biotechnology, biotechnology raises R&D ventures between NBFs and larger manufac- few, if any, unique issues in this context. Similarly, turing companies, particularly foreign ones, this since there are no trade issues peculiar to biotech- knowledge is being disseminated worldwide. At nology, and biotechnology products are likely to the same time, however, high-quality research in trade similarly to the products they replace, bio- molecular biology, immunology, and bioprocess technology is not likely to raise new issues for engineering is done in many foreign countries, trade law. The laws most relevant to biotechnol- and the published results are available to U.S. ogy now are the export control laws, which could scientists. The technique for making hybridomas, have a modest effect on U.S. competitiveness. for example, was developed in the United King- dom. Furthermore, patents granted in the United As this study went to press, the debate over re- States and abroad to foreign inventors and com- placement of the Export Administration Act of panies make technology available to all. Finally, 1979 was still in progress. Although the delay and R&D joint ventures between NBFs and large com- commercial uncertainty created by current U.S. panies presumably have resulted in the transfer export controls may adversely affect the develop- of some technology to NBFs in the United States, ment of biotechnology in the United States, these although this is not certain because of the pro- problems are general ones that are now under prietary nature of these agreements. Despite the consideration in Congress, and as such, are be- lack of empirical evidence showing the amount yond the scope of this report. The reader is re- and net direction of biotechnology transfer, most ferred to the OTA report Technology and East- (19) observers would agree that currently the net flow West Trade: An Update for a full discussion of biotechnology transfer is outward from the of the export control issue. United States. However, the net flow outward

Chapter 19 references

1. Baker, R., and Bohlig, R., “The Control of Exports: Study on Biocompetitiveness: Will It Surface or A Comparison of the Laws of the United States, Sink,” June 20, 1983, p. 1. Canada, Japan, and the Federal Republic of Ger- 5. Business International Corp., Investing, Licensing, many, ” International/ Lawyer 1:163:172-173, 1966. and Trading Conditions Abroad (France), Novem- 2. Baxter, J, W., World Patent Law and Practice, ber 1981. 2:117 (New York: Matthew Bender & Co., 1983). 6. Cooper, I., “U.S. Export Controls on Biotechnology)” 3. Bent, S., “Export Controls and U.S. Biotechnology,” Recombinant DNA Technical Bulletin 6:12, 1983. Biotechnology Law Report 2:6-14, 1983. 7. Defense Science Board Task Force on Export of 4. Biotechnology Newswatch, “White House Gets U.S. Technology, An Ana&sis oflixport Control of Ch. 19—International Technology Transfer, Investment, and Trade 471

21. Chapter 20 Targeting” Policies in Biotechnology Contents

475 475 475 476 477 477 478 478 478 478 478 479 479 479 479 479 480 480 481 482 482 482 483 484 Chapter 20 Targeting Policies in Biotechnology

Introduction

During the past few years, some governments both to enhance the international competitiveness in countries other than the United States have of foreign firms and to weaken that of U.S. firms. designated the commercial development of bio- This chapter examines the targeting policies in technology as essential to their nations’ continued biotechnology of Japan, the Federal Republic economic well-being. Unlike the U.S. Government, of Germany, the United Kingdom, and France. * which has relied on a policy of funding basic The targeting policies of most foreign govern- research in the life sciences and encouraging ments are directed toward both “old” and “new” research and development (R&D) in all industries biotechnology. This chapter focuses on the as- with tax credits, * these governments have insti- pects of these policies applicable to new biotech- tuted targeting policies in biotechnology designed nology, as defined at the outset of this report. to promote the commercial development of bio- Although it does not address the issue of whether technology. In the context of this report, a the U.S. Government should adopt a targeting pol- targeting policy for biotechnology is defined as icy for biotechnology, it does identify which any policy that singles out the indigenous devel- targeting mechanisms could most readily be opment of biotechnology for special attention adopted in the United States if the U.S. Govern- from the central government. Foreign targeting ment chose to target biotechnology. policies in biotechnology may have the potential

“Switzerland is not considered in this chapter, because the Swiss “See Chapter 12: h’inancing and Tax Incentit,es for Firms and Federal Government has no central policy for the industrial develop- C’hapter 13: [hnrernment Funding of Basic and Applied Research. ment of biotechnolo~y.

Timing and coordination of policies

The biotechnology targeting policies of Japan extent and degree of coordination of targeting and the Federal Republic of Germany have policies differ among countries. evolved out of at least a decade of interest in the commercialization of life-science-related technol- Japan ogies; these policies have more recently emphasized the incorporation of the new recombinant As early as April 1971, the Council for Science DNA (rDNA) and hybridoma/monoclinal antibody and Technology, Japan’s highest science and tech- (MAb) technologies, as well as advances in bio- nology policymaking body, including government, process engineering. The biotechnology targeting business, and academic leaders, stressed the im- policies of the United Kingdom and France, in con- portance of promoting life science on a nation- trast, have developed since about 1980, largely wide basis because of its commercial potential in response to the recent developments that have (16). Since then, three governmental departments occurred in the field of molecular biology. The in Japan—the Science and Technology Agency

475 476 ● Commercial Biotechnology: An International Analysis

(STA), the Ministry of International Trade and In- anese Diet special legislation governing the pro- dustry (MITI), and the Ministry of Agriculture, motion of biotechnology in Japan (25). * Forestry, and Fisheries (MAFF)-have specifical- MAFF has more recently established the Com- ly targeted the development of biotechnology. mittee on Biological Resources Development and STA responded in 1973 by establishing the Of- Utilization, which compiled a report recommend- fice for Life Science Promotion to plan and coor- ing actions MAFF could take to promote biotech- dinate STA’S R&D programs in life sciences. Un- nology’s development (21). til MITI’s entry into major biotechnology program- In addition to STA, MITI, and MAFF, three other ing in 1980, STA’S R&D programs in fields related Japanese Government agencies are funding R&D to biotechnology were the largest and the best in biotechnology: the Ministry of Health and funded in Japan. Even today, STA’S programs are Welfare, the Ministry of Education, and the En- comparable in scale to those of MITI (25). vironment Agency (26). STA, in addition to being responsible for carrying out its own R&D program in the fields related Federal Republic of Germany to biotechnology, is responsible for interministerial coordination. It should be pointed out, how- The West German Government’s interest in the ever, that STA’S influence on the formulation and development of old biotechnology, like that of the implementation of Japanese biotechnology policy Japanese Government, is more than 10 years old. is not as pervasive as it might appear on paper, In 1968, the old Federal Ministry for Scientific Interministerial rivalries and competition are com- Research explicitly recognized the potential common in Japan, and as described below, MAFF and mercial importance of old biotechnology by MITI, each with substantially larger in-house including it in a program to promote new tech- staffs and laboratories than STA, have independ- nologies (15), In 1972, the newly reorganized Min- ently formulated their own biotechnology tar- istry for Research and Technology (BMFT’, Bun- geting policies. Nevertheless, STA’S foresight with desministerium fur Forschung und Technologies), respect to the development of biotechnology has along with the Ministry of Education, commis- accorded the agency a more authoritative posi- sioned a report on old biotechnology from the tion for biotechnology than for other high-tech- German Society for Chemical Engineering nology fields. * (DECHEMA, Deutsche Gesellschaft fur Chem- isches Apparatewesen) (7). The DECHEMA study, MITI did not enter the biotechnology area until completed in 1974, laid the groundwork for a 1981. In that year, MITI reorganized itself to deal comprehensive Federal policy for the develop- comprehensively with the challenges of new de- ment of old biotechnology (15). In 1980, in light velopments in technology and established its “Sys- of increasing evidence suggesting potential com- tem for Promotion of Research on Next-Gener- mercial applications of advances in both scientific ation Industrial Technologies, ” an overall plan to and engineering aspects of biotechnology, BMFT promote “next-generation” industrial technologies presented its Leistungsplan: Biotechnologie, a per- (25). Three “next-generation” projects in biotech- formance plan for biotechnology (5). This plan nology were established within MITI’s Basic In- identified and targeted for support specific areas dustries Division, and an Office of Biotechnology in which West German industry could commer- Promotion was established within this division to cially exploit both old and new biotechnology (15). provide policy oversight for MITI’s biotechnology effort and to serve as liaison between MITI’s BMFT makes policy and coordinates German Biotechnology Long-Term Vision Advisory Group governmental activity for all biotechnology. BMFT and possible MITI efforts to obtain from the Jap- funds basic and generic applied research in biotechnology through a number of public and non- *STA was involved from the beginning with its own program and had the central role in the setting of rDNA regulations. The agency has a policy of reviewing on a case-by+ase basis scaled-up produc- “Several factors, including visible American concern with Japa- tion of genetically manipulated micmarganisms beyond 20 liters nese Government aid to high-technology industries, have made the and has been reluctant to relinquish this authority (4). passage of such programs unlikely (25). Ch. 20—Targeting Policies in Biotechnology ● 477

profit research centers (15). Its most important France function, however, is to oversee the development Official interest in the commercialization of bio- efforts of various industries in biotechnology, and technology in France was marked by the ap- it aids such efforts with a strong funding program pearance of the Pelissolo report (23) in Decem- (15). ber 1980. Since the election of the socialists in 1980, the French Government has resolved to United Kingdom push the development of several new technologies The formulation of official Government interest in French industries and has accorded a privileged in the commercialization of biotechnology in the position to biotechnology within this scheme. United Kingdom dates from March 1980, with the In July 1982, the old Ministry of Research and publication of the Spinks’ report (1). This report Technology in France was reorganized into a identified major weaknesses in the country’s bio- new, more powerful Ministry of Research and In- technology commercialization efforts and sug- dustry (Ministere de la Recherche et de lInhdustrie) gested ways of correcting them. The document based on the model of Japan’s MITI (29). Further- elicited almost immediate Government action on more, a wide-ranging research law adopted by its recommendations and sparked a spirited dialog the French National Assembly in July 1982 stip- among the various sectors with an interest in ulated a real increase in the civilian R&D budget developing and incorporating the latest advances of 17.8 percent per year for 5 years, economic in this set of technologies into British industries. * conditions permitting, and set up seven techno- The Department of Industry is the United King- logical “programmed, ” on which the majority dom’s lead department for biotechnology. Other of all civilian research funds are now to be Government departments involved in health, en- focused (30). ergy, the environment, agriculture, and food, Biotechnology was one of the seven “pro- however, contribute to the advancement of bio- grammed)” and a Biotechnology Mission (Mission technology within their respective sectors, pri- des Biotechnologies), established in August 1981, marily by funding basic research (8). In April produced a planning document for biotechnology 1982, the Department of Industry established the in France in July 1982. This document, the “Pro- Interdepartmental Committee on Biotechnology grammed Mobilisateur: l’Essor des Biotechnol- to strengthen the existing coordinating arrange- ogies, ” called for the restructuring of biotech- ments by focusing the Government’s effort on the nology policymaking into three separate coordi- commercial development of biotechnology. This nating bodies: 1) a national committee, presided committee coordinates the activities of other over by the Minister of Research and Industry; related bodies, such as the Research Councils, the 2) an interministerial coordinating committee; and British Technology Group (BTG), and the Public 3) a program team to work in daily liaison with Health Laboratory Service, and serves as a point other Government organizations most closely in- of contact for those outside Government. volved in distributing research funds (18).

Since the publication of the “Programme Mo- bilisateur,” the Ministry of Research and Industry *Biotechnology and Education: Report of a J%’orking Group, The has undergone a further restructuring. The new Royal Society, 1981; Biotechnology, Cmnd 8177 (London: H. M. Sta- name of this ministry, Ministry of Industry and tionery Office, ,March 1981); ‘l%e Strategv for Biotechnology in Brit- ain, BCCB Seminar, London, October 1981, series of unpublished Research (Ministere de lIndustrie et de la Re- papers, widely circulated at the time; Biotechrdogy: Interim Report cherche), further reflects the efforts of French on the Protecticm of the Research Base in Biotdmology, Sixth Report policymakers to focus on the commercialization from the Education, Science and Arts Committee, Session 1981-82, House of Comnmns Paper 289 (London: H. L1, Stationery Office, July of research results, including those in biotech- 29, 1982). nology (9). 478 . Commercial Biotechnology: An International Analysis

Industrialists’ role in policy formulation

Formulating a policy with the assistance of the industry (7), laid the groundwork for a com- parties whose activities it is intended to affect prehensive Federal policy. Much of BMFT’s fund- usually makes its implementation far more effec- ing goes to nonprofit research centers such as the tive. Foreign nations competing with the United Society for Biotechnology Research (GBF, Gesell- States in the commercialization of biotechnology schaft fur Biotechnologische Forschung) that con- have various mechanisms which incorporate in- duct generic applied research useful to industry dustrialists into the formulation of a government (13). The research institutes of these organizations targeting policy. have boards of directors with strong industrial representation, so their research strategy is thus Japan usually formed by a “bottom-up” process. *

In Japan, technological strategy is usually United Kingdom formed by a “bottom-up” process, and the formulation of the strategy for biotechnology was no The Department of Industry launched in No- exception. After the announcement of the Cohen- vember 1982 a new 3-year, $30 million program Boyer patent for the basic rDNA process in 1980, of support for biotechnology in industry (2). To five major Japanese chemical companies orga- promote and monitor. its funding initiatives, the nized a joint study group called the Biotechnology Laboratory of the Government Chemist, part of Forum. The Biotechnology Forum was instrumen- the Department of Industry, setup a Biotechnol- tal in lobbying for the establishment of MITI’s ogy Unit. The unit is headed by one official from three major “next-generation” biotechnology R&D the Laboratory of the Government Chemist and projects: rDNA technology, bioreactors, and mass three full-time biotechnologists on loan from in- cell culture (25). * Furthermore, discussions with dustry. The purpose of this group is to provide industrialists helped narrow MITI’s focus. A industrial biotechnology expertise previously planned “next-generation” R&D project in cell fu- unavailable in the Department of Industry (12). sion was dropped, because the chemical compa- The establishment of the Biotechnology Unit in nies working with the Basic Industries Division 1982 marks the first time the British Government of MITI were already rather advanced in this area has incorporated the industrial sector on a regular and because MAFF and the Ministry of Health and basis into the policymaking process for biotech- Welfare were developing their own programs in nology. Previously, the direction of the United the field (25). Kingdom’s informal involvement in biotechnology was determined largely by Government officials Federal Republic of Germany and scientists acting through already existing committees, with only occasional input from the pri- The biotechnology policy of the Federal Repub- vate sector. lic of Germany was formulated with industry consultation. As noted above, a report on old bio- France technology from DECHEMA, the private sector research association of the German chemical The presentation of the ‘(Programmed Mobili- sateur” in July 1982 followed an intensive period ● In fact, following the award of the Cohen-Boyer patent, the Com- of analysis and discussion between French Gov- mittee on Life Sciences of the Japan Federation of Economic Orga- ernment officials, research scientists, and in- nizations met in alarm to discuss a Japanese response. Included at this meeting were representatives of 30 major Japanese companies dustrialists. A product of the plan was a National with an interest in biotechnolo~y. The Cohen-Boyer ptent was seen Biotechnology Committee, presided over by the as a matter of concern because, acceding to their company sources, the patent would affect almost any product application of rDNA ● OTA’S report US. lndustrkd C’ompetifi\’eness: A Comparison of technology. Ironically, it was suggested that the United States was Steef, Electronics, and Automobiles (28) presents a general descrip- designating biotechnology as a strategic national industry and was tion of structural integration of business into West Germany’s policy- weaving about it a network of protective patents (27). making apparatus, pp. 196-200. Ch. 20—Targeting Policies in Biotechnology . 479

Minister of Research and Industry, with 30 to 40 French Government officials advocated general- members from the Government, academia, and ized support of R&D projects regardless of the industry responsible for providing general prospects for successful exploitation, to the mis- guidance in implementing the Government pol- may of industrialists who doubted the viability icy. In the past, the industrial policy of France has of some of the projects designated to receive Gov- been more autocratic than that of West Germany ernment support (29). or Japan (31). For biotechnology, enthusiastic

Policy goals

An examination of the goals of foreign bio- Federal Republic of Germany technology policies indicates that the domestic According to a September 1979 BMFT state- development of biotechnology, rather than the ment, a primary goal of Germany’s Federal bio- advancement of knowledge per se, is their foremost objective. technology policy is “to establish the preconditions for industrial innovation in this key area of technology” (15). Another goal is “to strengthen Japan the performance and competitive capacity of the Japanese Government programs for biotechnol- German economy in long-range growth-oriented ogy R&D are concerned specifically with the areas, in the process, correcting weaknesses development of Japanese industry. revealed through international comparison and preventing distortions in Germany’s competitive MITI’s interest in biotechnology has been almost position” (15). exclusively related to a more general program of structural adjustment for Japan’s extremely depressed basic chemicals industry (24,25). MITI’s United Kingdom three “next-generation” biotechnology R&D projects are part of a 10-year program that is specifi- While the British Government recognizes the cally designed to develop and diffuse biotechnol- potential of biotechnology, it is fairly guarded ogy among Japanese companies. According to a about the objectives of its biotechnology policy. recent MITI policy statement, it is not feasible to The Minister of Industry has stated that “many rely on the private sector for biotechnology-re- developments are only now beginning to emerge lated research that involves huge economic risks, from the research phase, and the direction of de- so “the Government itself must take the initiative velopment for commercial exploitation remains in such R&D, while at the same time offering as- uncertain. In addition, new biotechnological tech- sistance to private corporations in various forms niques and processes may well emerge over the to expedite this R&D” (19). next 20 years with benefits as yet unforeseen” (8). Clearly, however, the British Government in- STA also is directly concerned with providing tends to assist the country’s industries in realiz- the technological underpinning for industrial ing the commercial potential of biotechnological advancement in Japan. The essential distinction developments as such developments appear (8). between the STA and the MITI biotechnology projects is that the former concentrate on medical applications and longer term development of ad- France vanced bioreactors, whereas the latter are mainly concerned with fine chemicals, biological routes The French Government “Programme Mobili - to production, fertilizers, and enzyme technology sateur” plans to remedy the present deficiencies (25). in qualified personnel and spending levels for 480 ● Commercial Biotechnology: An International Analysis

R&D in biotechnology in French industry and the should account for 10 percent of the world lack of public sector applied research in 5 years. market in the “bioindustries” (not defined) in 1990, According to the document, French companies compared with an estimated 7.5 percent now (18).

Policy implementation

Examples of the mechanisms used to implement research projects in biotechnology. These projects biotechnology targeting policies in Japan and are to be carried out in 10 years by research other countries illustrate the variety of forms groups whose members are affiliated with Japa- which biotechnology targeting policies can take. nese universities and research institutes (26). One Several examples are cited below. For more in- of the projects, the project on the development formation on government funding, see Chapter of bioreactors, aims to develop what the Japanese 12: Financing and Tax Incentives for Firms and call “second generation” bioreactors and includes Chapter 13: Government Funding of Basic and Ap- computer control, biochemistry, and systems de- plied Research. sign. STA has encouraged an interdisciplinary approach to the project by inviting a variety of Jap- Japan anese companies skilled in various aspects of bio- The activities of STA’S Office for Life Science technology to participate. This approach has been Promotion are shown in figure 32. As shown in very productive (24). As shown in figure 32, the the figure, the Office is funding two goal-oriented Office for Life Science Promotion is providing sup-

Figure 32.—Activities of STA’S Office for Life Science Promotion Ch. 20—Targeting Policies in Biotechnology ● 481

port for rDNA research. This support includes projects have been organized into the Biotechnol- funding for the construciton of facilities. In 1982, ogy Development Research Association. This construction was begun on a P-4 (highest physical association has its own central office through containment level) facility in which experiments which the various companies communicate with in genetic manipulation can be performed in Tsu - MITI, but otherwise there are no intercompany kuba Science City (26). In 1980, as one of the Of- institutions (e.g., there are no common labora- fice for Life Science Promotion’s projects for the tories being maintained by the companies). MITI promotion of research services, the Japan Collec- subsidies to these companies cover 100 percent tion of Micro-Organisms was constructed to col- of all direct expenses (salaries and laboratory ex- lect, preserve, and supply micro-organisms (26). penses) for biotechnology R&D, but no overhead is allowed and any capital equipment purchased STA is implementing its policy in part through is nominally the property of the Japanese Govern- the general Newr Technology Development Fund. ment. Furthermom, all patents resulting from the This fund has already commenced funding a work belong to the Japanese Gmernment, which, number of biotechnology-related projects. A $4 MITI has assured other companies, both domestic million grant to the pharmaceutical company and foreign, will be freely available (14). Green Cross in March 1980, for example, launched Green Cross into the international arena of com- MAFF also is actively promoting cooperative petition in pharmaceuticals by enabling it to con- research with private industry at its laboratories duct research on rDNA methods for the produc- and is currently funding work with both Nippon tion of alpha interferon (25). Shokuhin Kako and Oriental Yeast at the National Food Research Institute and with Kao Soap at the MITI’s three next-generation biotechnology National Institutes of Agricultural Sciences. Fur- projects, which are targeted to establish and dif- ther joint research is planned in the areas of plant fuse scale-up techniques among companies, are breeding and species improvement with private even more illustrative of Japanese Government seed companies. Achievements from the research cooperation with industry. MITI has invited 14 are used jointly by Government and industry, companies to participate in the projects on a long- but those companies that participate in the re- term (l O-year) basis* and will provide allocations search projects receive exclusive licensing rights over 10 years of $43 million each to both the to the patents resulting from these projects for rDNA and bioreactor projects and $17 million to 3 years (22). $22 millon for the mass cell culture project (10). Although some 10 percent of the R&D work (by Federal Republic of Germany expenditure) for MITI’s biotechnology projects is being conducted in the national laboratories** of BMFT implements its biotechnology targeting the Agency for Industrial Science and Technology, policy in the Federal Republic of Germany the bulk of the work (90 percent) is conducted through three categories of support. One category in industry laboratories. To facilitate coordina- is funding for already existing schemes for indus- tion by the Office of Biotechnology Promotion and trial development. Another category is funding the Next-Generation Research Coordination Bu- for third-party organizations to which BMFT con- reau of MITI’s Agency for Industrial Science tributes as part of more generalized funding pro- and Technology, the 14 companies receiving grams for all areas of public research. GBF is the grants under the next-generation biotechnology foremost example of such an organization. Origi- nally founded to conduct generic bioprocessing “The bioreactor project has been di~rided into two subprojects with Llitsubishi Chemicals as the overall leader. Sumitomo Chemi. research to meet the needs of industries (17), GBF cals is the leader of the rDNA project, and Kyowa Hal&o is the leader employs 365 people and has a budget (1982) of of the mass cell culture project (25). $13 million (DM31 millon), of which 89 percent ● ● These include the Fermentation Research Institute, National came from BMFT (13). GBF’s current activities in- Chemical Laboratory for lndustrv, Research Institute for Polymers and Textiles, Government Indusfial Research Institute, and Institute clude general development of bioprocess technol- of Physical and Chemical Research (25). ogy, scale-up of laboratory processes, screening 482 . Commercial Biotechnology: An International Analysis

United Kingdom

*This is the right to choose whether or not to produce and market any good or sewice without having to bid competitively with other firms.

Findings

The governments of four leading industrialized and France-have instituted programs to target competitors of the United States—Japan, the Fed- the development of certain areas of biotechnol- eral Republic of Germany, the United Kingdom, ogy. The targeting policies are intended to reduce Ch. 20—Targeting Policies in Biotechnology ● 483

economic risk and lessen corporate duplication The mix of policy measures to encourage indus- in biotechnology R&D. trial innovation in biotechnology assumes a variety of forms within each country. In Japan and The governments of these four countries took the Federal Republic of Germany, the govern- an interest in biotechnology at different times. ments carry out their policies partly in the form The governments of both the Federal Republic of joint R&D projects with industry. These proj- of Germany and Japan identified the life sciences ects concentrate the resources of the government in the early 1970’s as an area worthy of special and private companies to meet specific objectives government and private sector assistance. Those set by the government. In some cases, the com - of France and the United Kingdom, on the other panics have exclusive rights to the resulting hand, realized the industrial importance of bio- patents; in other cases, the patents are made avail- technology only recently, primarily as a result of able to all interested parties. The British and the recent advances in molecular biology. French Governments, in addition to providing The centralization of government activities support for specific projects, have adopted a dif- varies among countries. In France and the Federal ferent sort of approach: the organization and sup- Republic of Germany, the direction of all activities, port of small firms, such as Celltech in the United from basic research to industrial development, Kingdom and Immunotech in France, to commer- is centralized in a single ministry: the Ministry cialize the results of government-funded basic and of Industry and Research in France and BMFT in generic applied research. Germany. In the United Kingdom, the Department At this early stage, any evaluation of the foreign of Industry is responsible for articulating and targeting programs’ probability for success is pre- executing the Government’s policy to commercial- liminary. History has shown that even the best ize biotechnology, but it must work with other thought-out targeting policies do not guarantee departments that are concerned with the develop- competitive success. whether the targeting pol- ment of science in specific fields, In Japan, at least icies of Japan, the Federal Republic of Germany, three Government departments have major bio- the United Kingdom, or France are superior to technology policies of their own. the U.S. Government policy of funding basic re- These four foreign countries have various proc- search in the life sciences and encouraging R&D esses by which industrialists are brought into the in all industries with tax credits remains to be formulation of their commercial biotechnology seen. The united States currently leads the world policies. Japan, France, and West Germany have in the commercialization of biotechnology. A1- a long history of involving industrialists. The though targeting policies may not be of great im- United Kingdom, on the other hand, has only portance when compared with other competitive been officially involving industrialists in the for- factors, they could tip the balance of equivalent mulation of its biotechnology policy for a short competitive situations in the future. period.

Issue

ISSUE: How could the U.S. Government taken, however, several targeting mechanisms target biotechnology? might be considered.

It is beyond the scope of this report to evaluate The mechanisms for targeting biotechnology in whether the commercialization of biotechnology France, the United Kingdom, the Federal Republic is of sufficient importance to the U.S. economy of Germany, and Japan range from highly coordi- as a whole to warrant targeting efforts by the U.S. nated to loosely organized, but all reflect some Federal Government. If such efforts are under- combination of the following: 484 Commercial Biotechnology: An International Analysis

● Firm-specific assistance. Firm-specific assist- precedents. The types of U.S. Government sup- ance involves choosing a single company or port that were provided for the U.S. semiconduc- group of companies for assistance from the tor industry in its early years are described in government in jointly agreed upon areas of Appendix C: A Comparison of the U.S. Semicon- high-risk R&D. The companies chosen some- ductor Industry and Biotechnology. As it did in times perform the subsidized research in the case of the U.S. semiconductor industry, the consortia. U.S. Government could provide or guarantee low- ● Industrywide assistance. Industrywide assist- interest loans for high-risk R&D in biotechnology. ance involves providing government assist- It could also guarantee Government procurement ance to all companies that perform R&D in of certain products to eliminate some market size a particular area (or funding R&D in a na- uncertainties. A commitment by the Federal Gov- tional laboratory open to all interested in- ernment to purchase certain drugs developed by dustry participants). Low-interest loans or tax biotechnology could spur R&D that otherwise credits for R&D and procurement of new might not be undertaken. products are methods commonly used. The third mechanism, an interagency coordi- ● An interagency coordinating committee. An nating committee, would probably raise the interagency oversight committee without the fewest objections in the United States but would authority to set goals or grant subsidies fa- also be the least substantial. The defunct Inter- cilitates coordination of the policies and agency Working Group on Biotechnology of the actions of government agencies and periodi- White House Office of Science and Technology cally recommends action through the appro- Policy temporarily served this function and priate agencies to address problems hinder- presented its recommendations to the Office of ing the development of biotechnology. Science and Technology Policy in June 1983 (11). The U.S. Government would probably have to Earlier chapters of this report have outlined avoid actions in the category of firm-specific options that could improve U.S. competitiveness assistance. If the U.S. Government were to select in biotechnology. The adoption of the most ac- a few companies for subsidies, demands for equal ceptable of these options in a coordinated fashion assistance would probably arise from the com- would be one way in which the U.S. Government panies that did not receive subsidies. could target biotechnology. For U.S. Government policies in the category of industrywide assistance, there are historical

Chapter 20 references Ch. 20—Targeting Policies in Biotechnology . 485

20.

21.

.9 .

1 (), 22

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23. 12,

13. 24.

14. 15, 25.

26. 16.

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28. 17.

18. 29.

30. 31. 19. Chapter 21 Public Perception Contents

Page Introduction ...... 489 Public Perception in the United States ...... 489 The Public and the Policymaker ...... 489 Factors Influencing Public Perception of Genetic Research and Technology...... 49o Arguments Raised in Debates Over Genetic Research and Technology ...... 492 Difficulties in Weighing the Risks) Costs, and Benefits of Genetic Research and Technology 494 Influence of the Media on Public Perception of Genetic Research and Technology . . . 49s Surveys of Public Perception ...... 496 Implications of Public Perception for Competitiveness in Biotechnology ...... 497 Findings ...... 499 Issues and Policy Options ...... 499 Chapter 21 References ...... 499 Chapter 21 Public Perception

Introduction

Public perception of genetic research and tech- The discussion in this chapter goes beyond bio- nology is a factor that could influence the rate technology as defined in the rest of this report, of commercialization of biotechnology. This and, for that reason, uses the broader terms “ge- chapter considers the factors that may affect netic research” and “genetic technology These public perception of genetic research and tech- broader terms include directed manipulation of nology. As it does not consider the many ways genes in human beings. Biotechnology, as defined by which the public might express its perceptions, in this report, does not include directed change it does not describe various methods that have of genes in human beings and is limited to indus- been or could be used for public participation in trial applications of new genetic technologies to decisionmaking processes, nor does it consider produce useful substances, to improve the charac- the arguments advanced for each. teristics of economically significant plants and animals, and to act on the environment in useful Most of the discussion in this chapter is cen- ways. Because the public does not always make tered on the United States. One of the final sec- a clear distinction between industrial applications tions considers the relative influence of public of novel genetic technologies and the manipula- perception on the commercialization of biotech- tion of genes in humans, biotechnology can elicit nology in the United States and foreign countries. public concerns that are based on incomplete For issues and policy options, readers are referred knowledge and sometimes erroneous assumptions. to OTA’S April 1981 report Impacts of Applied Regardless of the accuracy of public perceptions Genetics: Microorganisms, Plants, and Animals about biotechnology, however, these perceptions (29). could influence the rate of commercialization.

Public perception in the United States

The discussion that follows begins by consider- That public beliefs can significantly influence U.S. ing the U.S. policymaker vis-a-vis the public on policymakers with respect to biotechnology is issues related to science and technology. It then illustrated by the changing attitudes of policy- describes various factors that influence public makers in Massachusetts. In 1976, Boston Mayor perception of biotechnology in the United States. Alfred Vellucci argued strongly for major controls It also reviews some arguments frequently raised on research and development (R&D) using recom- in debates over genetic research and technology, binant DNA (rDNA) technology in Boston and considers difficulties in assessing risks and bene- Cambridge, As a result, the Cambridge Experi- fits of genetic research and technology, discusses mental Review Board was established to deter- the influence of the media on public perception mine whether additional protection for citizens of biotechnology, and provides some survey data. was needed beyond that provided by the National Institutes of Health (NIH) Guidelines for Research Involving Recombinant DNA Molecules (NIH Guide- The public and the policymaker lines). * Mayor Vellucci’s position may be con- ““rhe NIH Guidelines for Research Involving Recombinant DINA In a democratic society, where decisions are klolecules are discussed along with the rDNA research guidelines made by elected representatives, the public plays of other countries in Chapter 15: Health, Safetwv, and En\7ironmen - tal Regulation and Appendix k“: Recombinant D,VA Research a vital role in the acceptance of new technology (guidelines, ih~ironmental Lawrs, and Regulation of Vt’orker Health and the directions in which it will be applied (2). and Safetti\’. 489

25-561 0 - 84 - 32 490 . Commercial Biotechnology: An International Analysis

trasted with that taken by then Massachusetts An accident or perceived negative consequence Governor King when he addressed Harvard Uni- involving genetic research or technology could versity’s symposium on “New Partnerships in Bio- stir up public fears and have a sizable impact on technology” in 1982. Governor King pledged his biotechnology’s further development. This obser- assistance to the establishment of commercial bio- vation is true especially in the United States, technology firms in the State. The different posi- where public involvement in the debates sur- tions taken by Mayor Vellucci and Governor King rounding rDNA technology in its early years was reflect, in part, the changes in public concern over very strong compared with public involvement the risks posed by rDNA technology. in other Western democracies.

Although the level of U.S. public concern about Factors influencing public perception R&D involving rDNA appears lower now than it was in the late 1970’s, it is not nonexistent. As of genetic research and technology of June 1982, two States and nine municipalities The Organisation for Economic Co-Operation had passed laws and resolutions relating to con- and Development identified the following charac- trol of rDNA R&D. The two States are New York teristics of science and technology issues that dis- and Maryland. With the exception of Princeton, tinguish these issues from other public controver- N.J., the municipalities are located in Massa- sies (18): chusetts (Amherst, Boston, Cambridge, Newton, Somerville, and Waltham) and California (Berkeley . rapidity of change; and Emeryville). It is interesting to note that all the raising of new issues; local municipalities involved in formulating laws ● scale, complexity, and interdependence or resolutions are the sites of, or located near, among technologies; major centers of corporate and university re- . irreversibility of effects; search activity in rDNA. Although most of this ● strong public sensibilities about real or imag- legislative activity took place in the late 1970’s, ined threats to human health; and several municipalities in Massachusetts either ● challenging of deeply held social values. amended or originated ordinances or laws in OTA’S April 1981 report Impacts of Applied Ge- 1981. At a minimum, the laws extend the NIH netics: Micro-Organisms, Plants, and Animals (29) Guidelines from institutions receiving NIH funds noted that these factors were especially applica- to all public and private institutions conducting ble to advances in genetics and that they helped rDNA research. Some of them also establish addi- to explain the public controversy over the safety tional occupational and environmental safety re- of rDNA technology. The same factors remain ap- quirements (15). plicable to advances in genetics today. Some are In light of the developments noted above, U.S. discussed below, along with other factors that policymakers probably can expect to be increas- may elicit positive, negative, or mixed public reac- ingly involved in biotechnology issues. one issue tions to developments in genetic research and in biotechnology is the amount of consideration technology. that should be given to the unanticipated consequences of deliberately releasing into the environ- THE TECHNOLOGY IS PERCEIVED TO ment products of rDNA technology (e.g., modified ENDANGER BASIC HUMAN NEEDS plants or microbes with improved capability for Some new developments in science and tech- mineral leaching or pollution control). But this is nology are far more threatening to the societies just the opening wedge to a wider range of socie- in which they arise than are other developments. tal concerns that are emerging as new knowledge In an attempt to understand and predict which leads to new capabilities, The potential capabilities emerging technologies will be most threatening, of genetic research and technology include and hence be most likely to raise issues for pol- human gene therapy, gene surgery, and estima- icymakers, E. W, Lawless makes the reasonable tion of differential susceptibility to disease based assumption that public concern with a new tech- on differences in genetic traits. nology will vary in direct proportion to the degree Ch. 21—Public Perception ● 491

that the technology is perceived to affect basic stein-like subconscious fears when associated human needs (16). The greater the importance with human application. ‘(Cloning” of genes, a of an individual or societal need, and the greater basic technique of rDNA technology, can be con- the impact of the new technology on that need, fused in the minds of those who are not expert the greater will be public concern. in the field with the cloning of individual human beings. Because language is widely understood to At the top of the list of important individual influence perception, the problem of terminology needs developed by Lawless are the functions is not a minor one. Terms that are widely used, controlled by the nervous system, and particu- however, even though inaccurate, misleading, or larly by the brain. Genetic technology has the imprecise, are not easily changed. potential to alter the functioning of the human brain, affecting attitudes, emotions, learning, and PERCEPTION OF BENEFITS FROM memory. Besides the concerns associated with the B1OTECHNOLOGY technology’s potential to alter these characteristics Biotechnology appears to offer potentially major per se, genetic technology may arouse deeper positive contributions to diverse aspects of life. concerns that relate to an individual’s sense of Economic benefits (e.g., cheaper chemicals and self. Aspects of self derive from each person’s drugs), health benefits (e.g., cures for cancer, most basic characteristics—tendencies to elation schistosomiasis, and herpes; improved diagnostic or depression, ambition or sloth, and extroversion tools), agricultural benefits (e.g., saline-tolerant or or introversion, to name a few. If these charac- pest-resistant plants, a vaccine for foot-and-mouth teristics can be modified, what happens to an disease), and even decreased dependence on for- individual’s unique, inviolate self? eign oil (e.g., substitution of biomass for petro- The most fundamental societal need identified leum feedstocks, production of fuel alternatives) by Lawless is sexual activity, reproduction, and are envisioned. * To the extent that these benefits family organization. He notes (16): are perceived by the public, their perceptions of biotechnology are likely to be positive. . . . any events or practices which portend a threat to man’s reproduction or care of children NIH GUIDELINES FOR cause immediate and serious alarm. Technolog- RECOMBINANT DNA RESEARCH ically related cases involving materials which are mutagenic (cause genetic damage) or teratogenic Biological scientists were instrumental in bring- (cause congenital deformities) receive wide cov- ing about the NIH Guidelines for Research Involv- erage by the news media and attention by the ing Recombinant DNA Molecules that established public—the announcement that LSD may cause safety procedures for rDNA research conducted chromosome breakage apparently caused much with NIH funds. The NIH Guidelines apply only more concern to its users than other stated haz- to work supported by NIH funds, but other U.S. ards, and the thalidomide case is almost classic. Government agencies have adopted them volun- The application of genetic technology to the pro- tarily. As far as is known, private industry duction of useful industrial substances is not observes them as well. always clearly distinguished from the genetic ma- On the one hand, the history of the NIH Guide- nipulation-or “genetic engineering’’-of higher lines should produce a positive perception of organisms. Following Lawless, if biotechnology responsible action with regard to genetic research is associated with the capability to alter human and technology by the scientists concerned and reproductive cells, and hence future human gen- the Federal Government. On the other hand, NIH erations, it is likely to be perceived as threatening. is in a position of potentially conflicting interests. It serves both as a quasi-regulator of genetic TERMINOLOGY research through the NIH Guidelines and as a pro- As has been pointed out by various authors moter of genetic research through its sizable (20,21), some of the terminology of applied genetics has negative overtones. The phrase “genetic “For a re}rimt of the state of the art in achieving these benefits, engineering, ” for example, may raise Franken- tht’ reader is referred to chs. 5 through 10 of this report, 492 . Commercial Biotechnology: An International Analysis

funding of genetic research. The degree to which where the smallest incident may raise heated the public perceives a potential conflict of interest public emotions. and its influence on public perception of biotechnology are unknown. Arguments raised in debates over genetic research and technology THE IMAGE OF THE SCIENTIST Some members of the public appear to be dis- Five broad categories of arguments that are fre- mayed by the fact that some scientific researchers quently raised in debates over genetic research have turned into entrepreneurs. The question of and technology are briefly summarized below. It the appropriateness of private gain from research should be noted that the discussion that follows supported by public funds was aired as part of is in the simplest possible terms. The purpose is joint hearings in 1981 and again in 1982 by the to indicate some topics of controversy rather than Subcommittee on Investigations and oversight to describe the considerable subtlety of some of and the Subcommittee on Science, Research, and the positions that have been taken. Technology of the U.S. House of Representatives FREEDOM OF INQUIRY (26,27). Some people argue that scientists should be free There is no reason that scientists should not to pursue any inquiry they choose, and hence that share in financial rewards that accompany ap- genetic research should not be restricted in any plication of the results of their research, but the way. Others disagree and feel that at least some deliberate pursuit of profits makes a scientist also forms of research are subject to restraint, H. a businessman. It can be argued that a major rea- Jonas takes the latter position and argues that son for supporting research with public funds is unqualified free inquiry ceases as a preeminent that such research leads to commercial products right when science moves from contemplation to that benefit society and also generates more action (12). As soon as science involves action (e.g., public funds through taxes levied on new busi- conducting experiments with real apparatus and nesses. However, the fact that some scientists real subjects) rather than just thought, it is subject have become millionaires through corporations to legal and moral restraints, as all actions are, they have helped to establish has disturbed some people. Simple envy is not the sole reason for RISK OF CATASTROPHIC CONSEQUENCES unease; more important may be the public image Some people argue that genetic research should of the scientist. Although U.S. cultural tradition be banned unless the risk of catastrophic conse- has supported, and even encouraged, the entry of engineers and inventors into the business quences can be shown to be zero. At the other extreme, some people argue that any level of risk world (e.g., Edison), it has not done the same for is acceptable. Although either of these extreme individuals with established careers in pure positions may be taken by individuals, neither is science. * likely to be taken by society. What constitutes an COMMENT acceptable level of risk of catastrophic consequences, however, is a major societal issue, in part A fundamental reason that rDNA technology because of the difficulty of assessing both risks may be “so inflammatory” is that it elicits a mix- and benefits. The fundamental disagreement on ture of concerns from many categories (9). These both this and the preceding topic is where the concerns range from perceived positive benefits line is to be drawn between two extreme positions to fears associated with research on human sub- that can be taken. The position of the line is a jects. The point for the policymaker is that, societal decision that is never permanent and that because of the wide range of concerns, genetic varies across cultures and over time. research and technology is a volatile area, one THE TECHNOLOGICAL IMPERATIVE

“For a discussion of’ universit~/industr.y relationships in biotech- Some people argue that what is technologically nology, see Chapter 17. [Jniversit.vdndus[qv Relationships. possible will eventually be done, regardless of Ch. 21—Public Perception 493

moral and ethical guidelines. Others disagree. As As noted above, arguments for a prohibition S. P. Stich points out, successful animal breeding against genetic research are sometimes based on has been carried out for centuries, yet controlled religious grounds. Fundamentalist and religious breeding is not done in humans even though it has objections have played a major role in U.S. debates been known for a long time that it could be (24). over genetic research and technology in the past Thus, people have differing views on whether so- and are likely to continue to do so in the future. ciety is capable of deciding when genetic manip- Recognizing the importance of religious views in ulation of traits is and is not permissible. such debates, the President’s Commission for the Study of Ethical Problems in Medicine and Bio- medical and Behavioral Research (hereafter re- “WE SHOULD NOT PLAY GOD” ferred to as the President’s Commission) asked the General Secretaries of the National Council Some opponents of genetic research argue that of Churches, the Synagogue Council of America, humans should not “play God” by manipulating and the United States Catholic Conference to the genes of other organisms or themselves. De- “elaborate on any uniquely theological considera- spite its use of the term “playing God, ” this argu- tions underlying their concern about gene splicing ment is based on areligious as well as on religious in humans” (2 I). The scholars concluded (21): grounds. Both types of arguments are briefly con- . . . contemporary developments in molecular sidered below. biology raise issues of responsibility rather than To opponents of genetic research who argue being matters to be prohibited because they on religious grounds that humans should not ma- usurp powers that human beings should not pos- nipulate genes, proponents respond that humans sess. The Biblical religions teach that humans behave manipulated the genes of other organisms ings are, in some sense, co-creators with the Supreme Creator. for thousands of years. Long before the laws of genetics were known, humans were successful Furthermore, Pope John Paul II, who has been in changing the characteristics of plants and critical of genetic manipulation, “recently told a animals by selectively breeding them for desired convocation on biological experimentation of the characteristics. In addition to altering the genes Pontifical Academy of Science of his approval and of other organisms, humans also have altered support for gene splicing when its aim is to their own gene pool. Throughout history, because ‘ameliorate the conditions of those who are af- some persons are more desirable than others as fected by chromosomic diseases, because this of- mates, some genes have tended to increase in the fers hope for the great number of people affected gene pool while others have tended to decrease. by these maladies’ “ (21). More recently, medical advances have permitted It should be noted, however, that the religious persons with genetic diseases, such as hemophilia community’s position is in a state of flux. As illus- and phenylketonuria, to live and reproduce (17). tration, a resolution was issued on June 8, 1983, But, opponents argue, the genetic changes that that urged the U.S. Congress to ban genetic have been brought about so far have been limited changes affecting human reproductive cells. The and did not involve crossing fundamental species resolution was signed by 64 religious leaders rep- barriers. So far, this argument is correct in that resenting several faiths. The actual positions of species are defined by the fact that fertile hybrids the signatories of the resolution are difficult to between them do not occur in nature. However, decipher, because some church officials who some opponents of research involving genetic signed the resolution appear to be in favor of manipulation further argue that the forces of genetic changes that would repair the effects of evolution have led to separation of the species and genetic diseases. Some forms of genetic defect, that breaking down the separation will be dele- such as Tay Sachs disease, may be best eliminated terious or separation would not have occurred through changes that affect the reproductive in the first place. The accuracy of this argument cells. Such changes would be banned by the reso- is not known. lution (3)11,14)19). —

494 ● Commercial Biotechnology: An International Analysis

GENETIC DIVERSITY Difficulties in weighing the risks, Another area of controversy is the potential costs, and benefits of genetic research effect directed genetic manipulation may have on and technology genetic diversity, i.e., the total number of different kinds of genes available to a population. All The central question raised by genetic research members of a given species can mate with any and technology is how risks, costs, and benefits other member of that species, so the total number are to be weighed. This is a question surrounded of genes available to the species population is the by problems. sum of all the different kinds of genes in all One problem is that of establishing the prob- members of the population. Nevertheless, certain abilities that various risks and benefits will occur. combinations of genes may be perceived as par- Some probabilities can be estimated more accu- ticularly desirable. In agriculture, for example, rately than others because of differences in the most farmers in a given location often plant the assumptions that must be made and in the avail- same strain of a particular crop that they perceive ability of data that are useful in making estimates. as especially desirable; then all members of that Estimating the probability that an organism will crop in a given location are genetically identical. escape from a laboratory, for example, involves When a new pest threatens the crop, much of different assumptions than estimating the prob- the crop will be lost, because the genetic simi- ability that an organism released to the environ- larity of the plants results in a similar suscepti- ment (e.g., a genetically modified plant or a bility to disease. The corn blight of 1970 is a case microbe designed to control oil spills) will adverse- in point (10). ly affect that environment.

Opponents of directed genetic manipulation Then, there is the problem of measuring bene- fear that it may result in increased genetic uni- fits, risks, and costs, First, it is necessary to decide formity with a consequent loss of a species’ re- whether the measure should be in economic sistance to future threats. Whether such fears are terms (i.e., dollars) or human terms (e.g., lives justified depends, of course, on how the orga- saved or lost, illnesses prevented, or some nisms resulting from genetic manipulation are measure of quality of life). If a measure can be used. selected, then there is the problem of applying it. Furthermore, if different measures are appro- COMMENT priate for costs, benefits, and risks, how should Genetic technology, particularly when direct they be compared? Although methods have been applications to humans are considered, raises developed to deal with these questions, including strong public concerns. The degree to which pub- cost-benefit and cost-ffectiveness analysis, they lic concerns about direct human applications of are always fraught with assumptions that become genetic research and technology are likely to in- particularly acute with a new technology. * fluence the commercial development of biotech- Finally, like most new technologies, some appli- nology as defined at the outset of this report is cations of the new genetic technologies will have unclear. Some influence is likely, however, consequences that cannot be envisioned. These because of a failure on the part of the public to make a clear distinction between human and non- human applications of genetic technology, a prob- “For a discussion of some of the limitations of techniques such as cost-benefit analysis and cost~ffectiveness analysis, see OTA’S lem that is exacerbated by multiple uses of terms 1980 report 7he Implications of Cost-Effectiveness Anafysis of such as cloning. Medical Technology (28). Ch. 21—Public Perception 495

consequences may be high in benefit or high in mission would review developments in “genetic cost, but some are certain to alter significantly engineering” that have implications for human any calculations that are made today. application and examine the medical, legal, ethical, and social issues that might accompany such ap- In sum, assessment of benefits, risks, and costs, plication. As of this writing, H.R. 2788 has been except where empirical data are available, is a incorporated into the Health Research Education subjective rather than an objective process, as is Act of 1983, H.R, 2350. the assigning of relative value to various benefits, risks, and costs. Unfortunately, the most interesting and significant contributions of genetic re- Influence of the media on pubIic search are those for which there are no empirical data. While risk assessment analysis was help- perception of genetic research ful several years ago when concern focused on and technology the safety of laboratory research with rDNA, it The media bring knowledge of new discoveries may be of little use in considering many issues and applications of genetic research to the atten- that may emerge as the technology matures, such tion of the public and thereby play a role in public as whether to release genetically modified orga- perception of biotechnology. The role of the nisms to the environment, media extends beyond simple reportage of facts, What, then, can be done? In a thoughtful analy- however, because television, radio, and print sis of gene splicing as applied to humans, the media have time or space limitations that result President’s Commission recommends that an in selective coverage. In selecting items for cover- oversight group be established (21): age, the media impose value judgments on the relative worth of possible news items. The media . . . through which the issues generated by genetic engineering can continue to receive appropri- also determine how the items they consider news- ate attention. These issues are not matters for a worthy will be covered and thus vary the amount single day, deserving of only occasional attention. of coverage and the tone of coverage. Thus, it is They will be of concern to the people of this coun- helpful to explore the role of the media in public try—and of the entire globe—for the foreseeable perception of biotechnology further. future; indeed, the results of research and devel- June Goodfield, in an essay entitled “Reflections opment in gene splicing will be one of the major determinants of the shape of that future. Thus, on Science and the Media” (8), traces the shifting it is important that this field, with its profound relationship between scientists and the media in social and ethical consequences, retain a place at American society and the reasons for present day the very center of “the conversation of mankind.” dissatisfaction between these two groups. Good- field’s orientation is to the public, which, she The President’s Commission suggests several ob- believes, both professions serve. The media and jectives to guide the oversight group. Education, scientists, Goodfield observes, share a common it states, should be a primary responsibility— aim in their respective spheres, namely, “the education of the public about science and educa- public expression of truth.” Different pressures, tion of the scientific community about the social however, constrain achievement of this ideal for and ethical implications of emerging capabilities each profession. Constraints on the print media in genetic technology. include the need to create interest, the basic struc- That Congress may perceive that the recom- ture of newspaper reports, and the constant need mendation of the President’s Commission for an for newness. The problems are exaggerated for oversight body reflects a broader public interest radio and television. Scientists, on the other hand, is suggested by the introduction of H.R. 2788 to are constrained by the nature of their work and the 98th Congress (Apr. 27, 1983) by Represent- their methodology. No scientist likes to “go public” ative Albert Gore. H.R. 2788 would establish the before being sure that his or her findings are re- President’s Commission on the Human Applica- producible. The tendency among scientists, there- tions of Genetic Engineering. The proposed Com- fore, is toward caution. There is also, for a variety 496 . Commercial Biotechnology: An International Analysis

of reasons, an aversion among scientists to popu- Surveys of public perception larization. Thus, the different forces acting on each profession tend to polarize scientists and the Given all the above, it is reasonable to ask for media rather than bring them together. actual data on public perception of biotechnology, or at least of the broader area of genetic research In considering the relationships among scien- and technology. Unfortunately, such data are tists, the public, and the media, Goodfield is par- extremely limited. ticularly concerned with three aspects: 1) the obligation of science to inform, 2) the duty of the Two early surveys of the U.S. population were public to become informed, and 3) the appropriate conducted in the 1970’s with the following results role of the journalist relative to science and the (6): public. The journalist, she believes, not only must ● In 1977, the National Assessment of Educa- help the public distinguish what is factual from tional Progress surveyed the attitudes of what is speculative but also must help people adults 26 to 35 years in age toward rDNA judge between scientists who differ. technology. About two-thirds of the re- Some of Goodfield’s observations are echoed by spondents opposed its use on any life form. William Stockton, former Director of Science ● In 1979, the National Science Board con- Times of the New York Times. At a recent New ducted a survey of 1,635 adults. Sixty-five York Academy of Sciences meeting, Stockton cited percent of the respondents believed that an increasing number of science publications, studies relating to creating new life forms such as Science 80 and the Science Times, as indi- should not be conducted. cators that scientific journalism is moving into an era of scientific interpretation (25). In the 1980’s, Cambridge Reports, Inc., included five questions on “genetic engineering” in its The possible roles for the media vis-a-vis genet- survey for the first quarter report of 1982 (5) and ic research and technology include: one question on behalf of the American Chemical . reporting the facts; Society in its survey for the firstquarter report ● separating facts from speculation; of 1983 (1). The responses to the five questions ● presenting issues; in the 1982 survey showed (5): indicating which individuals or groups have ● About half the people surveyed either hadn’t a stake in each side of an issue and why; heard the phrase “genetic engineering” or ● promoting, or downplaying, specific aspects wouldn’t guess what it meant. of genetic technology; and ● Of those who had heard of private corpora- ● educating the public in genetic science and tions “getting into the field of ‘genetic technology, both their methods and their engineering’ or biotechnology” (roughly 40 content. percent), and who were willing to take a posi- Although many media people would probably tion as to whether this was good or bad, posi- claim that their role is limited to reporting the tive sentiments (15 percent) outweighed nega- facts and separating these from speculation, their tive (8 percent) by almost two to one. role is clearly larger. The media promote or ● Of those expressing an opinion about “genetic downplay a technology, if only by virtue of the engineering, ” 25 percent believed it would fact that some news items are selected for print bring major benefits to society; 11 percent or featured in a radio or television spot while believed it would endanger public health and others are rejected. Furthermore, the media’s pro- safety; 44 percent didn’t know; and 20 per- motional role is sometimes far more active than cent believed it would bring both benefits simple selection. and dangers. Ch. 21—Public Perception 497

● Respondents with higher income levels ● Sixty-two percent of the public were very or and/or higher levels of education were more somewhat concerned about ‘(genetic engi- likely to expect major benefits from “genet- neering” in 1982. ic engineering” than those with lower in- ● In 1982, those who had heard of “genetic comes and/or less education. engineering” were asked how it would be ● Of respondents able to choose between gov- applied (by responding to a list of possible ernment regulation and self-regulation, 28 application areas). Health was selected most percent favored the former and 16 percent frequently (61 percent), followed closely by the latter. Combination of both government test tube babies (58 percent), and farming (57 regulation and self-regulation and “don’t percent), Responses to other application areas know” made up the balance. were: food processing (33 percent ), forestry (31 percent), waste management (30 percent), The single question in the 1983 survey by Cam- chemical research (28 percent), pollution con- bridge Reports, Inc., asked what respondents trol (20 percent), and energy (19 percent). thought of when the term “DNA” was mentioned. Sixty-three percent didn’t know; 27 percent Yankelovich, Skelly, and White believe that, responded with relevant but incomplete answers; although the intensity of public concern with 2 percent gave an accurate definition; and 2 “genetic engineering” is low at present, there is percent said it was “poison” (1). a significant latent level of public concern that could surface if adverse consequences associated In 1981 and 1982, Yankelovich, SkeIly, and with applied genetics were reported (13). White surveyed the general public with regard to “genetic engineering” (13). Their survey popula- The survey data just cited suggest several tion is a nationwide stratified random sample of things: 2,500 persons aged 16 and over. Results are con- ● A relatively small fraction of the American sidered predictive of the U.S. population as a public is fully informed about genetics in gen- whole at a confidence level of 98 percent. The eral and, undoubtedly, about biotechnology results showed the following: in particular. ● The percentage of the general public believ- The more informed public is more likely to ing that the benefits of “genetic engineering” view applied genetics favorably. than unfavor- outweigh the risks increased from 31 percent ably. in 1981 to 39 percent in 1982. ● There are real concerns about applied genet- ● Seventy percent of the public had heard of ics. “genetic engineering” in 1982.

Implications of public perception for competitiveness in biotechnology

As a factor influencing competitiveness in bio- representative forms of government and the inde- technology, the importance of public perception pendence of the media. varies greatly both across and within countries. Considering first democratic v. nondemocratic Among democratic nations, variability in the countries, public perception as a factor influenc- importance of public perception as a factor influ- ing competitiveness will be more important in the encing the commercialization of biotechnology is democracies than in those countries without such a function of many cultural characteristics. of forms of government, simply because of the these characteristics, the traditions of the media, greater public input permitted by democratic, the degree to which the public participates in deci - 498 . Commercial Biotechnology: An International Analysis

sionmaking on scientific and technological issues, of resources to produce drugs using biotechnol- and the level of public education in science and ogy with markets that are potentially large and technology are particularly important. profitable v. drugs for treating rare diseases or diseases endemic to the Third World, where prof- Of the six countries examined in this assess- its are more limited. Ethical issues are also raised ment—the United States, Japan, the Federal Re- if rDNA technology permits the manufacture of public of Germany, the United Kingdom, Switzer- drugs that influence learning, memory, and per- land, and France—public perception appears to sonality traits, for decisions will be needed on have the greatest importance in the United States. whether such substances should be produced and The basis for this statement is that public debate perhaps on how their distribution should be over the establishment of rDNA R&D laboratories handled and controlled. in the late 1970’s was much greater in the United States than in the other countries. The behavior Use of normal DNA to treat the body cells of of the public and the media in the United States patients with genetic diseases such as sickle cell and other countries in the years since has anemia is another area where rDNA raises no changed little, and thus, public involvement as a new ethical issues beyond those associated with factor in competitiveness currently remains of other treatment of sick persons. As geneticist A. greatest importance in the United States. G. Motulsky points out, this therapy is (17):

Public perception will be a factor in determining . . . conceptually no different from any therapy competitiveness of the United States in the com- in medicine that attempts to improve the health mercialization of biotechnology primarily in the of a sick patient. The only difference is that DNA, event that genetic research or technology results rather than other biological, drugs, or surgery, is used as the therapeutic modality. in actual or perceived adverse consequences. In the case of an accident or perceived negative con- An application of genetic research and techno- sequence, several factors would operate to make logy that does involve new ethical issues is use public perception of genetic research and tech- of genetic markers for diagnosis of susceptibility nology of particular importance in the United to disease. This application raises questions per- States compared to other countries: the role of taining to private v. societal goals and confiden- the media, traditions regarding public participa- tiality. Similarly, any genetic manipulation that tion in scientific and technological issues, and the alters the reproductive cells is “a qualitative depar- public’s level of education in such issues. In this ture from previous therapies since this would context, “level of education” requires further affect future generations” (17). elaboration. Rational consideration of issues raised by genet- A technologically literate public can discrimi- ic research and technology is often confounded nate between different uses of genetic research by failure to discriminate between different types and technology; this is important because dif- of applications. The problem is compounded, ferent uses are associated with different issues. because, as pointed out in Chapter 14: Person- Some uses do not raise any new issues; others do. nel Availability and Training, scientific education Thus, use of rDNA technology to produce drugs in the United States is falling behind that of many and biologics that replace similar products pro- industrialized nations. These factors could act to duced by chemical synthesis or extraction is the disadvantage of the United States in the simply an alternate means of production and in worldwide commercial development of biotech- itself raises no ethical issues (17). An ethical issue nology should an accident or other adverse con- for the pharmaceutical industry may be allocation sequence occur. Ch. 21—Public Perception ● 499

Findings

Public perception of the risks and benefits of negative consequence of biotechnology. In such biotechnology is of greater importance in coun- a case, the level of scientific and technological tries with representative, democratic forms of literacy in the various competitor countries be- government than it is in countries with other comes important, as judgments must be made forms of government, simply because of the concerning complex issues. Unfortunately, at least greater attention paid to public opinion in the in the United States, survey data show that only democracies, and the independence of the media. a small fraction of the public is fully informed con- As a factor influencing competitiveness, public cerning genetics in general and therefore, un- perception is probably of greater importance in doubtedly, about biotechnology in particular. Sur- the United States than it is in Japan, the Federal vey data also suggest that there are real concerns Republic of Germany, the United Kingdom, Swit- in the public mind concerning applied genetics. zerland, or France. Given the lack of public knowledge, it is parti- A number of factors influence the relative cularly important that the media play a respon- importance of public perception as a factor influ- sible role with respect to biotechnology. The role encing competitiveness. In all countries, the im- of the media extends beyond mere reporting of portance of public perception will be greatly in- the facts. How far the media should go beyond creased in the event of an accident or perceived such reportage deserves consideration.

Issues and policy options

OTA’S first assessment in the field of genetics, Impacts of Applied Genetics: MicroOrganisms, Plants, and Animals (29), was published in April 1981 and contained a chapter titled “Genetics and Society. ” The issues that arise from the material presented in the preceding pages are similar to

Chapter 21 references 500 Commercial Biotechnology: An International Analysis

12. Jonas, H., "Freedom of Scientific Inquiry and the 23. Sinsheimer, R., "Troubled Dawn for Genetic Public Interest," Contemporary Issues in Bioethics, Engineering," Contemporary Issues in Bioethics, 2d 2d ed., T. L. Beauchamps and L. Walters (eds.) (Bel ed., T. L. Beauchamps and L. Walters (eds.) (Bel monC Calif.: Wadsworth, Inc., 1982). mont, Calif.: Wadsworth, Inc., 1982). 13. Kaagan, L., "Assessment of Current Public Views 24. Stich, S. P., "The Recombinant DNA Debate," Con of Biotechnology and Their Implications," pre temporary Issues in Bioethics, 2nd ed., T. L. Beau sented at the Seminar on Social and Ethical Issues, champs and L. Walters (eds.) (BelmonC Calif.: Industrial Biotechnology Association, Denver, Wadsworth, Inc., 1982). Colo., June 21-22, 1983. 25. Stockton, W., "Making Editorial Decisions for 14. Kalette, D., and Fink, D., "Hopes To End Birth Science Times/' Science and Public Policy II, Ann. Defects, Cure Cancer," USA Today, June 10, 1983. N.Y. Acad. Sci. 387:23-27, 1982. . 15. Krimsky, S., Baeck, A., and Bolduc, J., Municipal 26. U.S. Congress, House Committee on Science and and State Recombinant DNA Laws, prepared for Technology, Commercialization of Academic Bio Thp. Roston Np.ie-hhorhood Network. June 1982. medical Research hearings before the Subcommit 16. L~~~l;;;,--E-. -W-~--T;~h~~iog; -~n-d --S~~i~j Sh~~k tee on Investigations and Oversight and the Sub (Brunswick, N.J.: Rutgers University Press, 1977). committee on Science, Research and Technology, 17. Motulsky, A. G., "Impact of Genetic Manipulation June 8-9, 1981 (Washington, D.C.: U S. Government on Society and Medicine," Science 219:135-140, Printing Office, 1982). 1983. 27. U.S. Congress, House Committee on Science and 18. Nichols, G. K., "Technology on Trial: Public Percep Technology, University-Industry Cooperation in tion in Decisionmaking Related to Science and Biotechnology, hearings before the Subcommittee Technology" (Paris: Organisation for Economic Co on Investigations and Oversight and the Subcom Operation and Developmenc 1979). mittee on Science, Research and Technology, June 19. Norman, D., "Clerics Urge Ban on Altering 16-17, 1982 (Washington, D.C.: U.S. Government Germline Cells," Science 220:1360-1361, 1983. Printing Office, 1982). 20. Padwa, D., "Let's Clean Up Our Language," Genetic 28. U.S. Congress, Office of Technology Assessment, Engineering News 2(1):4, 1982. The Implications of Cost-Effectiveness Analysis of 21. President's Commission for the Study of Ethicai Medical Technology, OTA-H-126, \Vashington, Problems in Medicine and Biomedical and D.C., August 1980. Behavioral Research, Splicing life: A Report on the 29. U.S. Congress, Office of Technology Assessment, Social and Ethical Issues of Genetic Engineering Impacts of Applied Genetics: Micro-Organisms, IVith Human Beings (Washington, D.C.: U.S. Gov Plants, and Animals, OTA·HR-132, Washington, ernment Printing Office, 1982), D.C., April 1981. 22. Science News, "What is DNA?," 123:366, 1983. Appendixes Appendix A Definitions of Biotechnology

The following is a list of definitions of biotechnology France used by the governments and organizations of various “Biotechnology consists of the industrial exploitation countries in assessments of the developing field within of the potential of micro-organisms, animal and plant their jurisdictions. Most of these definitions encom- cells, and subcellular fractions derived from them” (6). pass both old and new biotechnology. * International Unions of Pure and Australia Applied Chemistry (1981) [Biotechnology is] ‘(the devising, optimizing, and scaling-up of biochemical and cellular processes for [Biotechnology is] “the application of biochemistry, the industrial production of useful compounds and biology, microbiology, and chemical engineering to in- related applications. This definition envisages biotech- dustrial processes and products (including here the nology as embracing all aspects of processes of which products in health care, energy, and agriculture) and the central and most characteristic feature is the in- on the environment” (3). volvement of biological catalysts” (2). “In its broadest sense, biotechnology encompasses Japan industrial processes based on biological systems involv- IBiotechnology is] “a technology using biological phe- ing naturally occurring micro-oganisms, micro-orga- nomena for copying and manufacturing various kinds nisms that have been modified by genetic engineer- of useful substances” (7). ing, or isolated cells of plants or animals, and the genetic manipulation of cells to produce new strains of plants or animals” (4). The Netherlands [Biotechnology is) “the science of the production Canada processes based on the action of microorganisms and their active components, and of production processes [Biotechnology is] “the application of biological involving the use of cells and tissues from higher or- organisms, systems, or processes to manufacturing or ganisms. Medical technology, agriculture, and tradi- service industries” (9). tional crop breeding are not generally regarded as bio- [Biotechnology is] “the utilization of a biological pro- technology” (10). cess, be it via microbial, plant or animal cells, or their constituents, to provide goods and services” (11). Organisation for Economic European Federation of Biotechnology Co-Operation and Development [Biotechnology is] “the integrated use of biochemis- Biotechnology consists of “the application of scien- try, microbiology, and engineering sciences in order tific and engineering principles to the processing of to achieve technological (industrial) application of the materials by biological agents to provide goods and capabilities of micro-organisms, cultured tissue cells, services” (3). and parts thereof” (3). Switzerland Federal Republic of Germany The Swiss Government uses the same definition the “Biotechnology deals with the introduction of bio- European Federation of Biotechnology uses (8). (See logical methods within the framework of technical definition above.) processes and industrial production. It involves the application of microbiology and biochemistry together with technical chemistry and process engineering” (5). United Kingdom [Biotechnology is] “the application of biological or- ● The distinction between old and new biotechnology as used in this report ganisms, systems or processes to manufacturing and is noted in Chapter I: Erecutive Surmna~v. service industries” (1).

503 504 ● Commercial Biotechnology: An International Analysis

Appendix A references 1. Advisory Council for Applied Research and Develop- nique (General Delegation of Scientific and Technical ment, Advisory Board for the Research Councils, The Research) (1980), cited in M. Vaquin, “Biotechnology in Royal Society, Biotechnology: Report of a Joint Work- France,” contract report prepared for the Office of ing Party (London: H.M. Stationery Office, March 1980). Technology Assessment, U.S. Congress, December 1982. 2. Biotechnology for Australia, Report to the Executive of 7. Japan External Trade Organization, “Research on Bio- the Commonwealth Scientific and Industrial Research technology in Japan,” Japan Industrial and Technological Organisation by a Special Committee of Review, Sydney, Bulletin (Tokyo: Ministry of International Trade and In- Australia, June 1981. dustry, 1982). 3. Bull, A. T., Holt, G., and Lilly, M. D., Biotechnology: In- 8. Jasanoff, S., ‘(Public and Private Sector Activities in ternational Trends and Perspectives (Paris: Organisa- Biotechnology: Switzerland,” contract report prepared tion for Economic Co-Operation and Development, for the Office of Technology Assessment, U.S. Congress, 1982). January 1983. 4. Commonwealth Scientific and Industrial Research 9. Miller, J., Fish, K., Basuk, J., et al., Biotechnology in Organisation, Biotechnology Reseamh and Development, Canada: Premises and Concerns (Ottawa: Science Coun- Sydney, Australia, 1981. cil of Canada, 1981). 5. Deutsche Gesellschaft fiir Chemisches Apparatewesen 10. Netherlands Study Centre for Technology Trends, (German Society for Chemical Engineering), “Biotech- Biotechnolo~: A Dutch Perspective (Delft, The Nether- nology: A Study of Research and Development,” con- lands: Delft University Press, 1981). tract report prepared for the Federal Ministry for 11. Task Force on Biotechnology, Biotechnology:A Develop- Education and Science and the Federal Ministry for Re- ment Plan for Canada (Ottawa: Minister of State for search and Technology, Frankfurt, 1974. Science and Technology, 1981). 6. Delegation Generale a la Recherche Scientifique et Tech- Appendix B Country Summaries

OTA identified five foreign countries as the major industry. Since then, led by the promise of interferon potential competitors of the United States with respect and monoclinal antibodies (MAbs) in cancer treatment to the commercialization of biotechnology: Japan, the and the potential of producing unlimited quantities of Federal Republic of Germany, the United Kingdom, each through biotechnology, more than 150 Japanese Switzerland, and France. This appendix summarizes companies have rapidly reorganized their R&D sys- information about those countries presented else- tems, equipped research institutes, and recruited new where in this report. It also describes the activities in staff to evaluate the applications of biotechnology. The biotechnology of Sweden, the Netherlands, Australia, breakdown by funding sector of Japan’s total expend- Israel, Canada, the U. S. S. R., and Brazil. itures for recombinant DNA (rDNA) related R&D for fiscal year 1981 is illustrated in figure B-1. Japan Japanese pharmaceutical companies, whose penetration of international markets heretofore has been low, INTRODUCTION show promise of becoming increasingly competitive with the United States in world pharmaceutical mar- The commercialization of biotechnology in Japan is kets. The Japanese pharmaceutical market is currently accelerating over a broad range of industries, many second only to the U.S. market in size. In addition to of which have extensive experience in bioprocessing. the pharmaceutical companies, Japanese companies Leading Japan’s drive to commercialize biotechnology from the food, chemical, textile, and pulp and paper are large established Japanese companies such as industries have also begun to further exploit their ac- Takeda Pharmaceutical, Shionogi Pharmaceutical, Mit- cumulated experience in bioprocessing by diversify- subishi Chemical, Sumitomo Chemical, Toray Indus- ing into newly developing pharmaceutical product tries, Suntory, and Ajinomoto. The general chemical and petrochemical firms especially are leaning strongly to biotechnology, and some of them are making rapid advances in research and development (R&D) Figure B-l.— Breakdown of Japan’s Expenditures through their efforts to make biotechnology a key for Recombinant DNA Technology R&D, technology for the future. Fiscai Year 1981 The Japanese Government, which fell behind in starting to form a national support structure, has em- barked on building a foundation for R&D and is demonstrating ambitious movement by forming Govern- ment and private collaborative projects with the motto “catch up, get ahead” (8). As biotechnology product markets begin to develop, Japan’s expertise in the art of bioprocessing will provide Japanese companies with significant competitive strengths.

INDUSTRY All of the large private sector Japanese companies using biotechnology have come from established industries. In this respect, Japan differs from the United States, where more than 100 new biotechnology firms (NBFs)* have been started specifically to exploit biotechnology. Japanese companies did not start investing in new biotechnology until after 1980, when publicity spread about its potential applications to the pharmaceutical

● NBFs, as defined in Chapter 4: Firms Commercializing Biotechnolog\~, are Total rDNA expenditure = $38.1 million (Y 9.5 billion) firms that have formed specifically to capitalize on developments in biotech- SOURCE. Off Ice of Technology Assessment, based on data from Science and nology Techno/ogy~ v In Japan, April/June 1983

25-561 0 - 84 - 33 506 Commercial Biotechnology An International Analysis

markets, * The field of specialty chemicals will be plied research)* and applied programs in biotechnol- another highly competitive area of Japanese involve- ogy were the largest and best funded Government pro- ment. Japan is already the dominant international grams in Japan, and even today STA’S programs are force in amino acid production, and two of the largest comparable in scale to those of MITI (see below). The amino acid producers, Ajinomoto and Kyowa Hakko agency is currently funding corporate generic applied Kogyo, have production plants in the United States. research projects to develop DNA synthesis tech- Japanese companies’ current emphasis on research in niques, bioreactors, immobilized enzyme processes, specialty chemicals such as enzymes and amino and screening techniques for new micro-organisms, and organic acids reflects efforts to pull the Japanese new medicines. petrochemical industry out of its present decline in Mfi did not enter the biotechnology field until 1981. international markets. The urgency of this task is That year, MITI established its “System for Promotion greater in Japan than in the United States, because of Research on Next-Generation Industrial Technolo- Japanese petroleum-based industries such as chemi- gies,” an overall plan to promote “next-generation” in- cals and textiles are solely dependent on imported dustrial technologies, including biotechnology (11). To petroleum feedstocks. Although some specialty chemi- focus MITI’s overall biotechnology effort and to over- cals have traditionally been made by bioprocesses, op- see its three next-generation biotechnology projects, portunities for using bioprocesses to make specialty an Office of Biotechnology Promotion was established chemicals previously made from petroleumderived within MITI’s Basic Industries Division. feedstocks have arisen with biotechnology. Producing MITI’s three next-generation projects in biotechnol- specialty chemicals using biotechnology offers Jap- ogy— bioreactors, rDNA technology, and mass cell cul- anese companies in these industries an opportunity ture-are a part of a 10-year program that is specifical- to reduce their dependence on petroleum and at the ly designed to develop and diffuse new biotechnology same time switch from the production of high-volume, among Japanese companies. * * MITI has invited 14 low value-added products to products with higher companies to participate in the projects and will pro- profit margins. vide allocations over 10 years of $43 million each to the rDNA and bioreactor projects and $17 million to GOVERNMENT TARGETING POLICIES AND $22 million for the mass cell culture project (2). Some FUNDING OF BASIC AND APPLIED RESEARCH 10 percent of the R&D work (by expenditure) for Within the Japanese Government, a consensus re- MITI’s biotechnology projects is conducted in the na- garding the importance of biotechnology to the future tional laboratories of MITI’s Agency for Industrial health of the Japanese economy has been achieved. Science and Technology. Ninety percent of the work Three Government departments in Japan—the Science is conducted in industry laboratories. and Technology Agency (STA), the Ministry of Inter- To facilitate coordination, the 14 companies that national Trade and Industry (MITI), and the Ministry MITI has invited to participate in the biotechnology of Agriculture, Forestry, and Fisheries (MAFF)—have projects have been organized into the Biotechnology specifically targeted the development of biotech- Development Research Association. This association nology. has its own central office through which the various STA was the first to demonstrate an interest. As companies communicate with MITI, but otherwise early as April 1971, STA’S advisory group, the Science maintains no intercompany institutions or laborato- and Technology Council, composed of government, ries. MITI subsidies to the companies cover 100 per- business, and academic leaders, stressed the impor- cent of all direct expenses (salaries and laboratory ex- tance of promoting life science on a nationwide basis penses) for biotechnology R&D, but no overhead is because of its commercial potential (4), and STA allowed, and any capital equipment purchased is nom- responded in 1973 by establishing its Office for Life inally the property of the Japanese Government. Fur- Science Promotion. This office, which is Japan’s thermore, all patents resulting from the work belong highest science and technology policymaking body, to the Japanese Government. MITI has assured both also manages and coordinates R&D projects in biotech- domestic and foreign companies access to the pat- nology. Until the early 1980’s, STA’S basic, generic ap- ents (11). “The first Japanese companies to enter the field of rDNA-produced pharmaceuticals, Green Cross, Hayashibara, and Suntory, were led by pioneering entrepreneurial managers. For example, the Hayashibara venture into ● Basic, generic applied, and applied research are defined in Chapter 13: producing interferon with hamsters was possible only because the owner Government Funding of Basic and Applied Reseamh. owns or controls 12 companies motels, gas stations, and candy manufactur- ● *The Biotechnology Forum, a group of five major Japanese chemical coming) and does about $ISO million ( + 37.4 billion) worth of business a year panies that had organized independently after the announcement of the (14). Suntory’s (a whiskey company) diversification into rDNA-produced phar- Cohen-Boyer rDNA process patent, was instrumental in lobbying for the es- maceuticals is a similar situation. tablishment of the biotechnology projects. App. B—Country Summaries . 507

The third Japanese Government agency that is tak- problem for the large companies in Japanese biotech- ing an active role in biotechnology, MAFF, recently nology. The Japanese companies involved in biotech- established the Committee on Biological Resources De- nology R&D have either their own internal sources velopment and Utilization, which compiled a report of funds or close relations with the banks (11). recommending actions MAFF could take to promote Certain weaknesses in Japan’s financial system have biotechnology development (7). Currently, MAFF is ac- been especially evident in biotechnology. Despite many tively promoting cooperative biotechnology research changes in recent years, capital remains heavily con- with private industry at its laboratories and is funding centrated in the Japanese banking system, and stock work both with Nippon Shokuhin Kako and Oriental markets play a relatively small role in allocating capital. Yeast at the National Food Research Institute and with Only 111 Japanese companies currently have their Kao Soap at the National Institutes of Agricultural securities traded over the counter, and total venture Sciences. It is also planning cooperative research with capital investments amount to no more than $84 mil- Japanese seed companies in the areas of plant breed- lion (l). * Mostly because of the lack of venture capital ing and species improvement. Although achievements and the cultural factors inhibiting risk-taking entre- from the cooperative research are used jointly by Gov- preneurialism, Japan does not have a large class of ernment and industry, these companies that partici- startup companies that specialize in biotechnology pate in the research projects receive exclusive licens- R&D such as that found in the United States. ing rights to the patents resulting from these projects Japan’s private sector has recently taken some initia- for a 3-year period (9). MAFF funding for biotechnol- tive in developing a source of “venture capital” by pool- ogy R&D is comparable to that of MITI and STA (11). ing corporate resources, The Japan Associated Finance In addition to STA, MITI, and MAFF, three other Jap- Corp. (JAFCO) is a private venture capital fund that anese Government agencies are funding basic and ge- was organized by Nomura Securities Co. One French, neric applied research in biotechnology: the Ministry three Hong Kong, and 10 Japanese firms are involved of Health and Welfare, the Ministry of Education, and in JAFCO, which plans to offer financial help to new the Environmental Protection Agency. Total Japanese businesses until they qualify for listing as a joint stock Government funding for biotechnology R&D in 1983 company. When the firm reaches this stage of maturi- is $67 million (11). Although the level of Japanese fund- ty, its income gains will be distributed among the part- ing may be slightly lower than Government funding ners of the fund according to the ratio of the capital in both the Federal Republic of Germany and the contribution to the fund (3). These new sources of ven- United Kingdom and is dwarfed by that of the United ture capital may or may not succeed in increasing the States, a far greater proportion of Japanese than U.S. supply of venture capital in Japan. In any case, the funding goes to applied research. amount of venture capital these sources currently pro- The importance of the Japanese Government’s in- vide is very small when compared to the amount avail- vestment in applied research relevant to biotech- able in the United States. nology, however, should not be overstated. Of greater The Japanese Government is interested in changing importance than the Government’s investment in re- the country’s financial system. In 1982, MITI set up search per se is the Japanese Government’s success a new Office of Venture Enterprise Promotion in par- in encouraging industry’s involvement in and long- allel with the creation of the Office of Biotechnology term commitment to biotechnology. The strength of Promotion (6). In fiscal year 1981, a Government- Japan’s biotechnology policy lies in its emphasis on the related organization called the Center for Promoting sensible development of mutually agreed on research R&D Type Corporations guaranteed approximately strategies, horizontal organization and coordination $3.7 millon (x 750 million) in loans (a total of 24 within the private sector, and timely funding of the loans), and beginning in 1982, this center began mak- necessary high technologies (known in Japan as the ing its own loans as well as guaranteeing other lender’s “seed corn” policy). loans. In an equally significant development, MITI and the Ministry of Finance (MOF) have recently begun dis- FINANCING AND TAX INCENTIVES FOR FIRMS cussing an ‘(automated over-the-counter share transaction system” to make it easier for enterprising small Private sector financing in Japanese biotechnology and medium-sized firms that lack business experience is still mostly indirect and mediated through the Jap- to raise funds in the finance market. Currently, MOF’S anese banking system. At present, most Japanese firms evaluation standards are so strict from the standpoint using biotechnology are very thinly capitalized. The of protecting investors that venture businesses find ratio of debt to equity is still far higher in Japan than it is in the United States. As far as can be determined, “Institutions such as Japan Godo Finance, Sogo Finance, and Universal however, the financing of R&D efforts is not a major Finance Corp. are viewed as nascent venture capital companies. 508 ● Commercial Biotechnology An International Analysis —— it difficult to have their shares sold when they want to go public. In the past, Government-funded banks like the Japan Development Bank UDB) have played a key role in providing large amounts of low interest loans to heavy industries. Certain funds within the JDB loan portfolio are targeted for “technology promotion,” and loans from the fund are made at interest rates between 7.5 and 8.4 percent. Currently, however, these funds are not being channeled into biotechnology (11). Japan’s corporate tax code exhibits a uniformity across industrial sectors that is not evident in the United States. Furthermore, corporate taxes are generally lower in Japan than they are in the United States (13). A number of Japanese tax code provisions are aimed at benefiting R&D activity and technological innovation across the board. One Japanese tax break of particular relevance to the development of biotechnology is the special depreciation schedule used for companies that are members of a Ml’TI-approved National Research Association (e.g., the Biotechnology Development Research Association). Such companies can take an immediate 100-percent depreciation deduction on all fixed assets used in connection with their research association activities. Because of the decentralized character of most Nation- al Research Association R&D—90 percent of it is performed separately in corporate laboratories—the tax writeoffs directly encourage R&D activity within corporate laboratories. of worker retraining, is truly extraordinary. In 1981, for example, no more than 10 private Japanese compa- PERSONNEL AVAILABILITY AND TRAINING nies had more than 10 researchers working on rDNA Since World War II, the training of industrial micro- technology; a year later, surveys revealed that 52 out biologists and bioprocess engineers has been encour- of the 60 leading companies surveyed had obtained aged by both Government and industry funding in 10 or more research workers in that area (11). Japan, and as a result, a steady supply of these personnel has been maintained. In fact, Japan is considered the world leader in this area. On the other UNIVERSITY/INDUSTRY RELATIONSHIPS AND hand, largely because of its weak basic biological sci- DOMESTIC TECHNOLOGY TRANSFER ence research base, Japan is experiencing a shortage In applied research areas such as bioprocessing and of molecular biologists and immunologists. Some Jap- microbiology, Japanese university/industry relations anese companies have addressed this problem by and the transfer of information from universities to sending some of their personnel to the United States industry are generally very good. In basic research for training in molecular biology. Other companies areas, however, the transfer of information from uni- have had success in repatriating Japanese workers versities to industry is impeded by the fact that almost already trained overseas. Figure B-2 gives a break- all university rDNA and hybridoma research in Japan down of Japanese personnel engaged in rDNA R&D takes place in ‘(basic” science departments, and these by type of research organization. departments pride themselves on independence from Retraining of corporate workers in biotechnology industrial influence. The Japanese Government has is being pursued actively in Japan. In Japan, more than launched new programs designed to cross the barriers in any other industrialized country, worker training between university basic science departments and in- is the responsibility of the corporation. Japan’s abili- dustry, but their future success is questionable (11). ty to adjust rapidly to weaknesses in its labor force, The movement of knowledge across industrial sec- based primarily on the Japanese corporations’ funding tors in Japan is facilitated by the unique “keiretsu” App. B—Country Summaries 509 structure (a group of companies with historical ties, tries through R&D joint ventures and licensing agree- which usually consists of a company from each indus- ments. NBFs in the United States in need of financial trial sector and a bank or trading company which support widely accept research contracts from Jap- plays a dominant role by virtue of its contact with anese companies, often because U.S. partners cannot other companies within the group). The transfer of be found. information among companies within sectors, how- An issue brought up in recent U, S.-Japan trade nego- ever, is inhibited by extreme secrecy and a lack of tiations was U.S. access to the technologies developed mobility of personnel from one company to another. by the MITI-sponsored National Research Associations. MITI’s “next generation” projects in biotechnology are MITI has promised to abandon its past policy and dis- designed in part to compensate for this problem and close the patents obtained in National Research Asso- to diffuse knowledge among companies using biotech- ciations to foreign firms. MITI is also promising mem- nology. In part because they suspect they would have bership in National Research Associations to U.S. com- to sacrifice proprietary positions in some commercially panies that have Japanese subsidiaries or substantial important research areas, however, some Japanese technological expertise. companies have not joined the MITI projects in the Japan is engaged in international efforts to secure areas in which they have comparative advantages (11). sources of biomass* in the event that biomass becomes For example, Kyowa Hakko, a leader in work on rDNA, the favored route to meeting energy needs. In coopera- is not participating in the “next generation” project in tion with developing countries (mostly Asian), Japan this area. is organizing biomass centers. This foresight may operate to Japan’s advantage in the future. OTHER FACTORS Nontariff trade barriers in Japan, especially in the Historically, Japan’s guidelines for rDNA research area of pharmaceuticals, may hinder U.S. companies’ penetration of Japanese markets. The Japanese Minis- have been among the most restrictive in the world. Although the guidelines have recently been relaxed try of Health and Welfare has not yet begun to accept somewhat, they are still quite restrictive. Japanese clinical test data from the United States, although as companies have mounted intensive lobbying efforts of April 1983, Japan did begin accepting foreign test to get the guidelines changed. Although companies data on animals. Foreign stability test data and data have had extreme difficulty in obtaining approval to on specifications and test methods will be accepted from October 1983 onward (10). do work with more than 20 liters of culture, this situation is expected to change soon. Unlike the United States, Japan has constraints in- Although estimates are difficult to obtain, the cost hibiting foreign acquisition of domestic companies. of gaining approval for new pharmaceuticals is be- Foreign acquisitions in Japan require the unanimous approval of the Japanese company’s board of direc- lieved to be lower in Japan than the United States. In tors and also the approval of MOF. Recently, however, Japan, the cost of obtaining approval for a new drug the regulation surrounding the establishment of for- is about $12 million to $20 million ( 3 billion to # eign subsidiaries in Japan has noticeably eased; large 5 billion), compared to about $87 million in the United numbers of European pharmaceutical companies have States. The time required for drug development and approval is similar (about 10 years) in both the United established wholly owned subsidiaries in Japan during the past year. The ease of foreign acquisition of States and Japan (5). The basic law governing worker health and safety domestic companies in the United States is an important issue to consider, because Japanese companies in Japan is the Industrial Safety and Health Law. This very often acquire foreign companies to gain access law imposes on employers the obligation of prevent- to their technology, markets, and distribution net- ing health impairment caused by substances and con- works. ditions found in the workplace. Substantial criminal penalties and fines are imposed for violations. At the CONCLUSIONS present time, no regulations are addressed specifically to biotechnology. Furthermore, specific measures Because of its present competitive strength in bio- governing environmental effects of biotechnology ap- logically produced specialty chemicals, Japan can be plications have not been prepared by the Japanese expected to be a major competitor in future specialty Government. chemical markets defined by biotechnology. The fu- Because the United States is considered a world leader in the commercial applications of biotech- ● Biomass, discussed further in Chapter 9: Coti”ty Chemicals and Ener~ nology, Japanese companies have been actively import- Production, is all organic matter that grows by the photosynthetic conver- ing technology from the United States and other coun- sion of solar energy. 510 Commercial Biotechnology: An International Analysis ture competitive position of Japanese companies in and services, Responsibility for most of the develop- future pharmaceutical markets is more difficult to ment of the country’s industrial capabilities in biotech- assess. Japanese companies traditionally have not had nology to date rests largely with chemical companies a significant presence in world pharmaceutical mar- such as Hoechst, Bayer, and BASF, three of the four kets, but Government promotion of the pharmaceu- largest in the world, and with the slightly smaller phar- tical industry, rising investments in pharmaceutical maceutical companies such as Boehringer and Scher- R&D (including related biotechnology applications), ing. Small and medium-sized West German companies and increased competition in the domestic pharma- have played no significant role in biotechnology in- ceutical market all portend a greater role for Japanese novation, despite the West German Government’s ef- companies in future international markets. * forts to encourage this through the provision, for example, of startup funding for high-risk undertakings Federal Republic of Germany (24). To speed the transition to new biotechnological tech- INTRODUCTION niques and processes, the large West German companies that are developing biotechnology have sought A powerful private sector, a well-developed adminis- outside expertise. Hoechst, for example, signed a 10- trative infrastructure, an extensive research base, a year, $70 million contract with Massachusetts General generous funding program, and an adequate supply Hospital to support work in molecular biology (18). of personnel all contribute to the potential of the Hoechst, criticized in Germany for a breach of faith Federal Republic of Germany to compete with the with national science and in the United States for the United States and other industrialized countries in ap~ropriation of U.S. technology, apparently entered biotechnology. The overall West German effort does into this agreement with the objectives of getting a have certain deficiencies (e.g., an inflexible research “window on the technology” and gaining access to a grants system), however, and the ability to correct large, state-of-the-art laboratory in which to train its them will be a factor that influences the country’s com- scientists (18). petitive position. The ability to correct these deficiencies, however, will not by itself guarantee competitive success. Poli- GOVERNMENT TARGETING POLICIES tics, for example, and its most powerful ally, public A government policy for the commercialization of perception, could influence the course of biotech- biotechnology rates as one of the Federal Republic of nology development more immediately in the Federal Germany’s strengths. According to a 1979 statement Republic of Germany than in any other country. The by the Federal Ministry for Research and Technology West German environmentalists, embodied in the (BMF’I’, Bundesministerium fur Forschung und Tech- political party of the Greens, have yet to focus their nologies), the German Government has an obligation attention on risks specifically associated with biotech- to establish the preconditions for industrial innova- nology, but the leading German companies using bio- tion in key areas of technology in order to strengthen technology have already aroused public protest as ma- the competitive performance and competitive capaci- jor chemical polluters, The Greens, now incorporated ty of the German economy in long-range growth areas, in the Federal parliamentary process, represent a po- and in the process, correct weaknesses revealed tential threat, especially in the event of a mishap, to through international comparisons (24). the progress of biotechnology in the Federal Republic The present biotechnology targeting policy has of Germany (24). evolved from the West German Government’s historical interest in the life sciences. In 1972, BMFT com- INDUSTRY missioned a report on old biotechnology from the Ger- The Federal Republic of Germany’s competitive posi- man Society of Chemical Engineering (Deutsche Ge- tion in biotechnology will be determined by the abili- sellschaft fur Chemisches Apparatewesen) (19), and in ty of large, established West German companies to de- 1979, BMFT presented its first official policy specifical- velop and market biotechnologically produced goods ly for biotechnology (16). This “performance plan” (Leistungsplan) outlined biotechnology research programs with specific objectives, such as the develop- ● For example, in 1981, Japanese companies ranked first in terms of the largest number of major new drugs introduced into world markets. In 1982, ment of unconventional feed and foodstuffs, bioinsec- not only did Japanese companies account for over 16 percent of all U.S. pat- ticides, and pharmaceuticals from plant cell cultures. ents issued for pharmaceutical and medicinal products, but 38 percent of BMFT’s more recent statements continue to promote all U.S. medicinal patents granted to foreign firms went to Japanese origina- tors. See Chapter 4: R“rms Commercializkg Biotechnology for a more detail- the development of specific product areas (e.g., phar- ed description of Japanese pharmaceutical activity. maceuticals, plant agriculture) and particular proc- App. B—Country Summaries ● 511 esses (e.g., cell culture), but they also focus attention Although laboratories supported jointly by BMFT on the importance of basic research and the need for and DFG, such as the Cancer Research Center at greater interdisciplinary cooperation between biolo- Heidelberg, carry out important biotechnology-related gists, chemists, medical experts, and engineers, disci- work, laboratories funded by the Max Planck Society plinary areas which are important to the development are responsible for the bulk of the basic research ad- of biotechnology (24). vances in biotechnology. The Max Planck Institute for BMFT implements its policy primarily through a Plant Breeding Research in Cologne boasts some of the strong and varied funding program. Types of BMFT best plant genetics teams in the world (24). Other support fall into three broad categories: 1) funds spe- leading Max Planck institutes working in basic re- cifically set aside for the development of biotech- search related to biotechnology include those in nology, 2) grants that fall into already existing schemes biochemistry at Martinsried, biology and virus re- for industrial development work, and 3) funds dis- search in Tubingen, genetics in Berlin, and cell biology tributed by third-party organizations to which BMFT in Ladenburg (21). contributes as part of more generalized funding pro- Some of the Max Planck institutes conduct generic grams for all areas of public research. For its own bio- applied biotechnology research, but the center for technology program alone, BMft in 1982 spent $29 such research is the Society for Biotechnological Re- million (DM70 million), up $5 million (DM12 million) search (GBF, Gesellschaft fur Biotechnologische For- from 1981. In 1981, BMFI’ also contributed to the Ger- schung). GBF is a Government-supported though pri- man Research Society (DFG, Deutsche Forschungsge- vate institution that was originally founded to conduct meinschaft) (25) and to the Max Planck Society (Max generic bioprocessing research to meet the needs of Planck Gesellschaft) (15). It is impossible to calculate industries (26). GBF employs 365 people (249 perma- the exact proportion of these other funds dedicated nent and 116 temporary), and its 1982 budget was $13 to biotechnology research, but a reasonable estimate million (DM31.6 million), of which 89 percent came might range from $20 million to $40 million (DM50 from BMFT, 9 percent from the lander, and 2 per- million to DM 100 million). Since data are unavailable cent from its own earnings (Gesellschaft fur Biotech- to support this estimate, a total BMFT biotechnology nologische Forschung, 1982). GBF’s current activities funding figure of $5o million to $7o million (DM120 include the general development of bioprocess tech- million to DM170 million) for 1982 should be regarded nology, the scale-up of laboratory processes, the with caution. screening of micro-organisms and plant and animal cell cultures, the support of other research groups in GOVERNMENT FUNDING OF BASIC biotechnology, the participation in joint biotechnology AND APPLIED RESEARCH projects with industry, and the advanced interdisci- The Federal Republic of Germany maintains an ex- plinary training for scientists, engineers, and tech- tensive public research base. Both basic and generic nicians. GBF suffers from the usual rigidity of a large applied research are generally good. Three different German research organization—funds, once allocated, types of nonindustry laboratories conduct basic re- cannot be shifted from one area of research to search in biotechnology: 1) laboratories belonging to another. Nevertheless this well-equipped and well- the universities, 2) laboratories dependent on BMFT staffed Government-supported applied research facili- for operating expenses and on DFG for project sup- ty in West Germany is one of Europe’s best. port, and 3) laboratories supported by the Max Planck FINANCING AND TAX INCENTIVES FOR FIRMS Society (which, in turn receives support from BMFT). The operating costs of the universities are supported There is no parallel in the Federal Republic of Ger- by the individual States (Lander). Highly publicized many to the U.S. venture capital industry. The power- deficiencies in German university research have re- ful and rather rigid banking structure in the Federal sulted from budget cuts and university reform laws. Republic of Germany virtually inhibits the formation With the current shortage of funds, grant allocations of venture capital, though there is apparently little de- go to tenured professors (27) and to replace used mand for it (24). Commercial banks provide most of equipment, not to the young researchers (29). Univer- the funds used for industrial expansion, and it is com- sity reform laws have created excessive administrative mon for such banks to have equity participation in duties for university professors, making it difficult for companies in which they invest. The commercial bank- them to dedicate sufficient time to their research (20). ing sector is dominated by three banks, and the link- Despite such problems, however, universities such as ages between the banking and corporate structures those at Heidelberg, Munich, and Cologne continue to are so close that the Monopoly Commission in 1976 conduct research fundamental to the development of concluded that the banks effectively utilize manage- biotechnology (21). ment functions to the detriment of competition (24). 512 ● Commercial Biotechnology: An International Analysis

In 1975, a consortium of 28 banks recognized that mechanisms to accomplish the transfer of technology the German banking system was not conducive to developed in public research laboratories into domes- funding high-risk innovative, startup firms and formed tic industries, The Max Planck Institute for Plant a venture capital concern called the Risk Financing So- Breeding Research and GBF both have several contract ciety (WFG, Deutsche Wagnisfinanzierungs-Gesell- arrangements with private companies. On a much schaft) (17). The principal objective of this organiza- larger scale, the pharmaceutical company Schering tion was to aid small and medium-sized firms in com- joined with the State of Berlin and its two universities mercializing their products. So far, however, this con- to establish a biotechnology research institute (Biotech- cern has not shown much interest in biotechnology nikum). Though the institute will undertake primari- companies, a major reason being that since 1980 it has ly basic research in rDNA technology, it will also sup- been looking for innovations that could achieve suc- port industrial microbiology research and the produc- cess within 24 months. If this continues to be the cri- tion of hormones and amino acids (22). Bayer, BASF, terion for a firm to receive funds from WFG, it would and Hoechst have also established cooperative re- be surprising if many biotechnology startup firms search programs with West German universities and were established in the Federal Republic of Germany other research institutes. with WFG funds. Tax incentives are a less important source of financ- OTHER FACTORS ing for private sector innovation in the Federal In general, the West German regulatory environ- Republic of Germany than direct Government subsi- ment is comparable to that in the United States and dies. This country maintains the highest nominal cor- poses no additional barriers to the commercial devel- porate tax rate of the six countries analyzed in this opment of biotechnology for either domestic or for- report (56 percent on retained earnings and 36 per- eign firms. Guidelines for rDNA research, food and cent on distributed earnings). Measures such as an in- drug testing regulations, intellectual property law, and vestment grant provision allowing a company to international trade laws in West Germany are approx- recover up to 20 percent of the cost of R&D capital imately equivalent to those in the rest of the compet- expenditures contribute to lower the effective tax rate, itor countries. although the United Kingdom, Switzerland, and Japan still have the lowest effective tax rates of the com- CONCLUSIONS petitor countries. The Federal Republic of Germany could become one PERSONNEL AVAILABILITY AND TRAINING of the principal competitors of the United States in the commercialization of biotechnology. West Germany’s The Federal Republic of Germany has sufficient per- extensive research base would be one of the most well- sonnel to compete with the United States and other balanced in the world, were it not for the funding and competitor countries in biotechnology. Molecular administrative problems in the universities and the re- biologists with expertise in rDNA and hybridoma resulting effects on the quality of research. Another search are in short supply, but the training of such problem is that the Government bureaucracy for im- specialists is now a high priority (24). Like Japan, the plementing biotechnology policy is somewhat inflexi- Federal Republic of Germany maintained a steady sup- ble. Once funding has been granted for specific proj- ply of both industrial and government funding for ap- ects, money cannot be shifted to other potentially plied microbiology and bioprocess engineering after more promising studies. One of the Federal Republic World War II. Thus, the supply of personnel in these of Germany’s strengths, however, is the country’s pri- areas appears to be adequate. vate sector. The size and international market penetra- The Max Planck Society’s senate and the present tion of established German chemical and pharmaceu- Minister of Research and Technology have indicated tical companies suggests that these companies are like- that there is a significant drain of German researchers ly to be competitive in the commercial use of biotech- from the Federal Republic of Germany to the United nology. States (21)28). The “brain drain” of scientists from West Germany, however, appears to be less serious than that from the United Kingdom (see below). United Kingdom

UNIVERSITY/INDUSTRY RELATIONSHIPS AND INTRODUCTION DOMESTIC TECHNOLOGY TRANSFER In many respects, the United Kingdom has the ca- The Federal and State Governments and the private pabilities to compete in biotechnology on an equal sector in the Federal Republic of Germany use several basis with the United States, Japan, and the Federal App. B—Country Summaries ● 513

Republic of Germany. Government initiatives, national In 1980, a Government committee published a report science and technology resources, both human and that identified weaknesses in the development of bio- material, and efforts by a few individual companies technology and recommended that the Government to commercialize biotechnology place the United King- take specific corrective actions to assist the transfer dom on a par with these other competitor countries. of the results of public sector research to industry and A relative lack of experience in joint government, in- to expand existing programs supporting training, re- dustry, and public research cooperation compared to search, and innovation (3o). The British Government the United States and, with some exceptions, a general- has responded to this report, commonly known as the ly risk-averse private sector, however, could become Spinks’ Report, by increasing funds both for the British obstacles to the smooth development of biotechnology Technology Group (BTG) for investment in innovative in the United Kingdom. private sector projects in biotechnology and for the Research Councils and Government departments for INDUSTRY the support of basic life science research. A number of NBFs have been started to commer- In 1981, the British Government, through BTG and cialize biotechnology in the United Kingdom. These in association with four private investors, established include Celltech, Agricultural Genetics, Plant Sciences, Celltech, Ltd., to develop and market products made Imperial Biotechnology, IQ (Bio), and other companies by some of the new technologies, In 1982, the Depart- that were founded specifically to exploit results of ment of Industry launched a new 3-year, $3o million basic research in biotechnology-related disciplines. program of support for biotechnology in industry (30. Although the United Kingdom has more NBFs than do The Government has also encouraged the creation of other European countries or Japan, the importance university centers of expertise in biotechnology to of NBFs to the commercialization of biotechnology in bring together experts in different disciplines within the United Kingdom does not generally rival that of a single field and has established a Biotechnology Di- their U.S. counterparts. The 1983 marketing by Cell- rectorate at the Science and Engineering Research tech of MAbs to detect and isolate interferon (34) and Council (SERC) to coordinate biotechnology R&D in all public sector research laboratories. of two blood-typing kits using MAbs (47), however, demonstrates a certain dynamism within the United Kingdom’s NBF sector. GOVERNMENT FUNDING OF BASIC AND The large established U.K. companies such as ICI, APPLIED RESEARCH Burroughs-Wellcome, G. D. Searle, Unilever, Glaxo, The United Kingdom has a strong and well-estab- and others will play the major role in determining the lished basic research base. The Research Councils and United Kingdom’s competitiveness in the commercial- the universities possess considerable depth in basic ization of biotechnology. These companies, like estab- research fields such as immunology and plant genet- lished companies in the other competitor countries, ics. Although the economic recession has forced cuts are better equipped than the NBFs to absorb the high in both university and Research Council grants (46), costs of large-scale production, health and safety the Government has attempted to protect the basic testing, and marketing, in fields such as pharmaceu- science research budget and to redirect resources ticals, food, or agriculture. Although they appear to within this budget to priority areas such as biotech- be investing large sums in biotechnology R&D (44), it nology. Research Council funds for biotechnology have remains to be seen whether established companies in actually increased. University funds have been re- the United Kingdom can generate the same level of duced in some areas, but the Government has encour- innovation from in-house research and arrangements aged universities to protect basic research, and the with universities as the NBFs in the United States. University Grants Committee has been funding the establishment of new posts at many different univer- GOVERNMENT TARGETING POLICIES sities (37). Until recently, many analysts in the United Kingdom Generic applied research in biotechnology has been believed that biotechnology products would reach receiving strong support in the United Kingdom. The markets only after 10 to 20 years (36) and that the British Government sponsors generic applied research British Government should maintain its traditional at a number of locations, including the Centre for Ap- functions with respect to developing technologies, i.e., plied Microbiology Research in Porton Down (’bioproc- limit itself to supporting basic R&D, training qualified ess engineering); Warren Spring Laboratory in Har- personnel, and creating a propitious climate for indus- well (downstream processing); and the Biotechnology try to capitalize on discoveries made in public research Institute and Studies Centre Trust (enzymes). These facilities (35). and other programs all contribute to make develop- 514 Commercial Biotechnology An International Analysis ment a strength of the Government’s support for bio- panies) and are used primarily to encourage additional technology. expenditures on R&D or on plants and equipment re- Definitional problems make it difficult to arrive at quired for research or scale-up. The tax code allows a figure for overall Government expenditures for bio- the largest and most rapid depreciation allowance of technology R&D. Though the British Government uses capital expenditures for scientific research of all the the Spinks’ Report definition, * research institutes tend competitor countries (100 percent in the first year of to classify work in scientific terms such as rDNA tech- use). This provision contributes to making the effec- nology, hybridoma technology, and others. A conserv- tive corporate tax rate in the United Kingdom among ative estimate of biotechnology funding for all phases the lowest of the countries analyzed by this report. of R&D would fall between $56 million and $60 million Few of the tax incentives in the United Kingdom, on for 1982 (46), though the Government expects to in- the other hand, encourage the formation of capital, crease this level substantially during 1983. The 1982 a necessary precondition for starting an NBF. Both the figure roughly equals spending in Japan, the Federal taxation of long-term capital gains (30 percent) and of Republic of Germany, and France. income resulting from the sale of technology (in the form of patent sales or licensing royalties) are the most FINANCING AND TAX INCENTIVES FOR FIRMS unfavorable of the competitor countries. The British Views on whether there is a shortage of funds avail- Government recently introduced new measures de- able for biotechnology firms in the United Kingdom signed to encourage the private sector to make equi- vary depending on the source of information. Finan- ty investments in startup firms by offering tax relief cial institutions say funds are not in short supply; at the top marginal rate to investors in new (up to 5 rather, the shortage is in well-presented ideas with years old) qualifying trades, but the effect of this policy commercial value that are capable of earning the rela- remains to be seen. tively high rates of return desired by investors with PERSONNEL AVAILABILITY AND TRAINING risk capital. Entrepreneurs say that there is a shortage of funds, because institutions demand more evi- Like the United States, the United Kingdom boasts dence than they can supply to prove that their prod- both qualified personnel and excellent training and ucts are capable of earning high profits. education programs for personnel in the basic life Funds for the industrial development of biotechnol- sciences. Personnel supported by the Medical Re- ogy, especially for NBFs, are available from both public search Council are internationally prominent in the and private sources. The major public source of ven- development of rDNA and hybridoma technologies. * ture capital is BTG (see above). Private venture capital Also like the United States, the United Kingdom is ex- groups with either investments or plans to invest periencing personnel shortages in areas related to include Biotechnology Investments, Prutec, Advent scale-up. The shortage in the United Kingdom in part Eurofund, Cogent, Technical Development Capital, and results from the fact that very limited opportunities others. Of these, Biotechnology Investments, a branch in British universities have led some scientists to leave of N. M. Rothschild Asset Management, is the largest, their posts in academia for positions in foreign bio- with an initial capital pool of $55 million (39). Most of technology companies. Approximately 70 Ph. D.s have the fund’s investments to date have been in U.S. NBFs left the United Kingdom in the past few years. Slight- and in primarily foreign quoted companies (39), ly less than two-thirds of these scientists have come although the company recently purchased equity in to the United States, though some of them may not Celltech (33) and is now considering more project probe working exclusively in biotechnology. About 30 of posals from British firms than from U.S. companies the 70 have joined commercial enterprises (13 now (43). Other sources of capital for NBFs include banks work at Biogen S.A. in Switzerland). This “braindrain” and other financial institutions, whose project loans also affects another class of professionals, i.e., in- are guaranteed by the Government, and the Unlisted dividuals skilled in applying the new technologies such Securities Market, for companies with profits of less as bioprocess and chemical engineers and masters- than $1 million. level microbiologists. Analysts estimate that a total of Tax law in the United Kingdom tends to favor es- between 100 and 1,500 experts in some aspect of bio- tablished companies with programs in or plans to im- technology have left the United Kingdom over the past plement biotechnology R&D rather than NBFs. Most several years (45). of the Government’s tax incentives apply to companies The effects of this outflow on the overall British ef- earning taxable income (i.e., the large established com- fort are difficult to determine; no one really knows

“This and other definitions of biotechnology are presented in Appendix ● British researchers Georges Kohler and Cesar Mi]stein at the Medical Re- A: Definitions of Biotechnology. search Council were the first to develop hybridomas, App. B—Country Summaries . 515 whether the United Kingdom may be losing visionaries OTHER FACTORS as well as scientists or whether 100 people represent The regulatory environment in the United Kingdom a significant portion of the available specialized per- poses little threat to the development of biotechnology sonnel in the United Kingdom (41). In an effort to cor- in that country. Approval for the marketing of a new rect a situation which often obliges some younger re- drug in the United Kingdom, for example, occurs twice searchers and engineers to emigrate, the British Gov- as quickly as in the United States (46). * ernment has recently launched a program to make The public body that has been responsible for set- room for “new blood” in the life sciences in the univer- ting and enforcing the United Kingdom’s guidelines sities. The creation of these new positions will raise for rDNA research is the Genetic Manipulation Ad- the number of lecturers and create new openings for visory Group (GMAG). GMAG’s status was recently re- postdoctoral research and postgraduate courses. In ad- viewed by the Health and Safety Executive, and the dition, SERC maintains a list of British biotechnologists subsequent report recommended the relocation of the outside the United Kingdom and may be taking meas- group from the Department of Education and Science ures to encourage them to return (45). to the Department of Health and Social Security (42). GMAG, now called the Health and Safety Commission UNIVERSITY/INDUSTRY RELATIONSHIPS AND Advisory Committee on Genetic Manipulation, has DOMESTIC TECHNOLOGY TRANSFER been moved to the Department of Health and Social The universities in the United Kingdom have had Security and will advise the Health and Safety Com- very few ties with industry in biotechnology. As a mission and Executive on general questions, giving ad- result, the transfer of technology from public research vice, when requested, to Government departments. to the industrial sector in the United Kingdom has not This change in status of the old GMAG reflects a belief always been effectively accomplished. In 1975, for ex- by the Government that those responsible for agricul- ample, the Government failed to patent Kohler and ture, environment, and industry need the committee’s Milstein’s technique for making hybridomas, the spe- advice now more than those in charge of education cialized cells which produce MAbs, and the Americans and science (44). Only in exceptional instances will the were the first to recognize the commercial potential Advisory Committee on Genetic Manipulation actual- of MAbs (40). ly review project proposals. The burden of this task With the growth of biotechnology and of public sup- has been passed on to Government officials (42). port for these technologies, however, the British Gov- British patent law in general conforms to European ernment has taken steps to encourage the process of standards. The lack of case law specific to biotech- domestic technology transfer. BTG, which encourages nology inventions, however, precludes an assessment cooperative projects between industry and public sec- of whether certain patents that are issued in the tor research and serves as a public source of venture United States would receive the same treatment in the capital, has committed $21 million in support for bio- United Kingdom. Antitrust laws are approximately technology projects so far, with $6.5 million annual equivalent to U.S. statutes. increases expected for the next few years (44). In addition, the Department of Industry launched in 1982 CONCLUSIONS a new, 3-year, $30 million “Biotechnology in Industry” The United Kingdom could be a major competitor program, independent of BTG’s activities. Directed by of the United States in specific product markets in the Laboratory of the Government Chemist, this pro- biotechnology. The country’s strong basic and generic gram sets aside funds for consultancies and project applied research base, the British Government’s strong feasibility studies, supports demonstration plant con- interest in direct measures to stimulate the commer- struction, and sponsors joint industry-research centers cial development of biotechnology, the excellent uni- (31). SERC has initiated several collaborative research versity system, and the relatively positive regulatory programs and promoted, for example, the Leicester environment all contribute to allow domestic indus- Biocentre. The British Government’s establishment of tries a competitive foothold in biotechnology. The NBFs such as Celltech and Agricultural Genetics Co. future of commercial biotechnology will be decided in association with private investors and BTG’s loss of in part by the speed, content, and scale both of political the rights of first refusal* on inventions in public re- decisionmaking with respect to biotechnology and of search (32) may help stimulate direct relationships be- industrial commitment to developing the technologies. tween researchers and industrialists, Although the number of NBFs has grown in the United Kingdom because of an increasingly positive “This is the right to choose whether or not to produce and market any good or service, without having to bid competitively with other firms, “For further discussion, see (38). 516 . Commercial Biotechnology An International Analysis public attitude toward high technology in general, the an NBF (Biogen S.A. *), and, to a lesser extent, several development of high-technology fields in the United companies involved with bioprocess engineering and Kingdom may lack some of the dynamism of similar biomass conversion for producing chemicals and for enterprises in the United States. The causes of what energy production (Bioengineering AG, Chemap AG appears to be a lack of entrepreneurialism fall outside (now owned by Alfa Laval), Petrotec Holding Co. AG, the scope of conventional modes of analysis and may and Batelle Geneva Research Center (U.S. owned). be due in part to cultural factors which defy measure- All of the three large Swiss pharmaceutical comment. panies spend a substantial portion of their R&D ex- The ability of all interested parties to adopt recent penditures abroad. Ciba-Geigy has made the greatest Government measures to encourage technology trans- in-house commitment to biotechnology R&D by im- fer from public institutions to industry and to solve proving current production lines such as antibiotics other problems will, to a large extent, determine with genetic manipulation. Ciba&eigy’s commitment whether the country can challenge the United States, to the development of biotechnology can be seen in Japan, and West Germany in this new set of technol- its new $19.s million biotechnology research center ogies. The United Kingdom’s affinity with the United employing 150 people and in its extensive program of States and longstanding commercial ties to the Pacific support for research in local universities and its own Basin could very well be assets. institute laboratories (53). Ciba-Geigy, spent about 8 percent of its 1981 total sales of $1.8 billion (SFr 3.8 Switzerland billion), on overall R&D. Of this amount, almost 60 percent was spent within Switzerland, while expenditures INTRODUCTION in U.S. facilities comprised 23 percent and those in the rest of Europe and Asia accounted for 20 percent of Switzerland reveals an impressive national commer- the total outlays (49). cial potential in the area of biotechnology. It has a good In comparison with Ciba-Geigy, Hoffmann-La Roche university system and several renowned research in- and Sandoz look more toward the United States for stitutions. A strong financial sector and a technology- developing biotechnology expertise through contracts based, export-oriented economy also contribute to and R&D subsidiaries. Hoffmann-La Roche, in con- Switzerland’s potential competitiveness in biotech- ducting biotechnology R&D in its research institutes nology. Swiss companies produce 10 percent of the throughout the world (especially New Jersey) and world’s pharmaceuticals (53), and, by reinvesting large forming partnerships with NBFs in the United States, proportions of sales revenues in R&D, they achieve spent $59 million on biotechnology R&D in 1981 (50). high rates of imnovation essential to competitive Approximately one-third of Hoffmann-La Roche’s bio- success. technology R&D budget goes to rDNA experiments Switzerland is organized as a federation of 26 (48). Similarly, Sandoz pursues biotechnology through relatively autonomous regions (cantons), and a liberal a half-million dollar contract with the Wistar Institute economic tradition constrains the Federal Govern- (Philadelphia), a contract with NPI (Salt Lake City), a ment’s role in industrial policymaking. Consequently, $5 million investment in the Genetics Institute (Boston), the Swiss Federal Government has not developed a and the purchase of Zoecon (Palo Alto), in addition to central policy for biotechnology. A number of steps research conducted in its Austrian institutes. Though have been taken to promote innovation through Gov- only $5 million of the $226 million Sandoz R&D budget ernment loans to highly focused, small-scale projects, has been spent on biotechnology since 1977, biotech- but these have not been focused on biotechnology (53). nology will account for an increasing share in the In fact, in 1982, a proposal to establish a national future (48). For example, a biotechnology research in- research program specifcally for biotechnology under stitute recently established by Sandoz at University the auspices of the Swiss National Science Foundation College, London, a center of neurobiology and neuro- (Schweizerischer Nationalfund zur Forderung der Wissenschaftlichen Forschung) was voted down by ● Biogen, S.A., a Wias company, is one of the four principal operating sub- this organization. sidiaries of Biogen N. V., which is the parent company of the Biogen group and is registered in the Netherlands Antilles. Biogen N.V. is about 80 percent INDUSTRY U.S. owned. The other three subsidiaries include: Biogen Research Corp. (a Massachusetts corporation) which conducts R&D under contract with Biogen Private sector biotechnology R&D in Switzerland is N.V. and Biogen B.V. (a Dutch corporation) and Biogen, Inc. (a Delaware corporation) both of which perform marketing and licensing operations. Biogen’s concentrated among three large pharmaceutical com- principal executive offices are located in Ceneva, Switzerland. Biogen N.V. panies (Ciba-Geigy, Hoffmam-La Roche, and Sandoz), is largely U.S. owned. App. B—Country Summaries . 517 chemistry, will receive $7.6 million over the next 3 these activities, the Commission for the Encourage- years. ment of Scientific Research itself plays an active role While the established pharmaceutical companies are in identifying potential industrial partners and in- beginning to explore new applications of biotechnol- teresting them in particular research projects (53). ogy in the area of pharmaceuticals, the NBF Biogen Given the proprietary nature of much of the work, S.A. is applying biotechnology to several industrial sec- funding figures are unavailable (52). tors with a diverse R&D program. Biogen was established in 1978, largely at the initiative of venture cap- TAX INCENTIVES FOR FIRMS italists from the United States, with funds from Inter- Beause of low corporate tax rates, Switzerland pro- national Nickel Co. Biogen currently has three other vides a favorable environment for established com- principal shareholders: Monsanto (U.S.), Schering- panies in biotechnology. Though corporations con- Plough (U.S.), and Grand Metropolitan Limited (U.K.). ducting business in Switzerland are subject to both Biogen S.A. has yet to sell any products made from Federal and cantonal taxes, the Swiss effective cor- biotechnology, but it was the first firm to obtain ex- porate tax rate is the lowest in Europe (51). pression of hepatitis B surface antigens, leukocyte interferon, and the viral antigen of foot-and-mouth dis- PERSONNEL AVAILABILITY AND TRAINING ease from rDNA technology. The diverse background of its scientific board suggests a flexible R&D policy The access to distinctive universities and the high with widespread applications of biotechnology to min- standard of living in Switzerland, attract highly ing and metals refining, pharmaceuticals, chemicals, qualified persomel from around the world to partic- energy, agriculture, and food and beverage produc- ipate in Swiss biotechnology. Although the availabili- tion (54). In 1982, through $20.5 million generated ty of personnel may not be important for the large from contract research (primarily with Schering pharmaceutical companies, which conduct a large pro- F.R.G.], Shionogi [Japan], and Fujisawa [Japan]), Biogen portion of their R&D in other countries, it is crucial S.A. supported an $18.4 million R&D program (48). to the Swiss advancement of biotechnology in other sectors. The attraction of talent from other industrial- GOVERNMENT FUNDING OF BASIC AND ized countries may help the competitive efforts of APPLIED RESEARCH Swiss companies in biotechnology in the future.

Though the Swiss Federal Government has no spe- OTHER FACTORS cific biotechnology policy, its funding for biotechnology-related research is increasing (48). The Swiss Na- Swiss antitrust laws preventing monopolies present tional Science Foundation serves as a clearinghouse no serious problems for R&D joint ventures. In Gov- for Federal funds for the support of basic research ernment-industry joint projects, Swiss law assigns related to biotechnology at specific universities and patents to industry, though holders of inventions other institutions. Much of the fundamental research whose R&D was supported by a Federal grant must in the life sciences, however, is carried out in the large- repay the Federal contribution from license fees gen- ly canton-supported universities (52). Out of Switzer- erated by the patent. land’s total biological and biomedical research budget Health and safety laws in Switzerland do not gener- of about $73 million (SF150 million), about 4 percent ally impose barriers to biotechnology development. or $980,000 (SF2 million) goes to biotechnology. Although Switzerland is following a previous, and The major Government source of applied research more restrictive version of the U.S. guidelines for funds is the Commission for the Encouragement of Sci- rDNA research, there are no requirements covering entific Research (Commission zur Forderung der Wis- large-scale work. The licensing of pharmaceuticals is senschaftlichen Forschung). This commission provides more streamlined in Switzerland than in other coun- grants for applied research projects of proven interest tries. There is no requirement for Government ap- to industry, normally contributing 50 percent of the proval before initiation of clinical trials, and the drug costs. The Department of Biotechnology (Institut fur approval process generally takes from 6 to 10 Biotechnologie) at the Swiss Federal Institute of Tech- months. * nology at Zurich (ETH-Zurich, Eidgenossische Tech- nische Hochschule) receives strong support from the commission. ETH-Zurich, with an additional complex at Honggerberg, conducts research in the areas of *The Swiss pharmaceutical industry exports ruughly 90 percent of its prud- ucts. Thus, the drug and other product regulations of importing countries basic biological research, bioprocess engineering, and cause more concern to these companies than Switzerland’s relatively relaxed water and sludge treatment. In addition to funding regulatory framework (s3). 518 ● Commercial Biotechnology: An International Analysis

CONCLUSIONS ment to increase R&D expenditures have met with frustration because of an adverse macroeconomic The factors cited above and a growing commitment situation in France during the last 2 years, However, to biotechnology by the private sector suggest that the existence of isolated centers of excellence in scien- biotechnology is advancing in Swiss industries. Both tific disciplines such as immunology, molecular bi- the Federal Government and most companies have ology, and bioprocessing, and of a few companies with been slow to initiate R&D programs in biotechnology, bioprocessing expertise and a strong commitment to although the Swiss pharmaceutical industry and developing biotechnology, such as Elf Aquitaine and especially four companies have boosted their activities Rhone Poulenc, may help France to compete with in these fields. For several reasons, Switzerland has other industrialized companies in selected product only recently begun to dedicate its collective efforts markets. to biotechnology (53): ● financial experts and bankers have lacked the INDUSTRY technical expertise to evaluate high risk technologies; Three large French companies have R&D programs ● manufacturers have been averse to incorporating in biotechnology-Elf Aquitaine (67-percent Govern- biotechnology into some Swiss industries because ment owned), Rhone Poulenc (100-percent Govern- of the high financial risks and uncertainties caused ment owned), and Roussel Uclaf (40-percent Govern- by public and professional concern about the safe- ment owned and a Hoechst subsidiary). Of these three, ty of rDNA research; Elf Aquitaine has committed the most effort and ● Swiss industrial scientists have trailed Swiss and money to biotechnology. It owns Sanofi, a pharmaceu- non-Swiss academic scientists in recognizing the tical company that has the right of first refusal on all widespread potential of biotechnology; and development research at Institut Pasteur Production ● Swiss industries are highly oriented toward chem- (the scale-up branch of the Institut Pasteur), and has ical synthesis and thus have underestimated the established Elf Bioindustries and Elf Bioresearch to commercial implications of new biological proc- develop biotechnology in the foodstuff and agricultural esses. sectors. Medium-sized French companies, especially In conclusion, the majority of Swiss biotechnological in the foodstuff sector, spend very little in overall R&D expertise rests in the large pharmaceutical companies (about 0.1 to 0.2 percent of revenues) and have hes- and in Biogen S.A. and a few other small firms. The itated to devote their energies to biotechnology (62). large companies generally conduct their R&D in for- Furthermore, France has only a few NBFs (e.g., Ge- eign subsidiaries or in the form of proprietary re- netica, Transgene, Hybridolab, and Immunotech), and search at in-house facilities and make no concerted most of them are subsidiaries of large companies or effort to support domestic basic research outside in- commercializing arms of research institutes. Thus, the dustry (48). Thus, technology transfer between large ability of large companies to commercialize biotech- Swiss firms and the universities is limited. Neverthe- nology products will determine France’s competitive- less, given the quality of Swiss educational institutions ness in certain product markets. teaching the knowledge needed for the development of biotechnology, the attraction of foreign talent to GOVERNMENT TARGETING POLICIES Switzerland, and a new Government focus toward bio- Official interest in the commercialization of biotech- technology development, the industrial use of biotechnology in France emerged only recently, with the ap- nology by Swiss companies is likely to become more pearance of the Pelissolo report in December 1980 widespread in the near future. (59). Since the election of the socialists, the French Government has resolved to push the development of several new technologies in its national industries and France has accorded a privileged position to biotechnology INTRODUCTION within this scheme. The French socialist government has established the France is currently in a less favorable position to most highly coordinated policy for the development compete with the United States than Japan and the of biotechnology of any of the six major competitor other European countries analyzed in this report. The countries identified in this assessment. This policy country’s research system and industries generally rests on two cornerstones: lack a critical mass of qualified personnel in many . a general research law (Loi de Programmation et disciplines important to the development of biotech- d’Orientation) adopted by the French National nology, In addition, attempts by the socialist govern- Assembly in the first week of July 1982, and App. B—Country Summaries 519

● a program specifically for biotechnology (“Pro- Little public sector generic applied research takes grammed Mobilisateur: L’Essor des Biotechnolo- place in France. There are no national applied re- gies”) presented toward the end of the same search laboratories, and with the exception of isolated month (58). programs at the universities at Compiegne (enzymol- The general research law sets two objectives: l)to ogy and bioprocess engineering) and Toulouse (bio- stimulate French effort in new technologies by “guar- technology), the Government of France supports al- anteeing” real increases in the overall civilian R&D most no generic applied research of benefit to its do- budget of 17.8 percent per year, economic conditions mestic industries. permitting, and setting up seven technological “pro- Until recently, Government funding of both public grammed,” including one for biotechnology, on which and industrial R&D counted as a French strength. Al- a major portion of research funds are now to be di- though it should be noted that definitions of biotech- rected; and 2) to open up French science to industry nology differ from one organization to the next, fund- and education by encouraging scientists in research ing estimates vary according to referred sources, and institutes to work in collaboration with private sec- many research projects receiving biotechnology mon- tor colleagues and to teach in universities (65). The ey have nothing to do with biotechnology (62), the Programme Mobilisateur, presented in July 1982 by French Government probably spent between $35 mil- the Biotechnology Mission of the newly organized Min- lion and $60 million on biotechnology R&D in 1982. * istry of Research and Industry (now the Ministry of Notwithstanding the Government strong initial effort Industry and Research), outlines in detail the steps the to fund biotechnology, increases planned for 1983 Government should take to strengthen French biotech- were effectively reduced. The National Assembly re- nology. This document calls for intervention from duced the scheduled 17.8-percent real increase in the Paris through a myriad of organizations and commit- 1983 civil research budget to about 10 percent (66), tees in all aspects of research, education, technology and the reduction for researchers in biotechnology re- transfer, and industrial development. lated fields was even greater. CNRS saw its original Both the research law and the Programme Mobilisa- 1983 budget cut by 12.5 percent, and the Programme teur demonstrate the French Government’s determina- Mobilisateur research has lost a quarter of its allocation to promote the necessary multidisciplinary ap- tion. These austerity measures allow research funding proach to the various technologies and to establish ver- to keep pace with inflation, but little more. In spite tical chains (filires) that incorporate all the relevant of the reductions, the overall research budget still rep- expertise in basic research, generic applied research, resents a 7.5-percent real increase over 1980 levels, and large-scale production necessary to bring a prod- and the Ministry of Industry and Research continues uct to market (60). The effectiveness of the French to support its policy of increasing allocations for policy, however, will depend in part on the extent of science (56). voluntary cooperation among the various Government groups implementing the policy and the sectors the FINANCING AND TAX INCENTIVES FOR FIRMS plans affect (i.e., public research centers, universities, A new law enacted in February 1983 created a legal and private industry). structure allowing the formation and investment of venture capital (67), but the venture capital market GOVERNMENT FUNDING OF BASIC AND in France is poorly developed. Banks are the major APPLIED RESEARCH source of financing in France, and have always hesi- Most basic research in France is conducted in public tated to take major equity positions in industry. The research centers (“grands organisms”), similar in prin- financing that French banks provide, however, is de- ciple to the British Research Councils, or in a few uni- signed for long-term projects, thus eliminating the versity laboratories associated with these centers. * problem, encountered by companies in the United One of the three major “grands organisms,” the Na- States, of finding sources for second- and third-round tional Center for Scientific Research (CNRS, Centre Na- financing. tional de le Recherche Scientifique), conducts basic With the exception of one provision, tax law in research related to biotechnology in three different France generally conforms to European and American divisions, and some of the projects CNRS sponsors standards. A generous depreciation allowance in the overlap with similar work both at the center itself and tax code permits a company in France to write off SO at other centers and universities (62).

● For a more detailed description of the research infrastructure in France, ● This estimate is based on a 3-year (1983-85) projected total of $175 million, see R. Walgate, “Great Schools, Great Contradictions” (63) and “CNRS-The with a guaranteed (by law) 17.8-percent annual increase in the ci~ril research Core of Research (64). budget, plus increased support for industry through existing schemes. 520 . Commercial Biotechnology: An International Analysis percent of its expenditures on R&D capital assets dur- public laboratories, acts as a catalyst for the direct in- ing the first year following the acquisition of these teraction between these institutes and private firms assets. (e.g., through publications on the status of innovation with applications in different industrial sectors). * PERSONNEL AVAILABILITY AND TRAINING OTHER FACTORS France has a serious shortage of qualified personnel that could well undermine the country’s basic and The French legal and regulatory environment, with applied science base and prevent France and its indus- one exception, poses no real barriers to the commer- tries from competing successfully in the world biotech- cial development of biotechnology. France maintains nology marketplace. Specialists in the fields of general the most rigid investment control laws in Europe (61). and industrial microbiology, rDNA and hybridoma These regulations allow the French Government to technologies, enzymology, plant and animal cell cul- prevent strategic companies from being acquired by ture, and bioprocess engineering are few (55). Al- foreign concerns and may well hinder foreign firms’ though some French research centers boast interna- ability to penetrate French markets. tionally recognized teams, such as the enzymology and Health and safety regulations, as well as patent and bioprocess technology teams at the technical Univer- antitrust laws in France, however, are approximately sity of Compiegne or the immunology groups at the equivalent to those in other European countries. Institut Pasteur (62), these are isolated clusters of expertise and will have difficulty matching the total out- CONCLUSIONS put of the large and balanced national research bases At present, France lags somewhat behind the United of other competitor countries. States, Japan, the Federal Republic of Germany, the The scarcity of personnel in France cuts across sev- United Kingdom, and Switzerland in the commercial eral sectors of R&D in these technologies and applies development of biotechnology. If the country can solve equally to different categories of personnel, from sci- its personnel problems, however, French industries entists and bioprocess engineers with advanced de- could well gain a competitive footing in selected prod- grees to skilled laboratory and production technicians. uct markets. The Government’s well-coordinated for- In order to correct this situation, the French Govern- mal policy and adequate but precarious funding pro- ment has given special attention to the education and gram represent a strong commitment to the develop- training of qualified personnel. The research law ment of biotechnology that needs to be completed with passed in July called for the active involvement in the the necessary qualified personnel. Although the educational process of public sector researchers out- French private sector until rather recently has hesi- side universities (65), and the Programme Mobilisateur tated to develop its biotechnology capabilities, large presents educational guidelines for all stages of school- companies do have the money and the means of un- ing from secondary to postdoctoral levels, placing spe- covering the latest technological developments. There- cial emphasis on an interdisciplinary approach within fore, the ability of both the public and private sector the universities (58). The education of a specialist in to recruit and train scientists and technicians and the rDNA technology, nonetheless, takes many years, as maintenance of sufficient Government allocations for does the implementation of such training programs. R&D in the face of adverse macroeconomic conditions As a short-term solution to its present lack of person- may ultimately determine the competitiveness of nel, therefore, France imports foreign experts (58). French biotechnology in the international marketplace. UNIVERSITY/INDUSTRY RELATIONSHIPS AND DOMESTIC TECHNOLOGY TRANSFER Sweden Universities in France have had very few ties with industry in biotechnology. Large firms in France ac- Sweden is a technologically progressive country, but tively seek out developments in basic research, either adverse public opinion toward rDNA technology has by locating plants near research centers or through resulted in the imposition of Government restrictions an office that monitors current developments in bio- on the use of rDNA in research and industry. Further- technology research in France and other countries. more, a lack of trained personnel in basic sciences has The French Government encourages domestic tech- restrained the commercialization of biotechnology. nology transfer through the National Agency for the Evaluation of Research (ANVAR, L’Agence National de la Valorisation de la Recherche). ANVAR, which has ● For a general review of ANVAR’S functions and activities, see “Commen- no right of first refusal on the results of research in tary on the National Agency for the Evaluation of Research,” L+?? Monde (57). App. B—Country Summaries ● 521

Swedish public opinion and Government policies shares ownership with Cardo Co. Biotechnics has a may be changing to encourage biotechnology in budget of $8 million to $10 million for an unspecified Sweden. If this proves to be the case, Sweden may length of time to produce specialty chemicals and market products in areas such as the following: ethanol using rDNA technology. ● Support sector. Swedish scientific instrumenta- Other Swedish companies interested in biotechnol- tion, filtration, and industrial separation systems ogy include Sorigona AB, which produces chemicals are used around the world and are important in and foods; Astra, which is working in collaboration the commercialization of biotechnology. with U.S. researchers to develop long-acting anes- ● Bioprocess engineering. A large portion of thetics (74); and approximately a dozen additional Sweden’s combined public and private sector firms. R&D efforts is devoted to heterogeneous bioproc- Funding for high technology in Sweden is available essing systems, stabilization of immobilized cell from several Government sources. Since each depart- systems, membrane technology, and downstream ment of the Swedish Government establishes its own purification and regeneration (76). R&D budget, however, overall R&D funding estimates ● Pharmaceutical industry. Swedish pharmaceutical are difficult to obtain. Some degree of R&D coordina- companies maintain aggressive export policies and tion is maintained by the National Swedish Industrial are active in innovation. The five largest Swedish Board (Statens Industri Verk), which is responsible for companies have a gross annual income of about promoting technological development, organizing $1 billion, with 70 percent derived from exports training, and orchestrating Government actions, and (76). It is not known to what extent Swedish phar- the National Swedish Board for Technical Develop- maceutical companies will use biotechnology, ment (STU, Styrelsen for Teknisk Utveckling). STU, given Sweden’s shortage of trained personnel in which is the main source of Government funds for rDNA technology and other areas. In the near biotechnology, granted an estimated $4 million for term, most Swedish companies will probably biotechnology in 1982, and Swedish industry probably rely on licensing arrangements with NBFs in the spent an additional $15 million (72). United States to gain access to biotechnology (76). The manner in which STU distributes R&D funds Among the Swedish companies that appear to have reflects a Swedish Government policy of directly pro- the potential to use biotechnology for producing goods moting strategic industries. STU works through joint and services are Pharmacia AB, KabiGen/KabiVitrum, Government/private ventures with foundations estab- and Alfa-Laval. lished by Swedish and foreign companies interested Pharmacia AB concentrates on pharmaceuticals, in a particular field of development. STU provides half separation products, diagnostics, and cosmetic prod- the R&D funding as provisional grants and the foun- ucts, and derives 90 percent of its revenues from ex- dation provides the other half. If the venture is suc- ports; the U.S. subsidiary, Pharmacia, accounts for 25 cessful, the funding is treated as an interest-free loan; percent of these sales. With demonstrated abilities to otherwise, it is considered a grant. Research grants/ serve specialty markets, this company is a leader in loans are limited to $100,000, and those for product separation science and is working to establish rDNA development to $600,000. In 1973, 20 Swedish, 2 capabilities. Danish, 2 Finnish, and 1 Norwegian company estab- KabiGen/KabiVitrum, operated by the Swedish Gov- lished a specific foundation to promote biotechnology ernment, is currently the world’s largest supplier of called the Biotechnology Research Foundation (SBF, pituitary derived human growth hormone (hGH). In Stiftelsen Bioteknisk Forskning) (72). SBF, in conjunc- order to protect its hGH market from foreign competition with STU, is currently conducting research on tion, Kabi has entered into a licensing arrangement heterogeneous bioprocessing systems, immobilized cell with Genentech (U. S.) to market rDNA-produced hGH systems, membrane biotechnology, and regeneration outside of the United States. KabiGen is also moving of coenzymes (76). to establish its own rDNA capabilities, intending to Private industry R&D in Sweden is encouraged by pursue projects on human insulin, methanol produc- corporate tax incentives, which include a 10-percent tion, bacterial metal enrichment from ores, interferon, deduction for R&D and a 20-percent deduction for any and anticoagulant pharmaceuticals (71,72). Further- increase in R&D from the previous year. more, Kabi is involved with the development of sup- Sweden’s Central Investment Bank and commercial port equipment, including a polynucleotide synthe- banks provide risk capital in promising technological sizer (69). areas. Information about the banks’ views toward new Alfa-Laval has large-scale fermentation capabilities biotechnology is not available, but in 1982, $300 and is currently working to establish rDNA capabilities million for all R&D loans in Sweden were tendered. through its subsidiary AC Biotechnics, in which it Capital for risk ventures from other sources is limited

25-561 0 - 84 - 34 522 Commercial Biotechnology An International Analysis

in Sweden, and the larger Swedish companies, such Netherlands * as Fortia, rely primarily on internal funds and Biotech- nology Research Foundation loans (73). The Dutch Innovation Programme on Biotechnology, The Swedish Government has encouraged high-tech- started in May 1981, is aimed at filling the gap between nology, export-directed growth for many years and basic research and applied development work in has promoted relations among the Government, in- Dutch universities. Funds supplied by the Government dustry, and the universities. Seven Swedish univer- of the Netherlands will be used to develop research sities have liaison officers with industry whose salaries in areas where current national effort is insufficient. are paid by STU. A 6-year, $7 million agreement has The program will be coordinated by the Dutch Pro- been established between the University of Uppsala, gramme Committee on Biotechnology. The program the University of Agriculture, the Swedish Veterinary will last until the end of the 1980’s, after which the Institute, and Fortia AB, that is intended to devel- existing research budgets of universities and institutes op expertise in rDNA technology and to create the will furnish Dutch industry with the needed basic re- ( most intensive programme of biotechnology in search. the “world” (68). The Programme Committee on Biotechnology (Pro- Although extensive interaction between the sectors gramma Commissie Biotechnologie) requested $11.2 is encouraged and funded, Swedish efforts to commer- million (NLG30 million) to be spent on basic biotech- cialize biotechnology suffer most from a shortage of nology research from 1983 until 1988. This amount certain types of trained personnel. Estimates of the is in addition to the $11.2 million to $15 million (NLG30 number of Swedes working in biotechnology vary million to NLG40 million) which the Government from 30 to 40 people (72) to as many as 200 workers spends yearly on research projects in the fields of at Uppsala alone (68), but shortages of personnel in molecular and classical genetics, microbiology, cell key areas such as rDNA technology hamper wider biology, biochemistry, enzymology, and bioprocess commercial applications (75). and bioreactor engineering. Personnel training for biotechnology has been large- In addition to the aforementioned sums, $2,6 million ly inhibited by negative Swedish public attitudes (NLG7 million) will be used by university/institute and toward rDNA experimentation. As a result of the re- industry groups in the Netherlands for multidiscipli- strictive rDNA guidelines, which required the Swedish nary biotechnological research projects. According to National Recombinant DNA Advisory Committee’s per- the Programme Committee, these projects should be mission to conduct any rDNA research, there was lit- in the following areas: tle need for trained personnel, and Sweden’s private ● host vector systems for industrial and agricultural sector relied on foreign companies for developing applications, products requiring rDNA processes (70). In a joint proj- ● somatic cell hybridization, ect between KabiVitrum and Genentech (U. S.) to de- ● second generation of biotechnological reactors velop and produce hGH, for example, the first actual and processes, and cloning of the hGH gene was performed in the United ● downstream processing. States by Genentech. Since the relaxation of the guide- Established Dutch companies that are setting up in- lines, however, the need for qualified engineers and house R&D efforts in biotechnology include the follow- scientists has increased, and some Swedish universities ing: have instituted training programs in biotechnology. ● Gist-Brocades N.V. The Swedish Government’s identification of biotech- c Akzo-Pharma N.V. nology as an industrially strategic area, as exemplified ● Unilever H.V. by the establishment of joint programs with SBF and ● N.V. DSM other promotional activities for research, indicates that ● Heineken N.V. Swedish views may be changing. With Sweden’s dem- Q Dupher N.V. onstrated ability to successfully exploit new technologies, Swedish companies may prove to be compet- ● This summary is based on a personal communication with Dr. Ir. R. R. itive in the future in the support and bioprocess sec- Van der Meer, Secretary-Coordinator, Programme Committee on Biotech- tors, as well as in pharmaceutical markets. nology, Gravenhague, April 1983 (78). App. B—Country Summaries ● 523

Gist-Brocades N. V., one of the two companies in the ability of Australia’s animals and animal products world that supply more than 60 percent of the world’s (especially wool) for export;* enzymes for industrial use, is devoting almost all of ● microbiological mineral recovery to reduce ex- its $20.6 million (NLG55 million) budget for R&D to traction and separation costs for certain minerals biotechnology. Intervet International, a subsidiary of that Australia exports in great quantities; Akzo-Pharma, was the first company to market vac- biomass conversion to ethanol and chemicals, cines produced through rDNA technology, Intervet’s based on Australia’s large resources of grain crops vaccines, introduced in March 1982, prevent scours and sugar cane residues. (infectious diarrhea) in calves and piglets (77). Other applications of biotechnology in Australia in- The Programme Committee on Biotechnology fore- clude animal breed improvements through embryonic casts no personnel shortages. In fact, there is an ex- gene transfer, MAb-based diagnostic reagents for a cess of biochemical and microbiology students for the number of human diseases, and, on a small scale, in- available Dutch jobs in industry. There are no tax terferon and other rDNA projects to develop phar- policies aimed at encouraging biotechnology in Dutch maceutical products. industries. The Dutch have eased their regulatory Government funding for biotechnology in Australia guidelines for working with rDNA technologies to con- is administered through several Government agencies, form to U.S. guidelines. including the Australian Science and Technology Council, which emphasizes expanded manufacturing Australia * and agricultural production with biotechnology, and the Commonwealth Scientific and Industrial Research The Australian Government supports a highly re- Organization (CSIRO), the main research agency in spected basic research system, especially in plant Australia, which provided $4.6 million ($A4.5 million) breeding and molecular biology, but it regards the for biotechnology research in 1981. Other sources are development of biotechnological applications, in- the National Health and Medical Research Council, cluding scale-up development and bioprocess engi- which distributed $19.0 million ($A18.7 million) in re- neering, as the responsibility of the private sector. search funds in 1980/81 (some of which benefited Aus- Owing to a historic dearth of capital for high-risk ven- tralian biotechnology); the Energy Research, Develop- tures and a lack of trained personnel in applied tech- ment, and Demonstration Program which distributed nology, commercial biotechnology in Australia is not $3.9 million ($A3.8 million) in 1980/81, partly for bio- well developed. Australia’s problems are exacerbated technology project development; the Department of by the emigration of some of its top scientists to other Health, which gave $1.88 million ($A1.85 million) to countries where attractive jobs exist, although there the Commonwealth Serum Laboratories to conduct re- is some indication that this situation might change in search on interferon from 1980/81 to 1983/84; and the the future. The Australian Government is taking steps Australian Research Grants Scheme, which awarded to implement incentives to help retain scientists and $18.3 million ($A18 million) in 1982 to individual encourage venture capital formation to help foster research scientists, some of whom use biotechnology promising applications of biotechnology. in their work. In addition, financial assistance for Australian efforts are not expected to have an im- general industry R&D projects is provided under the mediate impact on the markets discussed in this re- Australian Industrial Research and Development In- port. Nevertheless there is a strong possibility that, by centives Scheme which in 1980/81, distributed $9.8 using biotechnology to help solve local problems, Aus- million ($A9.7 million) in commencement grants and tralia will find new markets for biotechnology prod- $36.6 million (A$36.1 million) in project grants. ucts. Areas of biotechnology application in Australia Other Australian incentives include tax policies that being pursued include the following: give minor benefits to firms undertaking R&D activi- plant improvement programs to develop agricul- ties. Buildings used solely for scientific research pur- tural species that are adapted for higher yields poses are depreciable over a 3-year period, compared in Australian conditions; to general industry’s 40-year depreciation schedule. . animal health products, particularly veterinary New equipment used for scientific research is also and nutritional products that improve the market- depreciable over a 3-year period, as opposed to a 5-year period for general industry equipment.

● This summary is based on information presented in “Biotechnolo@ Research and Development, the Application of Recombinant DNA Techniques ● To date, most rDNA efforts have centered on cloning the genes that en. in Research and Opportunities for Biotechnolo~v in Australia” (79) and “Ge- code sheep wool keratin and other wool constituents in an effort to impro~e netic Engineering--Commercial Opportunities in Australia” (80). wool quality and lessen treatment costs of wool. 524 Commercial Biotechnology An International Analysis

In addition to basic research funding and tax incen- ● Fielder Gillespie, Ltd. This milling company funds tives to businesses, liaisons between Australian univer- MAb and biomass conversion projects. sities and industry are encouraged. In some cases, aca- In conclusion, Australia has the potential to develop demic researchers have financial equity in biotechnol- and commercialize several applications of biotechnology firms. In other cases, the relationship is through ogy successfully. A good Australian research base ex- contracts with the universities. One example is an ists, but increased infusions of capital are necessary agreement under which Agrigenetics Research Asso- for new commercial startups if the potentials of bio- ciation, Ltd. provided $2 million for biotechnology technology in Australia are to be realized. Australian research at Australian National University. * Although Government policies have targeted the development Australia has the infrastructure to support healthy of biotechnology, but the effect of the policies remains biotechnology development, lack of capital for high- to be seen. Some Australian products, such as MAb technology firms retards growth. The Government diagnostic products, may prove to be competitive in and Australian banks make loans available to small world markets, but overall, major competition in the businesses at low interest rates, but these loans are pharmaceutical and specialty chemical industries is not generally available to high-risk enterprises such unlikely. as NBFs. High-risk ventures are hampered by a smaller capital base in Australia than in the six major com- Israel petitor countries. With increased Government interest in commercial biotechnology, more capital may For several reasons, Israel may be unique among de- become available. This increase in capital might in turn veloped nations in fostering a strong basic and applied encourage increased efforts by existing NBFs to find research capability in biotechnology without having applications for new biotechnology, as well as the for- a large industrial infrastructure to exploit the suc- mation of more NBFs. It should be noted, however, cesses of research endeavors. Israeli scientists train that Australia has some of the most restrictive drug in U.S. institutions prominent in biotechnology and licensing laws in the world, and these regulations may have become well-versed in molecular biology and im- impede Australian applications of biotechnology to the munology. Except for small brewery plants and one pharmaceutical industry. bioprocess plant (Gadot, which manufactures about Biotechnology companies in Australia include the fol- 7,000 tons of citric acid per year), however, Israel does lowing: not have companies using old biotechnological tech- ● Biotechnology Australia Pty., Ltd. (a subsidiary of niques. Furthermore, Israel’s tax and financial struc- CRA Ltd.). Projects include animal feed additives tures do not encourage financial risk-taking or the for- and health care products, specialty chemicals, bio- mation of new firms. Therefore, there are few indus- mass conversion, and mineral extraction schemes. trial positions available for scientists trained in biotech- ● Austgen Pty., Ltd. (includes Biojet International nology. [Australia] Pty. Ltd.). projects include nutritional As a result of the lack of depth in industrial exper- additives and waste treatment systems. Much of tise in Israel, Israeli universities, through their Uni- Biojet International’s R&D is oriented towards versity-Connected Research and Development Organi-

products that can be exported. zations (UCRDOS)) * turn to foreign companies that ● Australian Genetic Engineering Pty., Ltd. Projects have the expertise to evaluate Israeli research and the focus on MAbs for diagnosis (a $5 million per year resources needed to commercialize the results of this market for MAbs for diagnosis currently exists in research. The number of joint ventures between Is- Australia; a $15 million market is expected by raeli UCRDOS and foreign firms is fairly large. 1986). Noteworthy basic research in biotechnology is tak- ● Bioclone Australia Pty., Ltd. This firm markets ing place at several Israeli universities and institutes, MAbs made by the Garvan Institute and CSIRO among them Hebrew University, Technion Institute on a worldwide basis. Its best known product is at the Israel Institute of Technology, the Center for an antiprolactin MAb. Eleven additional MAb Biotechnology at Tel-Aviv University, and the Weiz- products have been or will soon be marketed. mann Institute of Science. ● Australian Monoclinal Development Pty., Ltd. At Hebrew University, 12 departments in the medi- This company supplies MAbs primarily for re- cal school are conducting biotechnology-related research purposes. search projects, ranging from cellular biology to can-

● UCRDOS are set up by Israeli universities to promote commercialization *The goal of this research is to incorporate the nitrogen-fixing genes of and applied research. These organizations may enter into joint ventures or bacteria into plants adapted to Australian conditions. own equity in spinoff firms. App. B—Country Summaries ● 525 cer research. The agriculture department has initiated Inter-Yeda, a joint venture firm owned 60 percent several projects and has received over $410,000 (more by Interpharm and 40 percent by Yeda, will concen- than DM1 million) from the Minerva Fund in the Fed- trate on four areas: production of interferon using eral Republic of Germany for cooperative projects on rDNA techniques, identification and isolation of inter- improving plant tissue culture techniques, rDNA and feron-associated proteins, artificial production of in- protoplasm fusion in plant breeding, nitrogen fixation terferon, and MAb research (82). Inter-Yeda is ship- and control of soil-borne plant pathogens by micro- ping human fibroblast interferon to the Serono Cor- organisms, and new uses of algae (84). Hebrew Uni- poration in the United States (81). versity’s UCRDO Yissum signed a $5 million agreement Kibbutz Beit Ha’Emek hired researchers in order to on nitrogen-fixation research with Biotechnology Gen- use advanced tissue culture techniques to “develop eral (Israel), Ltd. (82), an Israeli NBF, and another $3 plant varieties resistant to herbicides, diseases and million agreement has been signed with International other environmental hazards” (86). The kibbutz claims Genetic Sciences Partnership (U. S.) (85), a $1 million income from “tissue-cuhurederived prod- Technion Institute, at the Israel Institute of Tech- ucts,” of which 65 percent are exported, mainly to the nology, is doing research on biotechnology instrumen- Netherlands and the Federal Republic of Germany. tation and on blood and blood plasma substitutes (82). At present, there is no central planning of any R&D Tel-Aviv University, Center for Biotechnology, con- by the Israeli Government, and thus the Government ducts research on MAbs, enzyme systems of anaerobic has no national targeting policy for biotechnology. bacteria, and immobilized enzymes (82). Each Ministry within the Israeli Government deter- The Weizmann Institute of Science is Israel’s main mines and funds the R&D it deems necessary. The ma- center for rDNA research and is especially noted for jor source of Government funds for biotechnology its work with interferon. Additionally, research is R&D is the Office of the Chief Scientist in the Ministry proceeding with MAbs, antiviral vaccines, synthetic of Industry and Trade. The Israeli Ministry of Industry antigens, and new genetic forms of wheat, within and Trade plans to invest $25 million in biotechnology seven departments. R&D over the next 5 years (85). Applied research using new biotechnology began in Israel in 1978. As of 1981, 17 universities, institutes, Canada and venture firms in Israel had been identified as performing or funding applied research in biotechnology. Canada’s economy relies greatly on its natural Of the 17, perhaps 10 use the new technologies in their resources such as agriculture, livestock, mining, and work (87). The four universities and institutes cited forestry. In the past 3 years, Canada’s Federal and Pro- above, in addition to conducting basic research, also vincial governments, as well as a few Canadian compa- do applied work. nies, have worked to incorporate biotechnology spe- Israeli companies noted for their applied R&D in- cifically as it relates to the development and exploita- clude Biotechnology General, Interpharm, Inter-Yeda, tion of the country’s natural resources. A focus on Kibbutz Beit Ha’Emek. Biotechnology General develops improving domestic capabilities in the necessary tech- research findings from the Weizmann Institute and nologies and avoiding dependence on imported prod- Hebrew University. Its main emphasis is on foot-and- ucts and processes, however, represents an attempt mouth disease vaccine, bovine growth hormone, bio- by both the public and private sectors in Canada to logical disease control agents, and nitrogen fixation compete in selected world markets. Whether Canada (82). becomes internationally competitive in areas of bio- Interpharm, a subsidiary of Applied Research Sys- technology such as agricultural plant strain develop- tems (ARES), a Dutch multinational firm based in Gene- ment, mineral leaching, or lignocellulose conversion, va, sold over 1.15 million shares of common stock on for example, will depend to a large extent on the ra- the United States over-the-counter market in 1981. At pidity with which it can exploit national expertise the time of offering, Interpharm had a contract to before other countries with extensive R&D programs supply ARES with hGH. Further, Interpharm may soon in these fields. market human fibroblast interferon for labial and gen- Interest in the commercial development of biotech- ital herpes, depending on results of clinical trials, pro- nology has evolved slowly in Canada. In June 1980, duced by its R&D susidiary Inter-Yeda (83). Other proj- the Canadian Federal Government commissioned a ects with commercial possibilities include an immuno- Task Force on Biotechnology to evaluate the oppor- assay separation technology, extraction technologies tunities available to Canada in this area. This task for follicle-stimulating hormone and luteinizing hor- force, in its report to the Minister of State for Science mone, and research on hybridomas (81). and Technology, identified specific weaknesses in 526 ● Commercial Biotechnology: An International Ana/ysis

Canada’s research base, Federal Government pro- Parallel to and coordinated with the five-pronged grams, regulations, and industry, and made specific program outlined above, the Ministry of State for Sci- recommendations to help correct these deficiencies ence and Technology has charged the National Re- (96). The Canadian Federal Government took more search Council (NRC)* with responsibility for the pro- than 2 years to act on these recommendations, In early motion of centers of expertise in biotechnology. Under May 1983, it announced two separate yet complemen- this program, NRC will undertake three separate proj- tary initiatives to help promote biotechnology in ects: Canada, . construction in Montreal of a $61 million biotech. First, as part of a broader plan to support the de- nology institute which will probably conduct velopment of emerging technologies in general, the generic applied research on bioprocessing and en- Ministry of State for Science and Technology desig- zyme technology (95); nated biotechnology as one of the priority technologies ● refurbishment and reorientation of the Prairie Re- targeted for development (94). The plan to support gional Laboratory in Saskatoon (95); and emerging technologies consisted of five basic com- ● strengthening of the NRC Biological Sciences Divi- ponents. The first was identification of strategic areas sion in Ottawa. of development most important to Canada. Adopting In addition to the Canadian Federal Government, the recommendations of the Task Force on Biotech- many Canadian Provinces have begun to promote the nology, the Federal Government will concentrate ef- development of biotechnology. Quebec, Ontario, Sas- forts on research in nitrogen fixation, plant strain katchewan, Alberta, and British Columbia have shown development, cellulose utilization, mineral leaching an increasing interest in the commercial opportunities and metal recovery, and animal and human health offered by biotechnology. Quebec, for example, has care products. The second component was creation developed an explicit policy which gives high priority of research networks. Individual Federal departments to biotechnology. Saskatchewan is also in the process will establish and promote networks of research proj- of developing such a policy. Quebec and Ontario have ects in biotechnology and researchers in areas rele- invested in commercial ventures in biotechnology (Bio- vant to their mandates. The third component of the Endo and Allelix, respectively). plan was establishment of a cost-sharing program. Several problems may limit the commercial develop- Under the program, and with $7.7 million per year, ment of biotechnology in Canada. First, there is a gen- the Federal Government will match funds invested by eralized shortage of personnel trained in the relevant industry in universities or Provincial research organi- technologies (only 200 to 300 Ph. D. s), and many of zations. The funds could be used for purposes such those who do graduate with degrees, for example, in as specific biotechnology research projects, the re- molecular biology or biochemical engineering are placement of equipment, and the establishment of re- lured to the United States to work in the private sec- search chairs. The fourth component of the plan was tor (97). Furthermore, very few private firms have di- strengthening of overall Federal research capacity in rected their efforts to developing an expertise in new biological sciences ($3.1 million). The funds will be biotechnology; most rely instead on more traditional used to establish and promote networks, to promote techniques in research, development, and produc- interactions between Federal departments and univer- tion. **Canada also has very little experience in joint sities and industry, and to strengthen existing pro- university, industry, and Government cooperation (93), grams within Government research organizations. Fi- though current Federal initiatives are addressing this nally, the fifth component of the plan was the crea- problem. tion of advisory and coordinating committees. A Na- tional Biotechnology Advisory Committee, chaired by a member from the private sector with 25 represent- “NRC is an independent Crown Corp. with considerable influence on Fed- eral science and technology policy. Though not a Government Department, atives from industry, academia, and Federal Govern- the Council is funded primarily by the Federal Government. Because of the ment departments, will monitor the course of the bio- scientific expertise NRC possesses, it will administer $120 million for the tech- technology policy and advise the Minister of State for nology support program (of which biotechnology forms a part). NRC currently employs a total of over 600 persons (including support staff) in biotech- Science and Technology on the program’s progress. nolo~ alone when their program is in full operation. An Interdepartmental Committee on Biotechnology, “*A]lelix Corp. appears to be one of the few companies devoted entirely which functions at the Deputy Ministry level, will con- to developing new biotechnology. Started by the Provincial Government of ontario, the Canadian Development Corporation, and John Labatt Ltd. with trol the allocation of funds to departments participat- a total initial capitalization of $IOS million (89), this company is currently ing in the Federal plan and will deal with a wide range concentrating on the development of new plant strains, using both cell-fusion and rDNA techniqum (88). For further information on private sector activities of issues such as patenting and regulation in biotech- in biotechnology in Canada, see “Biotechnology Research and Development nology (92). in Canada” (9o). .—

App. B—Country Summaries ● 527

The current Canadian patent law requires compul- port of the Government in the Soviet Union. The ad- sory licensing of all human therapeutic drugs devel- vantages of this system are: oped by one company to other general generic phar- ● risks are taken by the Government; maceutical companies (92). As a result of the im- . costs of development are borne by the Govern- plementation of this law in 1969, all multinational ment; ● the Government’s financial base can support an ex- pharmaceutical companies in Canada closed their re- tended period of development; and search operations (91). There is no equivalent in ● the Government can support long-term price con- Canada to the U.S. Plant Variety Protection Act, even trol to facilitate international market entry. though certain mechanisms do exist in Canada to pro- It is too early to project potential Soviet success in tect the ownership of new plant strains (88). the international biotechnology market. Much de- Canadian tax law favors the development of biotech- pends on successful completion of research programs nology. One provision allows for a 100-percent, first now underway, and, most importantly, continued sup- year deduction on all current and capital expenditures port by the Soviet Government. for R&D. Additionally, corporations in Canada may deduct a further 50 percent for incremental R&D ex- Brazil * penditures (calculated from a moving 3-year average). R&D expenditures are also eligible for a 10 percent Brazil is the only developing country that has a for- investment tax credit (small businesses and invest- mal government policy for biotechnology. This policy ments in some provinces receive a higher percentage was developed because relations among the universi- rate) up to a limit of $12,200 ($C 15,000). R&D limited ty, industry, and government sectors in Brazil tend partnerships are also permitted in Canada (94). to be adversarial, inhibiting communication among the sectors, Brazilian industry tends not to fund risky proj- U.S.S.R. ects, concentrating its efforts instead on already existing products and processes. Historically, Brazilian It is extremely difficult to obtain information on de- industry has relied on the purchase of foreign tech- velopment plans for biotechnology in the U.S.S.R. nology and on joint ventures with foreign companies. Although it is known that biotechnology R&D is car- Brazil’s universities have little contact with either in- ried out in the Soviet Union, information about the dustry or the Government and conduct little multi- extent of these activities is unavailable to the general disciplinary research. These historical relationships public. The following summary formed part of the re- suggest that the government (both Federal and State) port on competitive and technology transfer aspects will have to play a strong role in Brazil to develop the of biotechnology by a working group for the White R&D infrastructure necessary to develop biotechnol- House Office of Science and Technology Policy (98): ogy and to aid the commercialization of biotechnolog- The Soviet Union is actively supporting biotechnol- ical applications. ogy R&D and has established an Interagency Technical In general, the major weaknesses for biotechnology Council to organize and stimulate its progress across development in Brazil are as follows: a broad spectrum of disciplines, There is no informa- ● Brazil’s human resource base trained in advanced tion regarding the budget for biotechnology R&D. biotechnology techniques is limited. In 1982, six However, the rate of growth of the Soviet research establishment mirrors that which occurred in the qualified and experienced researchers in the field United States 3 to 5 years ago. Their stated interests of rDNA and MAbs were identified. are directed toward domestic concerns such as the ● Brazil’s national industrial sector is fairly under- development of medical/pharmaceutical preparations developed and has little in-house R&D capability and agricultural applications. Soviet establishment and little inclination to pursue high-risk, new of U.S. patents covering an amino acid producing or- product operation. ganism and the enabling technology suggests an in- ● There is uncertainty about the interpretation of terest in international commercial competition as well. Brazilian patent statutes with respect to biotech- Although Soviet research is often hampered by dif- nological products and processes. ficulties in obtaining equipment and reagents, the ● Soviet system offers one major advantage over the free Import and bureaucratic delays make it difficult enterprise system of the United States; i.e., R&D is for both public and private laboratories to obtain supported from inception through production and dis- the necessary R&D equipment and supplies not tribution, The financing gap between completion of available on the Brazilian market. basic research which has potential for application, and ● This summary is based on “An Analysis of Current and Projected Biotech- actual development, the costs of which in the United nological Activity in Brazil,” a contract report prepared for the Office of Tech- States must be borne by industry, receives full sup- no]ogv Assessment, U ,S, Congress, bv Robert Goodrich, Julv 21, 1982 528 ● Commercial Biotechnology: An International Analysis

● Adequate analyses of market needs and oppor- 6. Nihon Keizai Shimbun (Japan Economic Journal), “Dainiji tunities are lacking, leading to inadequate orien- Bencha Boomu Torai” (The Second Venture Capital Boom tation of research activities. is Coming), Sept. 9, 1982. Three major Federal agencies in Brazil are involved 7. Nihon Keizai Shimbun (Japan Economic Journal), “Pro- in the funding of biotechnology: 1) the National Re- motion of Biotechnology Development,” Sept. 2, 1982, translated by the Foreign Broadcast Information Service search Council, now known as the Council for the De- in Japan Re~rr (Joint Publications Research Service, Arl- velopment of Science and Technology (CNPq, Conselho ington, Va.). Nacional de Desenvolvimento Ciendfico e Tecnolojico); 8. Nihon Kogyo Shimbun (Japan Industrial Daily), “Four Ap- 2) the National Funding Agency for Studies and Proj- plications of Biotechnology,” Feb. 10, 1982, translated by ects (FINEP, Financiadora de Projetos); and 3) the the Foreign Broadcast Information Service in Japan Re- Secretariat of Industrial Technology of the Ministry port (Joint Publications Research Service, Arlington, Va.). of Industry and Commerce. CNPq will devote about 9. Nikkei Biotechnology, “Ministry of Agriculture, Forestry, 5 percent of its annual budget to biotechnology or and Fisheries,” Feb. 14, 1983, translated by the Foreign Broadcast Information Service, in Japan Report (Joint . $1.12 million (BCr200 million) during 1982-83. FINEP will spend approximately $1.5 million to $2 million Publications Research Service, Arlington, Va.). 10. 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SWEDEN REFERENCES 82. Biotechnology Newswatch, “Biotechnology Research and Development in Israel,” Oct. 5, 1981, p. 7. 68. Dampier, W., “The Biotech Boom Town,” Sweden Now, 83. Biotechnology Newswatch, “Interferon From Interpharrn pp. 23-25, May 1982. Enters Anti-Herpes Trials,” Mar. 1, 1982, p. 1. 69. Erland, R., “World Interest in New Version of Swedish 84. Biotechnology Newswatch, “Israel, West Germany Join DNA Machine,” NY Teknik, Stockholm, Dec. 3, 1981, Forces in Plant Biobreeding,” May 16, 1983. translated by the Foreign Broadcast Information Service 85. Executive Office of the President, Office of Science and in West Europe Report.’ Science and Technology (Joint Technology Policy, “Report of a Working Group on Com- Publications Research Service, Arlington, Va.). petitive and Transfer Aspects of Biotechnology,” Wash- 70. Fairlamb, D., “Scandinavian Setback,” Dun’s Business ington, D.C., May 27, 1983. Month 120(6):86-88, 1982. 86. Meyers, N., “Farming Today,” Nature 297:354, 1982. 71. Haijlen-Rylander, M. L., mailgram from U.S. Embassy, 87. Zilinskas, R., “Biotechnology in Israel,” a report prepared Stockholm, US. Department of State, July 18, 1980. for the Office of Technology Assessment, U.S. Congress, 72. Henriksson, K., “Swedish Industries’ Interest in Biotech- 1983. nology Increasing,” Svenska Dagldadet, May 18, 1982, translated by the Foreign Broadcast Information Service in West Europe Report: Science and Technology (Joint CANADA REFERENCES Publications Research Service, Arlington, Va.). 88. Bates, A,, President, Allelix Corp., Toronto, personal com- 73. Malmgren, Inc., and Developing World Industry and munication, July 1983. Technology, Inc., “Technology and Trade Policy, Issues 89. Biotechnology Newswatch, “$105 Million Starts ‘Allelix,’ and Agenda for Action,” prepared for the Department Canadian R&.D Firm,” Jan. 4, 1982, p. 1. of Labor, Bureau of International Labor, and the Office 90. Biotechnology Newswatch, ‘{Biotechnolo~ Research and of the United States Trade Representative, Washington, Development in Canada,” Jan. 4, 1982, pp. 4-5. D. C., October 1981. 91. Chemical Week, “Canada’s Biotech Plan Gets Chilly Recep- 74, Marketplace Sweden, “Swedish Pharmaceuticals: tion,” 132(21):17, 1983. Cresting on Product Development,” 14(4):11-12, 1982. 92. Farina, C., Director University Science and Technology 75. Royal Swedish Academy of Engineering Sciences, ‘(In- Branch, Ministry of State for Science and Technology, dustry and Biotechnology, Developments International- Ottawa, personal communication, July 1983. ly and in Sweden,” Report -214, Stockholm, December 93. Miller, J., “Biotechnology Studies in Canada,” notes for 1981. a presentation to the Canada-Europe Conference on 76. Skagius, K., “Can SBF Offer Danish Companies New Poli- Technological Planning, Ottawa, June 1-3, 1983. - cies New Possibilities?, ” speech, Nov. 25, 1982. 94. Ministry of State, Science and Technology, “Towards 1990: Technology Development for Canada,” Govern- NETHERLANDS REFERENCES ment brochure describing the new technology policy (Ot- tawa: Minister of Supply and Services Canada, 1983). 77. Schuuring, C., “New Era Vaccine,” Nature 296:792, 1982. 95. National Research Council Canada, “Institute for Plant 78. Van Der Meer, Ir. R. R., Secretary-Coordinator, Pro- Biotechnology in Saskatoon,” communique’, Ottawa, May gramme Committee on Biotechnology, Gravenhague, per- 12, 1983, sonal communication, April 1983. 96. Task Force on Biotechnology, Biotechnology: A Devel- opment Plan for Canada, a report to the Minister of State AUSTRALIA REFERENCES for Science and Technology (Ottawa: Minister of Sup- ply and Services Canada, 1981). Commonwealth Scientific and Industrial Research 79. 97. Zeman, Z., Institute for Research on Public Policy, Mon- Organization, Biotechnology Research and Development, treal, personal communication, July 1983. The Application of Recombinant DNA Techniques in Re- search and Opportunities for Biotechnology in Australia, Canberra, November 1981. U.S.S.R. REFERENCES 80. Department of Science and Technology (Australia), Bank 98. Executive Office of the President, Office of Science and of New South Wales, Australian Institute of Management, Technology Policy, “Report of a Working Group on Com- NSW Division, “Genetic Engineering-Commercial Oppor- petitive and Transfer Aspects of Biotechnology,” Wash- tunities in Australia,” proceedings of a symposium held ington, D.C., May 27, 1983. in Sydney, Nov. 18-20, 1981 (Canberra: Australian Gov- ernment Publishing Service, 1982). BRAZIL REFERENCES ISRAEL REFERENCES 99. Goodrich, R., “An Analysis of Biotechnological Activity 81 Bioengineering News, “Yet Another Offering: Inter- in Brazil,” contract report prepared for the Office of pharm,” June 1981, p 6. Technology Assessment, U.S. Congress, July 21, 1982. Appendix C A Comparison of the U.S. Semiconductor Industry and Biotechnology*

Introduction Semiconductor devices: terminology and evolution A parallel is sometimes drawn between the early development of the U.S. semiconductor industry and bio- Semiconductors are materials such as silicon and technology. There are similarities. Semiconductors and germanium with electrical conductivities intermediate biotechnology each showed promise for major ad- between good conductors, such as copper, and insu- vances. Whereas semiconductors immediately showed lators, such as glass. By appropriate manipulations, promise for major advances in electronics, biotech- these materials can be made into semiconductor de- nology shows promise for major advances in many in- vices that have special properties. Such devices include dustries, from agriculture to oil recovery. Further- diodes and transistors. more, developments in semiconductors and in biotech- One of the most important properties of a transistor nology have both been characterized by the pioneer- is its ability to amplify an electrical current flowing ing efforts of small startup companies, which have through it. A transistor is a compact, reliable replace- played a major role in technological innovation. ment for the vacuum tube, which was the foundation Another reason for drawing a parallel between the of the early electronics industry. While transistors U.S. semiconductor industry and firms using biotech- substantially improved the reliability and performance nology is probably the hope that the development of of electronic devices such as computers, they were biotechnology will be accompanied by the same kind simply components in electrical circuits connected by of intense competition, continuing innovation, wide wires to other components. commercial diffusion, and spectacular financial returns that characterized the U.S. semiconductor indus- Integrated circuits were the next major advance in try. semiconductor technology. Integrated circuits are As will be seen in this appendix, the early history “chips” or single components that perform functions of the U.S. semiconductor industry and the history of that had previously required groups of components biotechnology to date are in fact characterized more wired together. by differences than by similarities. Nevertheless, The next step in”semiconductor technology involved studying the history of the U.S. semiconductor in- increasing the density of circuit elements on each chip. dustry may aid the healthy development of biotech- The integrated circuit era began in the early 1960’s. nology in the United States. Some of the actions that By the end of the decade, medium-scale integration fostered the development of the U.S. semiconductor (MSI) had been achieved (10 to 100 digital logic gates industry could be applied to the further development on one chip). Large-scale integration (LSI) (100 to 1,000 of biotechnology, thereby increasing its similarity to gates) was achieved in the mid-1970’s, and the industry the semiconductor industry. The clear success of the is now working on very large-scale integration (VLSI) U.S. semiconductor industry suggests that such actions (circuit complexity exceeding 1,000 gates) (9). deserve consideration for their applicability to biotech- Advances in semiconductor technology have re- nology, although biotechnology is not an industry, but sulted in extraordinary gains in reliability and per- a set of technologies that can potentially be used by formance, with simultaneous reductions in component many industries. size and cost. In the 1950’s, for example, the cost of The purpose of this appendix is to clarify the simi- computer memory capacity was about $1 per bit, but larities and differences between the early history of by 1981, a bit could be purchased for only $0.0001 (9). the U.S. semiconductor industry and the development The U.S. senu”conductor industry is comprised of the of biotechnology, to identify factors contributing to companies that manufacture semiconductor devices the successful development of the semiconductor in- such as transistors and integrated circuits. Two types dustry, and to consider the relevance of these factors of firms can be differentiated: 1) firms that develop to the further development of biotechnology. and manufacture semiconductor devices for sale to other firms that use them to manufacture computers ● The primary source for this comparison was a contract report prepared and other end products; and 2) firms that develop and for OTA by Michael Borrus and James Millstein (2). manufacture semiconductor devices for in-house use

531 532 Commercial Biotechnology: An International Analysis in the manufacture of final products. Both types of arm Western Electric from 1949 to 1959 amounted firms have been important to the development of the to about $609 million-or about 48 percent of all industry. AT&T research (17). The quality of research at Bell The following material describes the early develop- Labs and the level of funding available from corporate ment of the U.S. semiconductor industry and com- and Government sources attracted the most compe- pares it to the short history of biotechnology. For the tent electronics scientists and engineers to work there. semiconductor industry, the period covered is from In the late 1930’s) the electronics industry depended 1947 (the invention of the transistor) to the early on the vacuum tube for amplification of electric cur- 1960’s. For biotechnology, which began in the mid- rents. The advantages of a smaller, more reliable de- 1970’s, the period covered is from the mid-1970’s to vice that would generate less heat were obvious, how- the present. In part because of the different time ever, and because of military and aerospace needs, periods in which the semiconductor industry and bio- there was strong motivation to invent an alternative. technology initially developed, an immediate dif- Also clear was the potential importance of the tran- ference between the two can be identified. The early sistor to commercial communications and computer development of the U.S. semiconductor industry oc- applications. It is not surprising, given Bell Labs’ com- curred primarily in the context of the U.S. domestic manding position in fundamental and applied elec- market, whereas biotechnology is evolving in a world tronics research, that the first new device that could marketplace. International competition, which is an compete with the vacuum tube in the marketplace, important factor in the development of biotechnology, i.e., the transistor, was invented in 1947 at Bell Labs. is a far more important factor in the semiconductor This invention gave Bell Labs a lead in what would industry now than it was in the early history of the ultimately become the semiconductor industry. industry. Both differences and similarities between the Semiconductor R&D by Bell Labs was supported development of the U.S. semiconductor industry and with corporate funds from AT&T. Between 1946 and biotechnology are indicated in the material that 1964, Bell Labs’ annual expenditures on semiconduc- follows. tor R&D rose from less than $1 million to about $22 million. In 1959, the funding of semiconductor R&D Development of the U.S. at Bell Labs represented about 30 percent of all privately funded semiconductor R&D in the United semiconductor industry States (14). Two major influences in the development of the U.S. The fact that Bell Labs was part of AT&T also con- semiconductor industry were Bell Telephone Labora- tributed to Bell Labs’ leadership in the semiconduc- tories (Bell Labs) and the U.S. Government. These two tor industry (2). The research done at Bell Labs was influences are intimately related, because the Federal linked to real-world problems through AT&T’s man- Government played a major role in shaping Bell Labs’ ufacturing arm, Western Electric. Western Electric in- contribution to the preeminence of the United States volved Bell Labs in the solution of engineering prob- in high-technology electronic products including semi- lems associated with conversion from vacuum tube conductors, lasers, and computers. These industries to semiconductor technology in communications sys- have been built, in large measure, on the results of tems. Western Electric also involved Bell Labs in re- research undertaken at Bell Labs. search to improve production of semiconductor de- The role of Bell Labs in the development of the U.S. vices. In addition to conducting research that led to semiconductor industry is briefly described below. new devices, therefore, Bell Labs did research that led The multifaceted role of the Federal Government is to process innovations. It was these process innova- discussed in the section that follows. tions that dramatically decreased the cost of semiconductor devices (2). Federal and corporate investment in Bell Labs pro- THE ROLE OF BELL TELEPHONE LABORATORIES duced significant return. Between 1947 (invention of As part of the American Telephone& Telegraph Co. the transistor) and 1959 (invention of the integrated (AT&T), Bell Telephone Laboratories does fundamen- circuit at Texas Instruments and Fairchild), Bell Labs tal and applied research in many areas to benefit its obtained 339, or more than 25 percent, of the patents parent company. Bell Labs also serves a broader con- related to the development of semiconductors. Dur- stituency. During World War II, for example, Bell Labs ing this period, Bell Labs also was responsible for a undertook about 2,OOO research and development disproportionate share of the most important product (R&D) projects for the U.S. Army, U.S. Navy, and Na- and process innovations (14). tional Defense Research Council (11). Federal funding In summary, market pull for an alternative to the of research at Bell Labs and AT&T’s manufacturing vacuum tube favored the development of the semicon- App. C—A Comparison of the U.S. Semiconductor Industry and Biotechnology 533 ductor industry. The key invention, the transistor, produce a dynamic, healthy U.S. semiconductor indus- arose from fundamental R&D in an industrial labora- try. Similar actions by the Federal Government could tory. That laboratory was an arm of a major corpora- encourage the development of companies in other tion that also would be a significant user of the new high-technology fields such as biotechnology. technology. Federal Funding of Semiconductor Re- The history of biotechnology is quite different from search and Development To Encourage Com- the early history of the U.S. semiconductor industry. petition.—In the late 1940’s, the U.S. Department of Biotechnology arose from basic research in universi- Defense (DOD) wanted to miniaturize and increase the ties—research supported by Federal funds for basic reliability of electronic devices so that a new genera- biomedical research. Probably most significant were tion of defensive weapons could be developed. Defen- Federal funds for research associated with the ‘(war sive missile systems, in particular, required these ad- on cancer. ” Because of the “war on cancer, ” a great vances. To ensure achievement of its objectives, DOD deal of research was done on tumors and tumor vi- distributed R&D funds to many research houses, in- ruses. One of the simplest viruses, SV40, causes tu- cluding Bell Labs. The provision of funding to many mors in hamsters and mice. Researchers went to great research houses encouraged the competitive develop- effort to locate the genes in SV40 that enabled it to ment of semiconductor technology throughout the cause tumors. A need to improve on tedious genetic U.S. electronics industry. It also had the effect of lev- selection procedures for mapping genes led to the eraging private funding of semiconductor R&D (2). identification and use of restriction enzymes that cut The same forces driving military interests—minia- DNA in specific locations, and thus enabled physical turization and reliability–also applied to the U.S. mapping of genes. Restriction enzymes also produce aerospace program. In addition to DOD, therefore, the the “sticky ends” that are fundamental to recombinant National Aeronautics and Space Administration (NASA) DNA (rDNA) experiments. Physical mapping of an en- also became a major source of funding for semicon- tire genome (an organism’s complete set of genes) ductor R&D. using restriction enzymes was first accomplished with It is important to note that the early development SV40. And it was a proposed rDNA experiment using of semiconductor technology was dominated by the SV40 that gave rise to the Asilomar meeting that even- interests of the U.S. military and NASA (2). Civilian ap- tually led to the National Institutes of Health (NIH) plications followed. This early predominance of mili- Guidelines for Research Involving Recombinant DNA tary interests driving the development of semiconduc- Molecules. * tors contrasts with the development of biotechnology, Other researchers concentrated on myelomas for although there are military applications of biotech- (neoplastic growth of certain white blood cells). Thus, nology, civilian commercial interests have driven its cancer research probably also contributed to the dis- development. and the monoclinal anti- covery of hybridomas * * Federal Funding of Demonstration Projects, bodies they make possible. Production, and Consumption of Semiconduc- In summary, cancer research played a significant tor Device% —Demonstration projects using semicon- role in the history of biotechnology and is another ex- ductor technology were financed by the Federal Gov- ample of how fundamental research may produce un- ernment. The U.S. Air Force, for example, funded a expected results. In the development of biotechnology, demonstration in which a small digital computer using “science push,” rather than the “market pull” that gave integrated circuits was built by Texas Instruments (l). impetus to the U.S. semiconductor industry, was par- Demonstration projects such as this convincingly dem- ticularly important. onstrated to both military and civilian users the feasibility of using integrated circuits in electronic systems THE ROLE OF THE U.S. GOVERNMENT (2). The actions of the U.S. Government that influenced In addition to funding demonstration projects, the the development of the U.S. semiconductor industry Federal Government funded the development of semi- were many and diverse. Undoubtedly, not all the ef- conductor production capability and provided a mar- fects of the Federal Government’s actions were in- ket for semiconductor products under industrial pre- tended or anticipated. With the benefit of hindsight, paredness contracts in 1952-53 and 1956-57. In 1952- however, it is apparent that these actions helped to .53, $11 million of DOD funds were used to build pilot transistor production lines at five sites operated by ● “I Iwse (1 S guidelines for rDX.A research arc dIsrussed In Chapfer 1.5 Western Electric, General Electric (GE), Raytheon, Hfw/t/J, Safet,\’, and En L’ironnwnta/ Regulation ● “Hyhndomas are made by fus]ng an ant]bo{l~’.pl-[)[]u(’ir]g spleen cell with RCA, and Sylvania (10). In 1956, DOD provided major a 111} f’lomd rf’11 assistance to production technology with $4o million 534 . Commercial Biotechnology: An International Analysis

in transistor production contracts to 12 firms. Because (USDA) and the Food and Drug Administration (FDA) early production was often faulty and about 90 per- would be somewhat analogous to the federally funded cent of the devices produced could not meet Federal semiconductor demonstration projects. Such trials are specifications, the 12 firms had to build production very expensive and beyond the financial resources of facilities potentially capable of manufacturing 10 to many small firms. 12 times the number of devices the Government The 19S6 Consent Decree.—In the development wanted, thus assuring the Government of the number of the semiconductor industry, the Federal Govern- of devices it needed (19). As processes improved, more ment provided more than dollars, useful as these were and more usable devices came off each assembly line, to fund R&D, build production lines, demonstrate and the search for new commercial markets was stim- their products, and provide a first market. Substan- ulated by the need to absorb increases in production tial Federal dollar investments were accompanied by capacity. less direct policy decisions that helped shape a highly The actions of the Federal Government just outlined competitive U.S. semiconductor industry. The 1956 helped to demonstrate the value of semiconductor consent decree is a case in point. technology to users other than the Federal Govern- In 1949, the U.S. Department of Justice initiated an ment, greatly reduced the risk of developing and pro- antitrust suit against AT&T. Resolved in 1956, the con- ducing semiconductor devices, and helped to develop sent decree (20) required AT&T’s manufacturing arm industry capacity to produce semiconductor devices Western Electric to license existing Western Electric at levels that would meet the needs of new users as patents to U.S. firms without royalty and to establish well as those of the Federal Government. reasonable rates for licenses under future patents. The Federal Government could support in biotech- AT&T was permitted to retain its vertically integrated nology, just as it did in the semiconductor industry, -structure but was prohibited from entering new prod- the development of process and production technol- uct markets; in other words, AT&T was restricted to ogy. These are the very areas in biotechnology where its existing markets of basic common carrier commu- needs for funds and for innovation are high. It is also nications and Government defense and aerospace. in process and production capability and capacity that Thus, AT&T was prohibited from using the results of the United States is least competitive with Japan, its research at Bell Labs to enter additional commercial major competitor in biotechnology (2). One area of markets that semiconductor technology promised to biotechnology that might be stimulated by a bioprocess advance, such as commercial electronic computers. production and demonstration project is the produc- Given the consent decree, one option for AT&T tion of commodity chemicals. Large-scale bioprocess would have been to redirect Bell Labs’ research so that facilities, and hence large financial investments, will it would not benefit fields AT&T could not enter. be necessary for U.S. firms using biotechnology to suc- However, semiconductor R&D directed to enhancing cessfully enter the commodity chemical market. Cetus AT&T’s major interests in the telecommunications, Corp. made an attempt to enter this market with its military, and aerospace markets was not separable fructose-alkene oxide process using Standard Oil of from R&D applicable to areas such as commercial California (SOCal) as financial backer. The attempt was computers from which AT&T was prohibited. In ad- frustrated when SOCal decided to terminate its back- dition, Bell Labs had a history of open communication ing (2). Federal funds could help new biotechnology regarding its research. As a result, AT&T conformed firms (NBFs)* enter commercial markets requiring not only to the letter but also to the spirit of the 1956 large-scale production. Alternately, rather than fund- decree. The effect was to transform Bell Labs, for a ing specific projects at particular firms, the Federal time, into a sort of national laboratory for semicon- Government could support R&D in generic technology ductor R&D. underlying bioprocessing. Regardless of the particular Continuing its open practices begun prior to the conform of support, the Government should ensure that sent decree, Bell Labs actively contributed to the dif- new knowledge of bioprocess technology gained with fusion of the technology that it helped develop. Sym- the assistance of Federal funding is made available to posia to educate Government users and small and other potential users. large firm licensees were begun in 1951, and a liberal Federal Government support of field and clinical license policy was begun in 1952. Also important, Bell trials necessary for approval of some products of bio- Labs and Western Electric personnel moved freely to technology by the U.S. Department of Agriculture new employment in firms exploiting the results of Bell Labs R&D without fear of suit for theft of trade secrets ● NBFs, as defined in Chapter 4: Firms Commercializing Biotechnology, are new, generally small firms that have been formed specifically to capitalize (18). Such movements transferred know-how devel- on new biotechnology. oped at Bell Labs and Western Electric to other firms. App. C—A Comparison of the U.S. Semiconductor Industry and Biotechnology . 535

Liberal licensing, the educational activities of AT&T, potential losses up to the amount of the guaranteed and personnel mobility encouraged by Federal anti- percentage (16). Such guaranteed loans accomplished trust activity resulted in wide diffusion of semicon- several things: ductor technology. Diffusion was facilitated by the fact They encouraged private investors by decreasing that data acquired under DOD R&D contracts were their risk of loss. subject to unlimited use by the Government, including Because they were granted at lower than prevail- their supply to other contractors working in related ing interest rates, they decreased the cost of capi- areas. Various DOD offices and agencies, and DOD- tal. funded centers at universities, served as information They served as a system of revolving credit. Guar- centers for research findings. The U.S. Department antees were not tied to particular loans but in- of Commerce (6), National Science Foundation, Na- stead were guarantees against loss of a particular tional Bureau of Standards (4), and NASA (13) served level of debt. As periodic repayments reduced out- as clearinghouses for semiconductor information and standing debt, therefore, additional loans could transferred knowledge derived from military con- be taken out as long as repayments kept debt tracts to civilian users. Government agencies held sym- within the face amount of the authorization. Thus, posia and colloquia to inform industrial contractors authorizations of only $2.9 billion allowed loans of the results of federally funded research and of totaling about $11.6 billion to be made to defense future military and space requirements. The result contractors. was an acceleration in the pace, and hence the com- They returned a net profit to the Federal Govern- petitiveness, of the U.S. semiconductor industry, in ment of about $24.5- million (15). This profit re- civilian as well as military markets. In 1961, the sulted because the Federal guaranteeing agent Army Signal Corps estimated that defense R&D had was entitled to a portion of the interest paid on made possible many civilian applications of semicon- the loan. ductor technology in a period perhaps 75 percent Most of the funding leveraged by the V-loan pro- shorter than that which would have occurred without gram was used for working capital rather than facili- Government support (17). ties. Other Government financial aids produced addi- In biotechnology, there is no institutional equivalent tional working capital. Progress payments, advance to Bell Labs, which served as a national resource for payments, and direct loans were made to companies semiconductor research, development, education, and involved in defense production (16). personnel. Furthermore, the scope and magnitude of A particularly important financial instrument en- Federal actions facilitating diffusion of knowledge and couraging investment in defense production capabili- know-how in the area of semiconductors have no party was a program permitting accelerated depreciation. allel in biotechnology at present. Finally, the diffusion In the 1950’s, the Office of Defense Mobilization of technolo~ by personnel mobility that occurred in awarded Certificates of Necessity that provided a the semiconductor industry because of the command- 5-year writeoff (compared to the usual 20- to 25-year ing position of Bell Labs, which was restrained by the amortization schedule) of the percentage of the cost 1956 consent decree, is unlikely to occur to the same of certified production facilities that could be at- degree in biotechnology, where knowledge is spread tributed to major defense production needs. From among many competing firms. November 1950 through April 1957, 21,925 Certifi- Federal Loan and Tax Policies.—In the 1950’s cates of Necessity permitted the accelerated writeoff and 1960’s, the U.S. Government also encouraged the of almost $23 billion on facilities costing $39.2 billion development of the U.S. semiconductor industry (15). Although these figures include more than semi- through Federal loan guarantees and tax policies. Al- conductor firms and data do not permit isolation of though not developed specifically for the semiconduc- their share, semiconductor firms definitely received tor industry, these general policies made funds avail- Certificates of Necessity and their writeoff was sure- able for operations, plant investment, and new equip- ly substantial (5). ment. The growth of the U.S. semiconductor industry was The Defense Procurement Act of 1950 established further spurred in 1962 by two changes in general U.S. the V-loan program and was a major source of Federal tax policy (2). One change was that the Revenue Act loan guarantees to defense contractors from 1950 to of 1962 permitted all manufacturing industries an in- 1958. This act provided Federal loan guarantees that vestment tax credit of up to 7 percent of qualified in- obligated the Federal agency guaranteeing the loan to vestment in machinery and equipment. This invest- purchase a stated percentage of the loan if the bor- ment tax credit stimulated investment in semiconduc- rower defaulted. Thus, the Federal agency shared any tor production capacity just when integrated circuit 536 Commercial Biotechnology An International Analysis procurement began to expand. The second change relatively stable environment deserves thought. In any was adoption by the U.S. Treasury Department in case, an increased role for FDA in fostering the de- 1962 of new regulations that shortened depreciation velopment of biotechnology is probably prohibited by guidelines by 15 to 20 percent. conflict of interest with its significant regulatory re- Clearly, Federal tax and loan policies can stimulate sponsibilities. substantially the growth of emerging industries. Con- Other relevant U.S. Government agencies, such as sideration might be given to whether current tax and DOD, the Environmental Protection Agency (EPA), the loan policies are stimulating development of biotech- National Bureau of Standards, the National Science nology adequately or whether additional Government Foundation, the Occupational Safety and Health Ad- financial instruments are needed. ministration (OSHA), and USDA have so far been less Defense Laboratory Research.–During the involved in the development of biotechnology than 1950’s and early 1960’s, each branch of DOD devel- either NIH or FDA. oped intramural programs for semiconductor R&D. In sum, the substantial role that DOD and NASA Although these defense facilities produced relatively played in encouraging the early development of the few significant semiconductor discoveries (with some U.S. semiconductor industry is a role that is not be- major exceptions) (21), they nonetheless played a ma- ing played by the U.S. Government in the commer- jor role in the development of the semiconductor in- cial development of biotechnology. dustry. In addition to serving as centers for information and technical liaison, these laboratories tested THE ROLE OF UNIVERSITIES theories and ideas considered too speculative by pri- During World War II, the successful funding of vate industry. Those that turned out to be practical defense developments at universities gave rise to a were then developed by industry (7). Furthermore, conscious national policy of U.S. Government funding personnel movements from defense establishments to of university basic research. Although Federal funds private industry served to transfer knowledge, some- for joint research at universities and industrial lab- times at critical points in the development of the U.S. oratories in solid-state physics and materials helped semiconductor industry (23). Especially important, de- provide the basis for the U.S. semiconductor industry fense laboratory researchers provided the Federal (22), the key discovery leading to the transistor was Government with an independent view of the state- made in an industrial laboratory. of-the-art of semiconductor technology and the capaci- In the early 1950’s, university electrical engineering ty to verify, assist, and at times lead industrial efforts. departments lagged behind industry in the area of In terms of level of expertise and dynamic inter- semiconductors by a considerable margin. * Federal action between Federal agencies and industry, the funds were provided to universities to help reduce this closest analogs in biotechnology are NIH and FDA. gap and build the university expertise and training Because it issues the U.S. guidelines for rDNA re- capacity that would be needed to support the expan- search, however, NIH is a quasi-regulator of biotech- sion of the U.S. semiconductor industry. nology. This role puts NIH in a conflict of interest posi- These Government expenditures were fruitful. By tion vis-a-vis both its substantial funding of basic roughly 1960, the major research universities in the research in biotechnology and any additional role it United States had highly trained electronics person- might assume in commercialization. NIH, which has nel, creative basic research programs, and faculty mem- been forced to be aware of developments in the com- bers who served as expert consultants to industry. mercialization of biotechnology by the guidelines, Furthermore, the U.S. semiconductor industry be- however, nevertheless has a major potential role in came concentrated geographically around the major biotechnology transfer. The degree to which and how university recipients of Federal dollars, in particular, best to involve NIH in commercial development of bioin Boston and San Francisco. The geographic proximity technology deserve consideration. of semiconductor firms and these universities fostered FDA has developed expertise in biotechnology be- productive interchange and insured the continued cause of its regulatory function. Its major contribu- buildup of university expertise. tion to the development of biotechnology to date has Increasingly cooperative ties between U.S. univer- been in providing a favorable regulatory climate for sities and the semiconductor industry resulted in the new products. However, the present regulatory cli- part-time employment by the industry of significant mate is highly subject to administration views on in- numbers of students. Many university faculty mem- dustry regulation. Whether U.S. regulatory agencies should be better insulated from the effects of changes “Massachusetts Institute of Technolo&v’s Lincoln Laboratories is an excep- in administrations so that biotechnology evolves in a tion App. C–A Comparison of the U.S. Semiconductor Industry and Biotechnology ● 537

bers served as directors of semiconductor corpora- it is used with other electronic components to tions, and some even held positions such as board make an end product such as a missile guidance chairman and part-time company president (2). Some system. Thus, in biotechnology, the contributions faculty members became millionaires through equity of the universities and industry are less distinct participation in the companies with which they were than they were in the semiconductor industry. associated (2). In comparison with the protests that ● The semiconductor industry had obvious contri- have been raised in reaction to similar arrangements butions to make to aerospace and defense. De- in biotechnology, public protests against these ar- fense and aerospace are seen as national objec- rangements were small. tives and national commitment to them tends to In sum, in the early history of the U.S. semiconduc- be stronger and more focused than commitment tor industry, few innovations emerged from federal- to other sectors of the economy, where biotech- ly funded university research. The universities used nology is making its first contributions. Actions Federal dollars to bring their expertise up to a level that would be protested otherwise may be toler- commensurate with industry’s and to become geo- ated when they relate to meeting defense and graphic foci for the development of the new semicon- aerospace needs. ductor industry. In the case of biotechnology, by contrast, innovations have emerged directly from univer- Structure of the U.S. semiconductor sity research. New semiconductor firms tended to lo- industry cate near major university research institutions. This collocation occurred fairly gradually as Federal dollars Industries develop unique structures in response to flowed to universities and helped build their exper- their own characteristics and the effects of external tise. In the case of biotechnology, the collocation of new forces acting upon them. The forces that have been firms and universities occurred immediately, because described in this appendix shaped the U.S. semicon- the universities were the site of biotechnology exper- ductor industry so that its particular structure evolved tise (2). from a myriad of possible structures, much as biolog- The lack of public and congressional concern over ical systems evolve in response to pressures of selec- equity ownership of semiconductor companies by uni- tion. The structure that emerged in the semiconduc- versity professors is in stark contrast to the reaction tor industry consisted of three types of companies: to similar arrangements in biotechnology. Some of the ● small, new entrepreneurial firms that developed factors that may account for the differences include and manufactured semiconductor devices, the so- the following: called “merchant” firms; ● The locations from which biotechnology and semi- ● generally larger, established companies that ob- conductor technology emerged and the source of tained most or all of their semiconductor devices their expertise, coupled with patterns of Federal from the merchant firms and incorporated them spending, are different. Semiconductor R&D was into electrical systems; and dominated by industry, especially in its early ● one very large, vertically integrated company, years, and Federal funds went to industry for the AT&T, t-hat manufactured semiconductor devices development of the technology. Federal funds to for use in its telecommunications systems but was the universities were used very differently from constrained by antitrust policy from dominating Federal funds to industry, namely, to build the other markets. * scientific infrastructure necessary to support the The role of AT&T, along with its affiliates Bell Labora- new industry. Thus, the roles played by univer- tories and Western Electric, has already been dis- sities and industry and the use of Federal funds cussed. The rest of this section describes the relation- in the two sectors were more distinct in the early ships between the other two groups of firms. years of the semiconductor industry than they The emergence of new entrepreneurial firms in the have been in biotechnology. U.S. semiconductor industry was facilitated by U.S. ● Many recent advances in research in biotech- Government policies and actions, such as the 1956 con- nology immediately suggest commercial products. sent decree and military and aerospace demands. In- Although there are many problems to be solved formation on semiconductor technology was widely between, for example, cloning the gene for human available, and personnel mobility was not effectively insulin and market success, the potential market- discouraged. AT&,T’s liberal licensing policy, a U.S. ability of the product of the research is obvious immediately, In addition, the DNA organism that *I,ater In the h]storj of the st’r~]i(orl(luctor” incfostr’} a seconcl ~arj Iar-ge makes insulin, is, in a sense, itself the product. A \ ert icallt integr

25-561 0 - 84 - 35 538 . Commercial Biotechnology An International Analysis

Government market for new products, and the fact the small new semiconductor firms and the Federal that transistors could be substituted for vacuum tubes Government. An essential difference, however, is that meant that an entrepreneur could start a new semi- small new semiconductor firms and the Federal Gov- conductor firm and move immediately to market with ernment did not compete for markets; NBFs would like a few million dollars of capital, a license from AT&T, to compete with established companies. and a DOD or NASA contract. In the absence of support from the Government for Larger U.S. companies were helped in establishing producing and marketing its products or processes, their position in the semiconductor industry by the an NBF is likely to turn to a large established company patterns of DOD development and procurement estab- that has expertise in scale-up technology and regula- lished during World War 11 that favored large corpora- tory clearance procedures. The established company tions. “Even as late as 1959 the old-line vacuum tube is likely to have gained this expertise by developing companies were awarded 78 percent of the federal a product similar to the one the NBF wants to bring R&D funds devoted to improving the performance and to market. If the new product threatens an existing reducing the cost of the transistor although they ac- product of the established company, the established counted for only 37 percent of the product market” company’s marketing of the new product is likely to (3). In contributing to the development of transistors be less than optimal. This is not to say that the estab- and integrated circuits, the large defense electronics lished company will refuse to undertake the clinical companies were speeding the obsolescence of a tech- trials, marketing, and distribution of the new product nology in which they had a very large investment, developed by the NBF. Indeed, the motivation of the vacuum tubes. The large companies were forced into established company is just the opposite. By obtain- this position, however, by the presence of small entre- ing a license for the NBF’s new product, the established preneurial firms that managed to obtain DOD funds company ensures that another large competitor does by their more flexible and rapid response to DOD’s not obtain the biotechnology product that threatens demands for miniaturization and reliability. The small, its own market. Furthermore, the established com- new firms undoubtedly contributed to the speed of pany can control the market environment of the new entry of the large companies into semiconductor tech- product. By entering into an agreement with an NBF, nology. the established company also gains access to the new Small entrepreneurial firms did contribute to inno- technology. vation in semiconductors, but preeminence in that role The arrangements between Eli Lilly and the NBF went to Bell Laboratories. In the development of the Genentech with respect to the new biotechnology U.S. semiconductor industry the major contributions product Humulin” are illustrative. * Eli Lilly has li- of small firms were to diffuse semiconductor technol- censed this rDNA-produced human insulin product ogy and to stimulate competition. Diffusion of semicon- from Genentech. Humulin” is a competitor of insulin ductor technology occurred because the small firms obtained from animals, and Lilly currently holds about exploited new markets. It was they who most “quick- 85 percent of the U.S. insulin market. Thus, the pace ly and successfully (took) new technology from the lab- of market development in Humulin” can be controlled oratory and adapted it for large-scale production” (14). by the very company whose monopoly position Humu- The small firms also stimulated-competition. In effect, lin” sales otherwise might challenge. A consequence of the small firms, as independent sources of advanced arrangements of this kind could be to slow market semiconductor technology, introduced an element of development and to reduce the flow of royalties to dynamic uncertainty into the US. semiconductor in- NBFs. Yet royalties maybe necessary to NBFs’ survival dustry. And because Federal policies helped them to and certainly are anticipated by the new firms to assist produce and market their products, the small firms them in expansion. Arrangements like that between stimulated semiconductor R&D among all companies Eli Lilly and Genentech in biotechnology go against the in the industry, large and small. lessons to be learned from the evolution of the U.S. Biotechnology, as it now stands, presents a very dif- semiconductor industry. Both the pace of technological ferent picture. Small NBFs in the United States, in development and the growth of small, innovative semi- order to spread risk and raise capital, have had to turn conductor firms such as Texas Instruments might have to complex cooperative arrangements with large do- been quite different had Texas Instruments found it mestic and foreign companies. * On the surface, the necessary to license GE or RCA to get its transistor arrangements between NBFs and established compa- products on the market. nies may appear analogous to the relationship between

● These arrangements are discussed in Chapter 4: Firms Commercializing Biotechnology. ● These arrangements are discussed in Chapter 5: Pharmaceuticals App. C—A Comparison of the U.S. Semiconductor Industry and Biotechnology 539

Like the semiconductor industry in its early stages, cial production. And for specific products of biotech- biotechnology currently is restricted by its need for nology, FDA, which regulates food ingredients and process technology. The history of process develop- human drugs and biologics, and USDA, which regu- ment in the evolution of the U.S. semiconductor indus- lates animal biologics, are particularly important. EPA try is of relevance to biotechnology. As has been and OHSA also may have significant regulatory author- shown, large electronic defense contractors such as ity, although their exact authority is somewhat GE were assisted in developing production lines for unclear. * U.S. Government regulation in research, de- semiconductor devices by large infusions of DOD velopment, and marketing of many products of bio- dollars. But the history of the U.S. semiconductor in- technology, for which there is no parallel in the semi- dustry demonstrates that small firms are not automat- conductor industry, makes effective commercializa- ically foreclosed from process advances. Thus, the ear- tion of the products of biotechnology relatively more ly growth of Fairchild Semiconductor, for example, complex. was tied largely to its development of the planar process, which dramatically increased the firm’s produc- Conclusions tion yield and helped compensate it for its lack of production experience, Certain differences between the early history of the In the case of biotechnology, firms that exploit pos- U.S. semiconductor industry and biotechnology are sibilities in both new product development and proc- particularly important from a policy perspective: ess innovation clearly will have more growth oppor- The U-.S. semiconductor industry- arose from a tunities than those that restrict themselves to one or fundamental invention (the transistor) made at a the other. In biotechnology, as in semiconductors, major industrial laboratory, AT&T’s Bell Tele- process know-how is probably transferable across a phone Laboratories, in 1947, and most of the sub- range of potential products and markets. Thus, if NBFs sequent product and process innovations in the can surmount the financial hurdles to commercial pro- period from 1947 to the early 1960’s also were duction, the pace of technological advance and market made by industry. Biotechnology arose from fun- development likely will be accelerated significantly, damental biomedical research in universities, and and the competitiveness of U.S. firms using biotech- its early subject matter experts were primarily nology probably will be increased. unversity professors. The need for development of the U.S. semicon- Other differences ductor industry to meet military and aerospace needs was clear. The tie between biotechnology Two other differences between the early history of and national objectives is less clear. The U.S. the U.S. semiconductor industry and biotechnology Government’s role in support of basic biomedical are noteworthy. The first difference is the range of research has been, and remains, clear, but its role economic sectors each technology was perceived in the commercialization of biotechnology is far potentially to affect. For semiconductors, military, aero- less defined. space, communications, and computer applications At Bell Labs, early commercial exploitation of were foreseen. All these draw primarily on the disci- semiconductor discoveries was strictly limited to plines of electronics and engineering. The applications one industrial sector, communications (despite the of biotechnology are perceived to be broader—phar- much wider applicability of semiconductor tech- maceuticals, plant and animal agriculture, chemicals, nology). In effect, Bell Labs became, for a time, pollution control, energy production, mining, oil re- something like a national laboratory for the semi- covery, and biosensors/biochips are areas where ap- conductor industry. There is no equivalent in bio- plications are being pursued. Not only is the array of technology. sectors expected to be affected by biotechnology Many new semiconductor firms in the United broader, the technical disciplines required for effec- States were formed to market a definite product, tive application of biotechnology are more numerous. and, because of the availability of Federal con- Developing an effective infrastructure to support the tracts, relatively little capital was required to enter commercialization of biotechnology, therefore, may the market. Most NBFs were started as R&D be more complex than was developing an infrastruc- houses, with the objective of determining how to ture to support the semiconductor industry. make a product. With certain exceptions (e.g., in The second difference is the prominent role of Fed- vitro monoclinal antibody diagnostic products), eral regulation in biotechnology. NIH, through the rDNA research guidelines, is in a quasi-regulatory posi- ● This issue is discussed in Chapter 1.5: Health, Safety, and Environmental tion with regard to both R&D and scale-up to commer- Regulation. 540 Commercial Biotechnology: An International Analysis

the capital required to produce a biotechnology tion to the industry that the NBF might otherwise product and bring it to market will be greater provide. than that needed by early semiconductor firms. The Federal Government was clear about its role in For NBFs attempting to commercialize a new drug the development of the U.S. semiconductor industry. or biological for human use, capitalization require- DOD and NASA funded the industry to produce prod- ments may be $50 million to $100 million. * ucts needed in military and aerospace applications. ● The early U.S. semiconductor industry was char- The Federal Government has funded basic biomedical acterized by multifaceted Federal encouragement research in university settings, but as yet it has no ex- of commercialization through a variety of policies plicit role in the commercialization of biotechnology. ranging from antitrust to Federal loan and tax pol- Unlike semiconductor technology, biotechnology has icies. There is no parallel to this in biotechnology. sprung primarily from academia. As biotechnology ● Biotechnology differs from the U.S. semiconduc- moves to the market, universities of necessity have tor industry in that the Federal Government is not played a role in commercializing the fruits of public providing substantial funds for process engineer- funding of research, because they were the sole source ing and development of pilot and production facil- of basic knowledge. Moreover, the role of the univer- ities. Nor is the Federal Government serving as sities has been further complicated in biotechnology a “creative first market” for the products of bio- by the close association between basic and applied technology as it did for the semiconductor indus- research in this area. The traditionally distinct roles try. of the university as source of research and training ● Biotechnology also differs from semiconductor and of industry as source of commercialization, which technology in the wider array of economic sec- were clear with respect to semiconductors, are tors it is perceived potentially to affect and in the blurred for biotechnology. * larger role of the Federal Government in regu- In the early history of the U.S. semiconductor in- lating many products of biotechnology. dustry, the Federal Government and industry were Thus, NBFs currently face a very different, and partners, with industry providing know-how and the much more complex, market environment than did Federal Government supplying public funds for R&D, the new entrants in the semiconductor industry. The demonstration projects, production, and consumption industrial sectors in which biotechnology appears to of semiconductor devices. Direct returns to the Fed- be making its first contributions are human and animal eral Government, in the form of advances in defense health care, and the pharmaceutical sector has special and aerospace electronics, were obvious. In the case characteristics. The market for a particular pharma- of biotechnology, however, not the Federal Govern- ceutical product is often dominated by one or a few ment but the public health organizations and univer- major corporations, as, for example, the U.S. insulin sities that were the sources from which biotechnology market is dominated by Eli Lilly.** The product of the arose have been industry’s partner in commercializa- dominant corporation is supported by extensive adver- tion, As a result, an impression is left that the public tising in medical journals, by a complex distribution is ceding the biotechnology research infrastructure system involving detail men who provide product sam- and discoveries brought about by public moneys to ples and are recognized by the physicians they serve, private industry without corresponding return. The and by the reluctance of physicians to switch to a problem has been exacerbated because biotechnology product with less familiar properties. The establish- emerged so quickly from the academic setting. Basic ed company is also skilled in the clinical testing pro- biomedical research nourished by Federal dollars is cedures necessary to obtain market approval. An NBF applicable suddenly to the development of commer- with a competing product, but without production cial products. capacity, experience in regulatory compliance, and an Consideration of the differences between the early established marketing and distribution system within history of the U.S. semiconductor industry and bio- the medical community, has little choice but to license technology suggests several areas of need for biotech- the new product to an established company that al- nology: ready produces a similar product. Such licensing, ● One need is for the Federal Government clearly however, will tend to reduce the competitive stimula - to distinguish basic research from commercialization and to define its different roles with regard to each. ● For discussion of the financial needs of firms using biotechnology, see Chapter 12: Financing and Tax Incentives for Firms, * ● A profile of Lilly’s sham in U.S. and foreign insulin markets is presented *University/industry relationships in biotechnology are explored at greater in Chapter .5: Pharmaceuticals. length in Chapter 17: Unit,ersit-vilndustry Relationships. App. C—A Comparison of the U.S. Semiconductor Industry and Biotechnology ● 541

A second need, suggested by the successful his- 10. Linville, J. G., and Hogan, L. C., “Intellectual and Eco- tory of the U.S. semiconductor industry, is for the nomic Fuel for the Electronic Revolution, ” Science Federal Government to facilitate the development 195:1107, 1977. of NBFs so that they can compete effectively in 11. Lustig, L. K. (cd.), Impact (Short Hills, N.J.: Bell Tele- the marketplace. As in the semiconductor indus- phone Laboratories, 1981), 12. Organisation for Economic Cooperation and Develop- try, small firm competition would stimulate in- ment, Gaps in Technology, Electronic Components, novation by all companies, large and small. Paris, 1968. Related to the above is the need to develop effec - 13. Organisation for Economic Co-Operation and Develop- tive mechanisms for the diffusion of knowledge ment, United States Industrial Policy, Paris, 1970. developed in biotechnology. 14. Tilton, J., International Diffusion of Technology: The The last is very important and is really the central Case of Semiconductors(Washington, D. C.: Brookings issue with respect to ensuring a return to the public Institution, 1971). for the financial investment that the public has made 15. U.S. Congress, Joint Committee on Defense Production, in biotechnology. Hearings on the Defense Production Act of 1950, Pro- gram Report No. 39 (Washington, D. C.: U.S. Govern- ment Printing Office, May 28, 1957). Appendix C references 16. U.S. Congress, Senate Committee on Banking and Cur- rency, Review of Voluntary Agreements Programs 1. Asher, N., and Strom, L., The Role of the Department Under the Defense Production Act (Guaranteed Loans) of Defense in the Development of Integrated Circuits (Washington, D.C.: U.S. Government Printing Office, 1958). (Arlington, Va.: Institute for Defense Analysis, 1977). 2 Borrus, M., and Millstein, J., “Technological Innovation 17. U.S. Congress, Senate Committee on the Judiciary, Sub- and Industrial Growth: A Comparative Assessment of committee on Patents, Trademarks, and Copyrights, Biotechnology and Semiconductors, ” contract report Patent Practices of the Department of Defense, prepared for the Office of Technology Assessment, U.S. (Washington, D. C.: U.S. Government Printing Office, Congress, March 1983. 1961). 3. Braun, E., and MacDonald, S., Revolution in Miniature 18. U.S. Department of Commerce, A Report on the U.S. (Cambridge, England: Cambridge University Press, Semiconductor Industry (Washington, D.C.: U.S. Gov- ernment Printing Office, 1977). 1975)< 4. Diamond, H., “Research and Development Programs 19. U.S. National Commission on Technology, Automation, of the National Bureau of Standards, ” unpublished and Economic Progress, “Technology and the Ameri- paper, Dec. 1, 1947. can Economy, ” in The Employment Impact of Tech- 5. Electronic News, “9 Firms Get Tax Writeoff Certifi- nological Change, vol. 2 (Washington, D. C.: U.S. Gov- cates, ” July 15, 1957, p. 6. ernment Printing Office, 1966). 6. Electronic News, “2 Services-Backed Research Studies 20. U.S. vs. Western Electric Co., 1956 Trade Case (CCH Available by OTS,” Jan. 27, 1958, p. 14. 68,246 (D. N.J., 1956). 7. Electronic News, “Navy Electronics Lab Turns Equip- 21, Utterback, J., and Murray, A., The Infi’uence of Defense ment Ideas Into Reality, ” Mar. 28, 1960, p. 17. Procurement and Sponsorstu”p of Research and Devel- 8. Ginzberg, E., Kuhn, J. W., Schnee, J., et al., Economic opment on the Development of the Civilian Electronics Impact of Large Public Programs: The NASA Experi- Zndustry (Boston: Center for Policy Alternatives, MIT, ence (Salt Lake City, Utah: Olympus Press 1976). 1977) 9. Levin, R. C., “The Semiconductor Industry,” Govern- 22. Weiner, C., “How the Transistor Emerged,” I.E.E.E. ment and Technical Progress: A Cross Industry Anal- Spectrum, January 1973, pp. 24-33. ,vsis,- R. R. Nelson, ed. (New York: PerEamon Press, 23. Wolff, M. F., “The Genesis of the Integrated Circuit,” 1982). 1.E.E.E. Spectrum, August 1976, pp. 44-53. Appendix D Firms in the United States Commercializing Biotechnology

Table 4 in Chapter 4: Firms Commerializing Fermentation Industries, Inc.) are missing from the list, Biotechno]ogy listed firms in the United States com- because sufficient information to confirm their activ- mercializing biotechnology and their product markets. ities could not be obtained. Like the biotechnology re- Their names and addresses are provided below. In search of established companies, the existence of new order for a company to be listed in table 4, the ex- biotechnology firms (NBFs) is often difficult to confirm. istence of the company and the fact that the company More than 10 new companies, not included here, are is pursuing the development of biotechnology as de- thought by OTA to be operating but with very little fined by OTA had to be confirmed by at least two public visibility. Some established companies and NBFs sources (e.g., company directories, individuals, trade regard the application of their biotechnology research journals). The existence and commercial application to be proprietary, and others will not even publicly areas of many of the companies listed also were con- confirm whether or not they are involved in biotech- firmed through the survey of firms’ personnel needs nology. Approximately 10 companies are not listed for conducted by the National Academy of Sciences and this reason. Various other companies are not listed, OTA. * because their existence and involvement in biotech- The number of companies listed in table 4 is a very nology were not confirmed by at least two sources. conservative estimate of the number of companies Most support firms are not included in the table, be- commercializing biotechnology in the United States. cause they are not applying biotechnology to the pro- More than five established companies thought to be duction of their products. Those support companies applying novel bioprocessing technology (e.g., G. B. that, in addition to supplying support products (e.g., restriction enzymes and oligonucleotides), are applying biotechnology to the development and production “All but 33 of the firms listed were sent the OTA/NAS survey questionnaire, which is repmdumd in Appendix E: OTAfNAS Survey of Personnel of such products as vaccines and monoclinal anti- Needs of R“rms in the United States. bodies are included.

Abbott Laboratories Allied Chemical Corp. Angenics 14th St. & Sheridan Rd. Columbia Rd. & Park Ave. 100 Inman St. North Chicago, Ill. 60064 P.o. Box 4oom Cambridge, Mass. 02139 Actagen Morristown, N.J. 07960 Animal Vaccine Research Corp. Rm. 802 Alpha Therapeutic Corp. 3333 Torrey Pines Ct., Suite 120 99 Park Ave. 5555 Valley Blvd. La Jolla, Catif. 92037 New York, N.Y. 10016 Los Angeles, Calif. 90032 Antibcxiies, Inc. Advanced Biotechnology Associates, Inc. Ambico, Inc. P.O. BOX 442 177 Post St., Suite 700 P.O. Box M, Route 2 Davis, Calif. 95617 San Franciso, Calif. 94108 Dallas Center, Iowa 50063 Applied DNA Systems, Inc. Advanced Genetic Sciences, Inc. American Cyanamid Co, 4415 Fifth Ave. 42 Maher Ave. One Cyanamid Plaza Pittsburgh, Pa. 15213 Greenwich, Corm, 06830 Wayne, N.J. 07470 Applied Genetics, Inc. Advanced Genetics Research Institute American Diagnostics Corp. 5 Jules Lane 2220 Livingston St. 1600 Monrovia Ave. New Brunswick, N.J. 08901 Berkeley, Calif. 94606 Newport Beach, Calif. 92663 ARCO Plant Cell Research Institute Advanced Mineral Technologies, Inc. American Quahx 6560 Trinity Ct. P.o. Box 1339 14620 Firestone Blvd. Dublin, calif, 94568 Socorro, N. Mex. 87801 La Mirada, Calif. 90638 Atlantic Antibodies Agrigenetics Corp. Amgen 10 Nonesuch Rd. 3375 Mitchell Lane 1892 Oak Terrace Lane P.O. BOX 60 Boulder, Colo. 80301 Newbury Park, Calif. 91320 Scarborough, Maine 04074

542 App. D—Firms in the United States Commercializing Biotechnology ● 543

Axonics BTC Diagnostics, Inc. Collaborative Genetics, nc. 1500 Salado Dr., Suite 202 61 Moulton St. 128 Spring St. Mountain View, Calif. 94043 Cambridge, Mass. 02138 Lexington, Mass. 01273 Baxter-Travenol Laboratories, Inc. Calgene Collagen, Inc. One Baxter Parkway 1910 Fifth St. 2455 Faber P1. Deerfield, Ill. 60015 Davis, Calif. 95616 Palo Alto, Calif. 94303 Becton Dickinson & Cb. California Biotechnology, Inc. Cooper Diagnostics, Inc. Corporate Research Center 2450 Bayshore Frontage Rd. 1230 Wilson Dr. P.O. BOX 12016 Mountain View, Calif. 94303 West Chester, Pa. 19380 Research Triangle Park, N.C. 27709 Cambridge Bioscience Corp. Cooper-Lipotech, Inc. Bethesda Research Laboratories, Inc 495 Old Connecticut Path 1030 Curtis St. P.o. Box 577 Framingham, Mass. 01701 Merdo Park, Calif. 94025 Grovemont Circle Campbell Institute for Research and Corning Glass Works Gaithersburg, Md. 20760 Technology Corning Biotechnology Department Biocell Technology Corp. Campbell Soup Co. Baron Steuben Plaza 22o East 23rd St. Campbell Rd. Corning, N.Y. 14830 New York, N.Y. 10010 Camden, N.J. 08101 Crop Genetics International Biochem Technology, Inc. Celanese Research Co. 7170 Standard Dr. 66 Great Valley Parkway 86 Morris Ave. Dorsay, Md. 21076 Great Valley Corporate Center Summit, N.J. 07901 Cutter Laboratories, Inc. Malvern, Pa. 19355 Cellorgan International, Inc. 2200 Powell St. Bio-con, Inc. 300 Park Ave. P.O. BOX 8817 3601 Gibson St. New York, N.Y. 10010 Emeryville, Calif. 94662 P.O. BOX 5277 Celtek, Inc. Cytogen Corp. Bakersfield, Calif. 93388 102 West Eufala 201 College Rd., East Biogen, Inc. Norman, C)kla. 73069 Princeton Forrestal Center 241 Binney St. Centaur Genetics Corp. Princeton, N.J. 08540 Cambridge, Mass. 02142 120 South LaSalle St., Suite 825 Cytox Corp. BioGenex Laboratories Chicago, 111.60603 954 Marcon Blvd. 6529 Sierra Lane Centocor Allentown, Pa. 18103 Dublin, Calif. 94566 3508 Market St. Dairyland Foods Corp. Biological Energy Corp. Philadelphia, Pa. 19104 620 Progress Ave. P.o. Box 766 Cetus Corp. Waukesha, Wis. 53187 2650 Eisenhower Ave. 600 Bancroft Way Damon Biotech, Inc. Valley Forge, Pa. 19482 Berkeley, Calif. 94710 115 Fourth Ave. Bio Response, Inc. Cetus Immune Corp. Needham Heights, Mass. 02194 55o Ridgefield Rd. 34OO West Bayshore Rd. Dart & Kraft, Inc. Wilton, Corm. 06987 Palo Alto, Calif. 94303 2211 Sanders Rd. Biotech Research Laboratories, Inc. Cetus Madison Corp. Northbrook, Ill. 60062 1600 East Gude Dr. 2208 Parkview Rd. Davy McKee Corp. Rockville, Md. 20850 Middleton, Wis. 53562 10 South Riverside Plaza Biotechnica International, Inc. Chiron Corp. Chicago, 111.60606 85 Bolton St. 4560 Horton St., Suite 0214 DeKalb Pfizer Genetics Cambridge, Mass. 02140 Emeryville, Calif. 94608 Sycamore Rd. Bio-Technology General Corp. CibaGeigy DeKalb, Ill. 60115 280 Park Ave. 444 Saw Mill River Rd. Diagnon Corp. New York, N.Y. 10017 Ardsley, N.Y. 10502 225 Main St. Brain Research Clonal Research Westport, Corm. 06880 46 East 91st St. 1598 Monrovia Ave. Diagnostic Technology, Inc. New York, N.Y. 10028 Newport Beach, Calif. 92630 240 Vanderbilt Motor Parkway Bristol-Myers Co. Codon Hauppauge, N.Y. 11788 Industrial Division 430 Valley Dr. P.O. BOX 657 Brisbane, Calif. 94005 Syracuse, N.Y. 13201 544 . Commercial Biotechnology: An International Analysis

Diamond Laboratories Enzyme Technology Corp. Genex Corp. 2538 S.E. 43rd St. 783 U.S. 250 East, Route 2 6110 Executive Blvd. Des Moines, Iowa 50316 Ashland, Ohio 44805 Rockville, Md. 20852 Diamond Shamrock Corp. Ethyl Corp. Gentronix Laboratories, Inc. T. R. Evans Research Center P.O. Box 341 15825 Shady Grove Rd. Rockville, Md. 20850 P.O. BOX 348 Baton Rouge, La. 70821 Gainesville, Ohio 44077 Exxon Research & Engineering Co. Genzyme DNA Plant Technology 180 Park Ave. 1 Bishop St. 2611 Branch Pike Florham Park, N.J. 07932 Norwalk, Corm. 06851 Cinnaminson, N.J. 08077 Fermentec Corp. W. R. Grace & Co. DNAX Corp. 301 Saratoga Ave. Research Division 1454 Page hfill Rd. Los Gates, Calif. 95030 7379 Route 32 Palo Aho, Calif. 94304 FMC Corp. Columbia, Md. 21044 Dow Chemical Co. 2000 Market St. Hana Biologics, Inc. 2030 Dow Center Philadelphia, Pa. 19103 626 Bancroft Way Midland, Mich. 48640 Frito-Lay, Inc. Berkeley, Calif. 94710 Ean-tech, Inc. Frito-Lay Tower Hem Research 699-A Cerramonte Blvd. Exchange Park 12220 Wilkins Ave. Dale City, Cdif. 94015 P.O. Box 35034 Rockville, Md. 20852 Dallas, Tex. 75235 Eastman Kodak Co. Hoffmann-La Roche, Inc. 343 State St. Fungal Genetics, Inc. 34o Kingsland St. Rochester, N.Y. 14650 14721 Cottonwood P1. Nutley, N.J. 07110 Bothell, Wash. 98011 Ecogen, Inc. Hybridoma Sciences, Inc. c/o Johnston Associates, Inc. Genencor 4761 Hugh HowelI Rd., Suite D 1101 State Rd., Bldg. O Baron Steuben P1. Tucker, Ga. 30084 Princeton, N.J. 08540 Corning, N.Y. 14870 Hybritech, Inc. E. 1. du Pent de Nemours & Co. Genentech, Inc. 11085 Torreyana Rd. Central Research and Development 460 Point San Bruno Blvd. San Diego, Calif. 92121 Department South San Francisco, Calif. 94080 Hytech Biomedical, Inc. 1007 Market St. General Electric Co. 1440 Fourth St. Wilmington, Del. 19898 Research and Development Berkeley, Calif. 94710 Electro Nucleonics Laboratories, Inc Laboratories IBM Corp. 12050 Tech Rd. One River Rd. Thomas J. Watson Research Center Silver Spring, Md. 20904 Schenectady, N.Y. 12345 Yorktown Heights, N.Y. 10598 Eli Lilly & Co. General Foods Corp. IGI Biotechnology, Inc. Lilly Research Laboratories 555 South Broadway 9110 Red Branch Rd. 307 East MKarty St. Tarrytown, N.Y. 10591 Columbia, Md. 21045 Indianapolis, Ind. 46285 General Genetics Immulok, Inc. EnBio, Inc. 15400 West 44th Ave. 1019 Mark Ave. Union Ave. #408A Golden, Colo. 80403 Carpinteria, Calif. 93013 Fairfield, Calif. 94533 General Molecular Applications Immunetech, Inc. Endorphin, Inc. 1834 Elmwood Ave. 8950 Villa La Jolla Dr., Suite 2132 1000 Seneca St. Columbus, ohio 43212 La Jolla, Calif. 92037 Seattle, Wash. 98111 Genetic Diagnostics Corp. Immunex Corp. Engenics, Inc. 160 Community Dr. 51 University Bldg., Suite 600 2 Palo Alto Sq., Suite 500 Great Neck, N.Y. 11021 Seattle, Wash. 98101 Palo Alto, Calif. 94304 Genetic Replication Technologies, Inc Immuno Modulators Laboratories, Inc. Enzo Biochem, Inc. 1533 Monrovia Ave. 10511 Corporate Dr. 325 Hudson St. Newport Beach, Calif. 92663 Stafford, Tex. 77477 New York, N.Y. 10013 Genetic Systems Corp. Immunogen Enzyme Bio-systems, Ltd. 3005 First Ave. c/o T. A. Associates BOX 8000 Seattle, Wash. 98121 111 Devonshire St. Englewood Cliffs, N.J. 07632 Genetics Institute Boston, Mass. 02109 Enzyme Center, Inc. 225 Longwood Ave. 33 Harrison Ave. Brookline, Mass. 02115 Boston, Mass. 02111 Genetics International, Inc. 50 Milk St., 15th Floor Boston, Mass. 02109 App. D—Firms in the United States Commercializing Biotechnology . 545

Immunotech Corp. Martin Marietta New England Nuclear Corp. 11 Blackstone St. 1450 South Rolling Rd. 85 Wells Ave. Cambridge, IMass. 02139 Baltimore, Md. 21227 Newton Center, Mass. 02159 Imreg, Inc. Meloy Laboratories, Inc. Norden Laboratories P.O. BOX 56643 6715 Electronic Dr. 601 West Cornhusker Highway New Orleans, La. 70156 Springfield, Va. 22151 Lincoln, Nebr. 68521 Indiana BioLab Merck & Co., Inc. Novo Laboratories, Inc. Palmyra, Ind. 47164 Merck Sharp and Dohme Research 59 Danbury Rd. Integrated Genetics, Inc. Laboratories Wilton, Corm. 06897 51 New York Ave. P.O. Box 2000 NPI Framingham, Mass. 01701 Rahway, N.J. 07065 417 Wakara Way University Research Park Interferon Sciences, Inc. Microlife Genetics 783 Jersey Ave. P.O. BOX 2399 Salt Lake City, Utah 84108 New Brunswick, N.J. 08901 1817 57th St. Nuclear & Genetic Technology, Inc. Sarasota, Fla. 33578 172 Brook Ave. International Genetic Engineering, Inc. Deer Park, NY. 11729 (INGENE) Miles Laboratories, Inc. 1701 Colorado Ave. 1127 Myrtle St. Ocean Genetics Santa Monica, Calif. 90404 Elkhart, Ind. 46515 1990 N. California Blvd., Suite 830 Walnut Creek, Calif. 94596 International Genetic Sciences Miller Brewing Co. Partnership 3939 West Highland Blvd. Oncogen 155-25 Styler Rd. Milwaukee, Wis. 53201 3005 First Ave. Jamaica, N.Y. 11433 Molecular Biosystems, Inc. Seattle, Wash. 98121 International Minerals & Chemical 1118-A Roselle St. Oncogene Science Inc. Corp. San Diego, Cdif. 92121 Nassau Hospital Biochemical Division Molecular Diagnostics Professional Bldg., Suite 33o 1401 South Third St. 400 Morgan Lane 222 Station Plaza North Terre Haute, Ind. 47808 West Haven, Corm. 06516 Mineola, N.Y. 11501 International Plant Research Institute Molecular Genetics, Inc. Organon, Inc. 853 Industrial Rd. 10320 Bren Rd., East 375 Mt. Pleasant Ave. San Carlos, Calif. 94070 Minnetonka, Minn. 55343 West Orange, N.J. 07052 Kallestad Laboratories, Inc. Monoc]onal Antibodies, Inc. Ortho Pharmaceutical Corp. Austin National Bank Tower, Suite 2000 2319 Charleston Rd. Route 202 Austin, Tex. 78701 Mountain View, Calif. 94043 Raritan, N.J. 08869 Kennecott Copper Corp. Monsanto Co. Petrogen, Inc. One Stanford Forum 500 N. Linbergh 2452 East Oakton St. Stanford, Corm. 06904 St. Louis, Mo. 63167 Arlington Heights, Ill. 60005 Lederle Laboratories Multivac, Inc. Pfizer, Inc. one Cyanamid Plaza P.O. Box 575 25 East 42nd St. Wayne, N.J. 07470 Seal Beach, Calif. 90740 New York, N.Y. 10017 The Liposome Co., Inc. Nabisco, Inc. Phillips Petroleum Co. 1 Research Way River Rd. and De Forest Ave. Research Center Princeton Forrestal Center East Hanover, N.J. 07936 Bartlesville, Okla. 74004 Princeton, N.J. 08540 National Distillers & Chemical Co. Phytogen Liposome Technology, Inc. 99 Park Ave. 101 Waverly Dr. 1030 Curtis St. New York, N.Y. 10016 Pasadena, Calif. 91105 Menlo Park, CMif. 94025 Neogen Corp. Phyto-tech Lab Litton Bionetics Nisbet Bldg., Suite 22 21822 South Vermont Ave. 5516 Nicholson Lane 1407 S. Harrison Rd. Torrance, Calif. 90502 Kensington, Md. 20895 East Lansing, Mich. 48824 Pioneer Hybrid International Corp. 3M co. New England Biolabs 1206 Mulberry St. 3M Center 32 Tozer Rd. Des Moines, Iowa 50308 St. Paul, Minn. 55144 Beverly, Mass. 01915 Plant Genetics, Inc. Mallinckrodt, Inc. New England Monoc]onal Resources 1930 Fifth St., Suite A 675 McDonald Blvd. 267 Plain St. Davis, Calif. 95616 P.O. Box 5840 Providence, R.I. 02905 St. Louis, Mo. 63134 546 . Comrnercial Biotechnology: An International Anaiysis

Polybac Corp. A. E. Staley Manufacturing Co. Unigene Laboratories, Inc. 1251 S. Cedar Crest Blvd. 22OO Eldorado St. 110 Little Falls Rd. Allentown, Pa. 18103 Decatur, Ill. 62525 Fairfield, N.J. 07006 PPG Industries Standard Oil Co. of California Universal Foods Corp. One Gateway Center 225 Bush St, 433 East Michigan St. Pittsburgh, Pa. 15222 San Francisco, Calif. 94104 Milwaukee, Wis. 53202 Purification Engineering, Inc. Standard Oil Co. of Indiana University Genetics Co. 9505 Berger Rd. Amoco Research Center 537 Newtown Ave. Columbia, Md. 21046 P.o. Box 400 Norwalk, Corm. 06852 Quidel Home Naperville, Ill. 60566 U.O.P., Inc. 11077 North Torrey Pines Standard oil Co. of Ohio 10 UOP Plaza La Jolla, Calif. 92037 1424 Midland Bldg. Des Plaines, Ill. 60016 Replicon Cleveland, (lhio 44115 The Upjohn Co. P.O. BOX 27053 Stauffer Chemical Co. 7000 Portage Rd. South San Francisco, Calif. 94127 Nyala Farm Rd. Kalamazoo, Mich. 49001 Repligen Corp. Westport, Corm. 06881 Viral Genetics 101 Binney St. Summa Medical Corp. 10 Cutter Mill Rd., Rm. 403 Cambridge, Mass. 02142 4272 Balloon Park Rd., N.E, Great Neck, N.Y. 11021 Ribi Immunochem Research, Inc. Albuquerque, N. Mex. 87109 Wellcome Research Laboratories P.o. Box 1409 Sungene Technologies Corp. 3030 Cornwallis Rd. Hamilton, Mont. 59840 3330 Hillview Ave. Research Triangle Park, N.C. 27709 Rohm & Haas Co. Palo Alto, Calif. 94304 Worne Biotechnology, Inc. Independence hfall Sybron Biochemical Medford Medical Bldg. West Philadelphia, Pa. 19105 Birmingham Rd. Stokes Rd., Box 458 Salk Institute Biotechnology/ Birmingham, N.J. 08011 Medford, N.J. 08055 Industrial Associates, Inc. Synbiotex Corp. Xenogen, Inc. 3333 Torrey Pines Ct., Suite 140 348-B Rancho Dr. 557 Wormwood Rd. La Jolla, Calif. 92037 San Marcos, Calif. 92069 Mansfield, Corm. 06250 Sandoz, Inc. Syncor International Xoma Corp. Route No. 10 12847 Arroyo St. 3516 Sacramento St. East Hanover, N.J. 07936 Sylmar, Calif. 91342 San Francisco, Calif, 94118 Schering-Plough Corp. Synergen Zoecon 2000 Galloping Hill Rd. 1885 Thirty Third St. 975 California Ave. Kenilworth, N.J. 07033 Boulder, Colo. 80301 P.o. Box 10975 SDS Biotech Corp. Syngene Products & Research, Inc. Palo Alto, Calif. 94304 7528 Auburn Rd. 225 Commeme Dr. Zymed Laboratories Gainesville, Ohio 44077 P.o. Box 2211 P.O. BOX 1856 Fort Collins, Colo, 80524 Burlingame, Calif. 94010 G. D. Searle & Co. Box 1045 Syntex Research Zymos Corp. Skokie, Ill. 60076 c/o Syntex Corp. 2121 North 35th St. 3401 Hillview Ave. Seattle, Wash. 98103 Serono Laboratories, Inc. Palo Alto, Calif, 94304 280 Pond St. Randolph, Mass. 02368 Syntro Corp. 11095 Torreyana SmithKline Beckman San Diego, Calif. 92121 One Franklin Plaza P.O. BOX 7929 Syva Co. Philadelphia, Pa. 19101 900 Arastradero Rd. Palo Alto, Calif. 94303 E. R. Squibb & Sons, Inc. P.o. Box 4000 Techniclone International Corp. Princeton, N.J. 08540 33o1 South Harbor Blvd., Suite 104 Santa Ana, Cahf. 92704 Appendix E OTA/NAS Survey of Personnel Needs of Firms in the United States

As noted in Chapter 14: Personnel Availability and that they were not engaged in biotechnology activi- Training, OTA and the National Academy of Sciences’ ties, and 20 others were determined not to be engaged (NAS) Committee on National Needs for Biomedical and in biotechnology from their answers to the question- Behavioral Research Personnel cosponsored a survey naire. The remaining 95 indicated that they were en- of the personnel needs of U.S. firms using biotechnol- gaged in biotechnology activities. The responses of ogy. The purpose of the OTA/NAS survey was twofold. these 95 firms, which are tabulated on the survey First, OTA was interested in identifying the companies questionnaire reproduced in this appendix, are the that were using new biotechnology as defined at the basis of the characteristics described for the respond- outset of this report. Second, OTA and NAS were in- ents. The distribution of size of firms was not signifi- terested in the number of employees engaged in in- cantly different between respondents and nonre- dustrial biotechnology, how that number would grow, spondents. Because the survey response rate was low, and where shortages of personnel, if any, are occur- however, only general trends in the data have been ring. The cover letter and survey questionnaire repro- used in the discussion of personnel needs in chapter duced in this appendix were sent to 286 U.S. compa- 14. nies. Of the 133 firms that responded, 18 indicated

547 548 ● Commercial Biotechnology: An International Analysis

Cornell University

Ithaca, New York 14853

March 4, 1983

Dear :

The Congressional Office of Technology Assessment (OTA) and the National Academy of Sciences (NAS) Committee on National Needs for Biomedical Behavioral Research Personnel have a mutual interest in determining the nation'ts need for research personnel. I am chairman of the NAS Committee’s Panel on Basic Biomedical Sciences. We are particularly concerned that there be an adequate nunber of people trained in areas of the new biotechnology. I am writing to ask your assistance in collecting some information on this issue. You could help us greatly in our efforts to get a profile of current employment opportunities and a sense of future demard in biotechnology and related industries by responding to the three questions on the attached page. To be useful in our report to the Congress, we need your answers before March 14, 1983. The tabulated data from the questionnaire will be published. Only OTA and the NAS panel will have access to the individual responses. If you have additional commments or suggestions that you think would assist us, please include them with your response. A self-addressed envelope is enclosed. Also, if you have any questions concerning the questionnaire, don’t hesitate to call me at (607) 256-3374. With thanks for your help.

Yours sincerely,

Robert Barker, Ph.D. Director, Division of Biological Sciences Cornell University

RB:db Enclosures App. E—OTA/NAS Survey of Personnel Needs of Firms in the United States ● 549

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----HI Qn OQ . Appendix F Recombinant DNA Research Guidelines, Environmental Laws, and Regulation of Worker Health and Safety

Chapter 15: Health, Safety, and Environmental Reg- the expertise to assess the safety of rDNA experiments. ulation discussed the regulatory policies of the United TWO members must be otherwise unaffiliated with the States, the Federal Republic of Germany, the United institution and must represent the community’s inter- Kingdom, France, Switzerland, and Japan as they per- est with respect to health and the environment. Insti- tain to biotechnology. This appendix elaborates on the tutions are encouraged to open IBC meetings to the material presented in that chapter. public, and minutes of IBC meetings and certain other documents must be made available to the public on Recombinant DNA research Guidelines request. The institution must register the IBC with NIH by providing information about its members. UNITED STATES At the Federal level, the responsible parties are the Director of NIH, the NIH Recombinant DNA Advisory The National Institutes of Health “Guidelines for Re- Committee (MC), the NIH Office of Recombinant DNA search Involving Recombinant DNA Molecules” (NIH Activities, and the Federal Interagency Advisory Com- Guidelines) apply to all research involving recombinant mittee on Recombinant DNA Research (Interagency DNA (rDNA) in the United States or its territories con- Advisory Committee). The Director of NIH is the final ducted at or sponsored by any institution receiving decisionmaker under the guidelines. For major actions, support for rDNA research from NIH (28). All Federal he or she must seek the advice of the RAC and must agencies require their own scientists to comply with provide the public and other Federal agencies at least the guidelines, and Federal agencies other than NIH 30 days to comment on proposed actions. Every ac- funding rDNA research also require their grantees to tion taken by the Director of NIH must present “no comply. Compliance is enforced by the authority of significant risk to health or the environment .“ RAC is the agency to suspend, terminate, or place restrictions a diverse group of experts that meets three or four upon its financing of the offending projector all rDNA times a year to advise the Director of NIH on the ma- projects at the institution receiving support. jor technical and policy issues. * The NIH Office of Although the NIH Guidelines are not legally binding Recombinant DNA Activities performs NIH’s adminis- on private companies (unless the company receives trative functions under the guidelines. Additional over- Federal funds), the private sector has espoused vol- sight is provided by the Interagency Advisory Com- untary compliance. Some States and localities have re- mittee. This committee, which is composed of repre- quired industry to comply by law. sentatives of approximately 20 agencies, coordinates Administrative Framework.—The NIH Guide- all Federal rDNA activities, and its members are non- lines create an administrative framework for oversight voting members of RAC. that specifies the responsibilities of scientists, their in- Substantive Requirements.—The NIH Guide- stitutions, and the Federal Government. The primary lines classify all experiments into four categories: responsibility for ensuring compliance lies with the 1) exempt, 2) those requiring RAC review and NIH ap- institutions and scientists doing the research. The in- proval before initiation, 3) those requiring IBC ap- stitution must establish an Institutional Biosafety Com- proval before initiation, and 4) those requiring IBC mittee (IBC) meeting certain requirements, appoint a notification at the time of initiation. The first cate- biological safety officer if certain experiments are done, ensure appropriate training, and implement health surveillance, if appropriate. The principal in- ● In accordance with its charter, RAC is composed of not more than 25 mem- vestigator has the initial responsibility for determin- bers. At least eight must specialize in molecular biology or related fields; at least six must be experts in other scientific disciplines; and at least six must ing and implementing containment and other safe- be authorities on law, public policy, the environment, public or occupational guards and for training and supervising the staff. health, or related fields. As of June 30, 1983, RAC Was Composed of 10 The IBC oversees all rDNA work at the institution molecular biologists, 6 experts from other scientific disciplines, and 9 persons in the third category (6). An industry trade association has requested for compliance with the NIH Guidelines. The IBC must that an industry representative be appointed to the RAC as a nonvoting consist of at least five members who collectively have member.

550 App. F—Recombinant DNA Research Guidelines, Environmental Laws, and Regulation of Worker Health and Safety 551 gory-exempt-covers an estimated 80 percent to 90 design requirements in the Recommendations make percent of all rDNA experiments. Examples include sense to us and are consistent with other regulations work with E. coli K-12, S. cerevisiae, and asporogenic relating to the manufacture of products for use with B. subtilis host-vector systems. human subjects” (4). The group went onto state that NIH approval is required for experiments involving it also saw difficulties arising from the recommen- formation of rDNA containing genes for the synthesis dation that the primary containment system not be of certain toxins lethal to vertebrates, deliberate re- opened until all microorganisms are inactivated be- lease of recombinant organisms into the environment, cause that could compromise that product in some and transfer of drug resistance to certain microor- cases (4). ganisms under certain conditions. Impact on Biotechnology.—The impact of the IBC approval is required for experiments involving NIH Guidelines on biotechnology appears to be mini- certain pathogenic organisms, whole organisms or mal. As essentially voluntary codes of practices that plants, or more than 10 liters of culture (except for are fairly consistent with previously established good certain exempt experiments). The last category ex- laboratory and manufacturing practices, they add little periments requiring IBC notification–is a catch-all in the way of additional restrictions. Moreover, an es- category. Containment levels are specified for each cat- timated 80 to 90 percent of the experiments are ex- egory except the one requiring NIH approval, where empt. On the basis of past history and what experts containment is set on a case-by-case basis. continue to learn about risks, the NIH Guidelines are Application to Industry. -In the absence of legal likely to be further liberalized and may even disap- authority over industry’s work with rDNA, NIH has pear. In fact, whatever burdens they impose are prob- taken several steps to encourage voluntary compliance ably offset by the gains in public confidence and the and provide a modest degree of Federal oversight. Part likelihood that they have headed off more restrictive VI of NIH Guidelines, added in January 1980, sets up mandatory controls. a mechanism for voluntary compliance. It creates a parallel system of project review and IBC registration, EUROPEAN ECONOMIC COMMUNITY COUNTRIES: modified to protect proprietary information. * In ad- FEDERAL REPUBLIC OF GERMANY, dition, RAC established a subgroup in May 1979 to deal UNITED KINGDOM, AND FRANCE with large-scale work. “Physical Containment Recom- European Economic Community.—The Euro- mendations for Large-Scale Uses of Organisms Con- pean Economic Community (EEC) has considered at taining Recombinant DNA Molecules” (Large-Scale Rec- length the problems and prospects for rDNA research ommendations) (27) developed by that subgroup, RAC, and the need for common Communitywide action to and NIH specify physical containment requirements, regulate and promote its development (13), but only suggest the appointment of a biological safety officer, a nonbinding recommendation has been made by the and suggest the establishment of a worker health sur- Council of the European Communities to member veillance program for work done at higher contain- states on the question of guidelines applicable to rDNA ment levels. (They were added to the NIH Guidelines research. The nonbinding EEC Guidelines were as Appendix K in June 1983.) adopted in June 1982 (2). By that time, most of the in- According to industry spokespeople, the NIH Guide- dividual member states with any significant amount lines are accepted and followed by the private sector.** of rDNA research had already adopted their own na- Compliance with the Large-Scale Recommendations tional guidelines. The EEC Guidelines impose no also appears to be widespread, but there have been stricter requirements on rDNA research than those few, if any, definitive statements by industrial spokes- of the individual member states. They principally pro- people on this point. Regarding present Large-Scale vide that any laboratory wishing to conduct rDNA re- Recommendations, one industry group stated that its search notify the competent national or regional au- experience has indicated that “the present [recommen- thority in the member state and that the member dations] are reasonable and workable, although they states adopt a common definition of work involving are quite stringent for work at the P1-LS level. The rDNA (sees. 1-3). More particularly, the EEC Guidelines suggest that “Proprietary information is protected in several ways. First, there is a notification of any rDNA research be given before presubmission review of data as to availability under the Freedom of Infor- work is commenced, except for research of very low- mation Act. Second, NIH must consult with institutions applying for exemp- risk potential. * The notification should include infor- tions or approvals about the content of any public notice to be issued, if the application Contains proprietary information. Finally, applications involving ● The EEC Guidelines do not define the term “very low risk potential,” but proprietary information are considered by RAC in nonpublic sessions, indicate that this be determined by the competent national authorities. The ● ● Although there is no means for NIH to monitor compliance with the NIH United Kingdom, France, and the Federal Republic of Germany have adopted Guidelines or Large-Scale Recommendations, there is no evidence suggesting somewhat different methodologies in their guidelines for defining risk noncompliance. potential 552 Commercial Biotechnology: An International Analysis mation about the experimental protocol, the protec- gardless of the source of the DNA. * The guidelines also tive measures to be taken, and the general education specify the appropriate containment methods required and training of the staff working on the experiment for various rDNA experiments. Physical and biological or monitoring it. Such notification is thought desirable containment measures are divided into four and two because it creates records that will be helpful in what levels (LI to L4 and B1 to B2), respectively. the Commission of the European Communities believes The German guidelines for rDNA research are ad- to be the highly unlikely event of an accident or other ministered by the Central Commission for Biological misfortune involving rDNA (2). The authority receiv- Safety (Zentrale Commission ffi die Biologische ing the notification must also, under the recommen- Sicherheit), * * a biological safety officer or committee dation, protect the confidentiality of the information at each laboratory, and a project leader for each ex- submitted (2). The EEC Guidelines do not call for spe- periment. * * * The guidelines specify that the Central cific approval of rDNA research of any type. As is Commission must be notified of all rDNA experiments discussed below, certain member states do require except those at the lowest physical containment level. specific approval. For research at the next level, the Central Commis- The EEC Guidelines do not address many issues sion must authorize one of its scientist members to which national guidelines, including those of the supervise the work and to keep the Commission in- United States, have attempted to cover. The EEC formed. Experiments using mid-level containment Guidelines do not discuss the question of whether measures require the prior approval of two members private laboratories should be subject to regulation, of the Commission. Prior approval must be sought leaving this decision to the discretion of national from the Central Commission for all experiments using authorities. Neither do they address how large-scale vertebrate cells as the host and for experiments using rDNA research should be regulated. DNA from pathogenic organisms. In the case of the The fact that the EEC issued its rDNA guidelines de- latter, the Central Commission must find that the ex- spite the existence of more comprehensive guidelines pected benefits clearly outweigh the conceivable haz- in the member states reflects both the continuing con- ards. On request, the Central Commission will also cern over the safety of rDNA research and the difficul- authorize the use of new host-vector systems not ty in obtaining agreement on such matters. It is clear enumerated in the German guidelines. The Central that the EEC has not yet determined its proper role Commission also gives advice on research and safety in the regulation of rDNA research. Although discus- measures. sions concerning rDNA as well as biotechnology gen- United Kingdom.-The U.K. guidelines for rDNA erally are continuing within the EEC, it is likely to be research (26)T are similar to the NIH Guidelines in some time before any agreement is reached concern- broad conceptual terms but differ with respect to ing the respective roles of the EEC and the member “These specially restricted experiments are: 1) the production of recombi- states. nant DNA for the biosynthesis of powerful bacterial exotoxins such as Federal Republic of Germany.—The Federal botulinus toxin, tetanus toxic, diphtheria toxin, and snake toxin; Z) the use Republic of Germany has issued guidelines for rDNA of genomes of extremely pathogenic viruses such as Lassa, small pox, and hepatitis B; and 3) the transmission of genes which confer resistance to an research (3) that borrow heavily from the NIH Guide- antibiotic between micro-organisms that do not naturally exchange genes lines of the United States. The West German guidelines when the resistance gene has not previously been known in the receptor cell, are theoretically broader than the NIH Guidelines * ● West Germany’s Central Commission for Biological Safety, the only Gov. ernment body, has 12 members, 4 rDNA experts, 4 experts from related field because the German guidelines nominally apply to all of biology, and 4 “outstanding individuals” from unions, industry, or research- research activities involving DNA. The only enforce- promoting organizations, all appointed by the Federal Minister for Research ment mechanism, however, is control over research and Technology. ● ● ● The officer or at least one member of the committee must have the funding from the German Federal Government. appropriate license, if the research work involves pathogenic or toxin- The West German guidelines, like the NIH Guide- producing organisms. The project leader must possess adequate experience in microbiology and, for certain higher containment level work, knowledge lines, provide that the physical and biological contain- about pathogens. The project leader is responsible specifically for planning ment measures required for particular experiments and conducting the research, health monitoring of laboratory workers, in- be determined according to the risk of the experiment. forming the Central Commission and the biological safety officer or committee of the research and the planned safety measures, implementing Com- Risk is evaluated largely in terms of the source of the mission instructions, making regular reports to the Commission, maintain- DNA. The German guidelines also prohibit certain ing a record of safety instruction, and training laboratory personnel. Whe term used in the United Kingdom to describe rDNA research is ‘(ge- E specified experiments in the host organism . coli K12 netic manipulation. ” Genetic manipdation is defined in the Genetic Manipula- and other E. coli strains discussed in the NIH tion Regulations as: the formation d new combinatims of heritable material Guidelines (and the corresponding bacteriophages and by the insertion d nucleic acid molecules produced by whatever means outside the cell, into any virus, bacterial plaamid, or other vector system so as plasmids of these strains), thereby requiring that the to allow their incorporation into a host organism in which they do not natural- higher biological containment measures be used, rely occur but in which they are capable of continued propagation. App. F—Recombinant DNA Research Guidelines, Environmental Laws, and Regulation of Worker Health and Safety 553

scope, risk assessment, and enforcement. Like the NIH tors: access, expression, and damage. * As a general Guidelines, the U.K. guidelines have been gradually matter, the British classification system appears to relaxed. Nevertheless, the guidelines in the United require less stringent containment measures for some Kingdom are still regarded as more restrictive than types of research than would be required in other those of the United States. countries. For example, the damage factors asso- The guidelines for rDNA research in the United ciated with interferon and insulin are quite low and Kingdom are promulgated and administered by the work with these products would be classified as less Genetic Manipulation Advisory Group (GMAG) under risky in the United Kingdom than in some other coun- the Health and Safety at Work Act of 1974 (24). * The tries (22). guidelines apply to all research in the United Kingdom, The administrative framework for implementing the not just that funded by the Government. Enforcement GMAG guidelines relies on institutional and govern- is the responsibility of the Health and Safety Executive mental oversight. GMAG and HSE must be given ad- (HSE), which is comparable to the U.S. Occupational vance notice of work involving rDNA except for cer- Safety and Health Administration. HSE has taken no tain selfdoning experiments.** Most work at the lOW- enforcement action to date. est two physical containment levels can go forward As do the guidelines in all of the competitor coun- after notice. Although no express provision prohibits tries, the GMAG guidelines establish four progressively work at containment levels three and four before more restrictive physical containment levels based on GMAG issues its advice, such premature work might the perceived hazards of the research.** Facilities for violate the Health and Safety at Work Act, which car- the highest two levels must be examined by HSE ries criminal penalties. In addition, each institution inspectors before any rDNA research can be con- conducting rDNA research is required to have certain ducted to ensure that the GMAG requirements are personnel responsible for the research * * * review, to met. forward notifications of proposed rDNA research to The GMAG guidelines also adopt the two-level bio- GMAG, and to suggest other health and safety actions logical containment approach of most of the other that the institution might take. countries * * * which is based on the degree of disabili- Industrial or large scale applications of rDNA—that ty of the host-vector system being used. However, is, research involving the growth of self-propagating GMAG has also developed special rules for rDNA re- products of genetic material in volumes of 10 liters search involving experimental animalsl and for work or more—are subject to special rules. GMAG reviews that involves the introduction of foreign nucleic acid proposals to conduct such large-scale research on a into higher plants or into any plant pest. * case-by-case basis and visits each site, commenting on GMAG asssess the degree of potential hazard in a the safety measures proposed. GMAG expects that this way somewhat different from the other countries, in- review will involve “integration” of questions about cluding the United States. GMAG considers three fac- physical and biologic containment. Whether this means that review of large-scale work will be stricter ● The Government department with responsibility for GMAG policy is the or more relaxed is unclear. GMAG has stated, how- Department of Educaticm and Science, afthough this department has little expertise in such areas, particularly in comparison to tk Department of ever, that vaccine and antibiotic production can be Health and Social Security, which has a very limited role, via the Medical done safely using ordinary chemical engineering meas- Reseamh Council, in the wersight of genetic manipulation safety [25). GMAG’s ures—measures probably more relaxed than the con- status was recently reviewed by the Health and Safety Executive, and the subsequent report recommended the relocation of the group to the Depart- tainment-level measures required for small-scale ment of Health arri Social Security (12). GMAG, now called the Health and research (20). Safety Commissicm Advisory Committee on Genetic Manipulation, has been moved to the Department of Health and Social Security. GMAG has recognized the potential commercial and ● *Certain Dh’A research is considered so safe as to not require contain- industrial importance of genetic manipulation by ment. 1~boratories conducting this research must imtead follow simply the establishing special confidentiality requirements for Guidelines for Microbiological Safety. ● ● ● France has four levels of biological containment. work that raises questions about commercial proper- tThese require isolatkm of the animal, safe disposal of refuse and waste, and stricter rules for twsearch in category 111 and IV laboratories (23). ● “Access” is the possibility that escaped organisms will enter the human “plant pest is defined as “any living organism, other than a vertebrate body and eventually reach susceptible cells. “Expression” is the possibility animal, or any pathogen which is injurious to any plant, and includes any that a foreign ge~ incorporated into the gene sequence of an organism will culture of such organism or pathogen. ” me work requires a special license be able to carry on or “express” its normal function, such as secretion of from the Agricultural Ministries. The Iiceme will be issued cmly if the research a toxin that the mganism formerly did not secrete. “Damage” is the chance is conducted according to the containment recommendation of GMAG, which that a new gene sequence will cause physiological damage in the body to include special rules for the handli~ of plants and preventing the dissemina- which it gains amess once it is expressed (15,18, 19,22). tion of pollen and seed. The special plant rules do not cover experiments * ● These include experiments using E. cdi K12, B. subtilis, and S. cerevisae involving the introduction of plant nucleic acid into bacteria or other micro- (17). organisms (except #ant pests), which are covered by the existing GMAG guide- ● ● ● These include a Biological Safety Officer familiar with the safety proce- lines (z I). It should be noted that the United Kingdom has adopted specific dures for rDNA work and a Safety Committee to consider the containment restrictions on the importation of such pests. and other safety measures proposed for genetic manipulation. 554 Commercial Biotechnology: An International Analysis ty or patents. While confildentiality arrangements may ilar to that of the United States, with the four levels vary from case to case, GMAG generally treats as con- of containment in France being finer gradations of the fidential any material so labeled. Members of GMAG two levels used in the United States. who have commercial interests in DNA work are pro- France allows biological agents containing rDNA to hibited from seeing such material or taking part in the be imported and exported freely, although the French discussion about it (17,20). guidelines specify that certain measures must be met France.-The French guidelines for rDNA research to safely transport and import rDNA materials. Large- (S) largely follow those of the United States. The guide- scale research—i.e., experiments involving volumes of lines were promulgated and are administered by the 10 liters or more—is not covered by the French guide- National Control Commission (Commission de Con- lines for rDNA research, but Government oversight trole), which reports to the General Delegation of exists on a case-by-case basis. Scientific and General Research (Delegation Generale de la Recherche Scientifique et Technique). The SWITZERLAND French guidelines apply only to Government-funded The Swiss have basically adopted the U.S. guidelines research and require that scientists conducting such as their national rDNA research guidelines. Although research notify the Control Commission of the planned the Swiss generally have amended their guidelines research and in some cases obtain approval of the whenever the NIH Guidelines are amended, they are research. Local safety committees monitor ongoing currently using a version based on the NIH Guidelines research. The principal sanctions for failure to comp- in effect in April 1982 (14). ly with the French guidelines are loss of Government There are other basic differences. The Swiss Govern- funding or denial of approval to conduct research. ment has no direct role in regulation of rDNA re- As in the United States, rDNA experiments in France search; Swiss scientists instead have established a sys- must be conducted using certain physical and biolog- tem of complete self-regulation. The Commission for ical containment measures. The degree of containment Experimental Genetics (Commission fur Experimen- depends on the risk of the work. Risk is assessed using telle Genetik) created by the Swiss Academy of Medical a method very similar to that used in the United States. Sciences, is responsible for monitoring rDNA research. Research with DNA from oncogenic or highly patho- The guidelines that this commission has promulgated genic viruses is reviewed on a case-by-case basis apply to all research involving rDNA in Switzerland, but generally must be conducted according to the not only that funded by the Government. Moreover, most stringent containment measures unless the on- the Swiss guidelines do not require special approval cogenic or highly pathogenic genes are eliminated for work using cell culture volumes in excess of 10 before cloning. liters. In certain respects, the physical and biological con- The adminstrative structure for oversight in Swit- tainment requirements in the French guidelines dif- zerland is quite similar to that in the United States. fer from those in the United States, Although the The Commission for Experimental Genetics must ap- French guidelines use four levels of physical contain- prove certain experiments in advance, such as those ment as in the United States, they appear to be more involving the deliberate release into the environment flexible than the U.S. guidelines with respect to up- of any organism containing rDNA. For two other grading containment. In some cases, the French guide- classes of experiments, scientists must notify the com- lines permit a laboratory’s containment level to be mission but need not obtain approval. A final class of upgraded without requiring construction of a new experiments are exempt from the guidelines. Principal facility. Use of an approved safety cabinet will give investigators, safety officers, and institutional safety the laboratory the next higher rating. If a safety cabi- committees also bear oversight responsibility, net is used to render a P3 laboratory equivalent to a P4 laboratory (the laboratory with the highest degree JAPAN of containment), however, the National Control Com- mission must certify the facility. This upgrading Japan’s guidelines for rDNA research (11) are pro- system should expand the ranges of research that a mulgated by the Ministry of Education (on recommen- French laboratory can do, as well as make research dation by the Science Council). The guidelines apply at higher containment levels less expensive. With only to publicly funded research, but private industry respect to biological containment, the French guide- has followed them on a voluntary basis. lines use four levels, unlike the U.S. guidelines, which Each research institution is required under these use two levels. Biological containment is based on the guidelines to have laboratory supervisors, a safety safety of the host-vector system. In effect, the French committee, and a safety officer. The head of each re- approach to biological containment appears quite sim- search institution is also charged with specific duties App. F—Recombinant DNA Research Guidelines, Envirvnmental Laws, and Regulation of Worker Health and Safety ● 555

in supervising the rDNA work. The laboratory super- to the biological characteristics of the source of the visor must submit plans of experiments and changes DNA, * the purified or unpurified nature of the DNA,** in plans to the head of the research institution for his the size of the clone number,*** and the scale of the or her approval, The head of the institution then con- cultivation. t Required physical containment measures sults with the safety committee—a body consisting of resemble those under the NIH Guidelines and are cat-

“members representing the relevant fields, and hav- egorized in a similar PI to P, scale. Similarly, the Jap- ing high standards of both professional and technical anese guidelines provide for two levels of biological knowledge and judgment”—to determine whether the containment. plans comply with the guidelines, what training will Historically, the Japanese guidelines have been be necessary, and other issues relevant to the safety among the most restrictive in the world. Although Ja- of the research. The safety officer’s role is to monitor pan’s guidelines have recently been relaxed consider- the safety of ongoing work and to make appropriate ably to bring them more into line with the guidelines reports to the safety committee. in other countries, they are still the most restrictive The Japanese Government monitors rDNA research of the ones surveyed in this appendix, Japanese com- through two bodies: 1) the Council for Science and panies applying biotechnology consider themselves Technology, which advises the Prime Minister and handicapped in competition against their foreign coun- which oversees work by private institutions; and terparts for two principal reasons. First, hosts are lim- 2) the Science Council, which advises the Ministry of ited in Japan, with a few exceptions, to E. coli and B. Education and which supervises Government-funded subtilis; other micro-organisms such as the actinomy - university research. The Science Council and the cetes, which is effective in producing antibiotics, there- Ministry of Education formerly had to approve univer- fore cannot be used. Second, work in Japan is limited sity rDNA research; now it is only necessary that the to volumes of 20 liters or less, and successful commer- university safety committee and the university presi- cial development requires larger fermenters (8). Jap- dent approve the experiment (7,9). Ministry authoriza- anese companies using biotechnology have mounted tion is still required, however, for experiments involv- an intensive lobbying campaign to eliminate the 20- ing specified “especially dangerous” organisms and the liter rule (10). release of such organisms into the environment. * Certain experiments are effectively prohibited in Environmental laws and regu1ations Japan, because the Japanese guidelines for rDNA research specify no safety or containment rules for UNITED STATES them. Effectively prohibited experiments include large-scale research (more than 20 liters of cell culture) The United States has no laws specifically directed and experiments in which recombinant organisms in- toward biotechnology, but, as discussed in Chapter IS: fect individual animals and plants, in which the source Health, Safety, and Environmental Regulation, the Tox- ic of the DNA is other than specified cells or host-vector Substance Control Act (15 U.S.C. $2601-2629) and the Federal Insecticide, Fungicide, and Rodenticide Act systems. Such experiments can be done once contain- (47 U.S.C. ~136(a)-(y)) will play a major role in prevent- ment standards are set, but setting such standards ing any adverse environmental impacts from biotech- depends under the guidelines on confirmation of the nology products. In addition, there are several statutes safety of these experiments, which has not been com- dealing with pollution that would apply because they pleted for most types of this research. Large-scale generally define pollutants or wastes so as to cover research is possible if special permission is granted by biological materials. They are: the Ministry of Education; few companies have sought ● The Federal Water Pollution Control Act, as it successfully. Japanese companies using biotech- amended by the Clean Water Act of 1977 (33 nology are now lobbying heavily for relaxation of restrictions on large-scale research, For permissible experiments, the Japanese rDNA re- ● The relevant bokgical characteristics of the DNA are pathogenicity, toxin- search guidelines require physical and biological con- producing ability, cardnogenicity, parasitic quality, drug resistanm, likelihood tainment based on the perceived risk of each experi- of becoming an alkmgen, masked intkctive factors such as nucleic acids related to C-type virus, vulnerability to contamination by vimses, bacteria, or other ment. Under the guidelines, risk is assessed principally parasites, ability to produce substances such horrmnes or metabolic inter- according to a phylogenic scale** but also according mediates affecti~ the metabolism of human beings, and possibility of causing ecological disturbances. ● ● “Especially dangerow” experiments indude the transplant of manipulated “ Purified DNA, prow?d to carry only Nonhazardous genre) is deemed safer genes with toxicity into animal and plant cells. University presidents may than unpurified DNA, still approve work with disease pathogem, including influenza and hepatitis ● ” ● The fewer the number of clones, the safer the experiment is, on the viruses [7). reasoning that a lower number will reduce the probability that harmful genes ● ‘DNA donor organisms closer phylogenically to humam are considered will appear. riskier. TSmaller-scale experiments are considered safer than large-scale ones. 556 . Commercial Biotechnology: An International Analysis

U.S.C. $$1251-1376, as amended by Public Law the Federal Government. In controlling pollution, poi- No. 95-217, 91 Stat. 1566 (1977)). sonous substances, and waste, the Federal Govern- ● The Marine Protection, Research and Sanctuaries ment and the ~“nder have concurrent jurisdiction, but Act of 1972 (33 U.S.C. j$1401, 1402, 1411-1421, the Lander may pass laws in these areas only if the 1441-1445). Federal Government has not done so. In environmen- ● The Clean Air Act (42 U.S.C. $$7401-7508, tal protection, land use, and water law, the Federal 7521-7574, 7601-7626). Government may enact broad “framework” legislation, ● The Solid Waste Disposal Act, as amended by the but the Lander must implement the general Federal Resource Conservation and Recovery Act of ‘1976 laws by enacting detailed legislation adapted to the (42 U.S.C. f\6901-6987, as amended by Public law conditions of each State. No. 94-580, 90 Stat. 2795 (1976)). The Ministry of the Interior (Bundesministerium Des Under the Federal Water Pollution Control Act, as Innern) coordinates the environmental policies of the amended, the Environmental Protection Agency has West German Federal Government, including environ- promulgated regulations on wastewater from the mental planning, waste and water management, and manufacture of pharmaceuticals by fermentation (4 control of air pollution. The Federal Environmental C.F.R. Part 439 (1982)). Agency (Umweltbundesamt), which is more concerned with environmental protection, furthers Federal en- EUROPEAN ECONOMIC COMMUNITY COUNTRIES: vironmental policies by developing planning programs FEDERAL REPUBLIC OF GERMANY, and performing research. Coordination of Federal en- UNITED KINGDOM, AND FRANCE vironmental programs also is conducted by a Cabinet European Economic Community.–Although Committee for Environmental Questions (Arbeitsge- the EEC has issued no directives or taken any other meinschaft fur Umweltfragen E.V.). action specifically to regulate the environmental ef- The only environmental regulations directed specif- fects of biotechnology, several general directives con- ically at biotechnology are contained in the Federal cerning waste disposal and water pollution will be ap- Republic of Germany’s guidelines for rDNA research plicable to biotechnological products (30,31,33). The (39). The Gerrnm guidelines impose requirements on EEC’S environmental regulations are general and flex- disposal of waste from rDNA experiments, require- ible, giving maximum discretion and authority to the ments that depend on the containment level of the bureaucrats that implement them. work involved. In no case may biological agents con- Companies using biotechnology will encounter en- taining rDNA be released into the environment. Ex- vironmental regulation in manufacturing biotechno- perimental plants and animals containing rDNA must logical products in the EEC member states and in ex- be kept under conditions of isolation. All rDNA ma- porting products to those states. Under the premar- terial may be removed from the laboratory only in air- keting notification requirement imposed by the Sixth tight packaging and must eventually be destroyed, usu- Amendment to the EEC’S dangerous substances direc- ally by incineration. All wastes containing micro- tive (32), * a firm must test a new chemical before organisms or nucleic acids must be sterilized or marketing, must provide the proper authorities in the denatured. Waste water from experiments at the L3 member states where the product is to be marketed or L4 level must be decontaminated. with the results of the “base test” (minimum testing Apart from the rDNA research guidelines, it appears requirements), and must conduct such further tests that the Federal Republic of Germany’s legislation and as those authorities may deem necessary before ap- implementing regulations do not specifically regulate proval may be granted. Since many biotechnology environmental impacts from biotechnological products products will likely qualify as “new chemicals,” the and processes. Instead, companies using biotechnology Sixth Amendment’s requirements would apply. Of would appear to be subject, like other firms in West course, a firm seeking to build a plant to manufacture Germany, to a series of general environmental pro- biotechnology products in a member state would be tection laws and regulations. required not only to secure “new chemical” approval, The most general of these laws is the Chemicals Act but also to comply with the more comprehensive sys- (40), which is designed to protect humans and the en- tem of environmental regulation in the member state. vironment from all types of dangerous substances. Federal Republic of Germany.-The Federal This law set up compulsory testing of substances and Republic of Germany is a federal state, and under its compulsory classification, labeling, and packaging of Constitution, the 11 ~“nder (States) share power with dangerous substances and materials. It implements in the of ● The first directive in the field of dangerous substances was Council Direc- Federal Republic Germany the Sixth Amend- tive of June 27, 1967 (29). ment to the EEC’S environmental protection directive. App. F—Recombinant DNA Research Guidelines, Environmental Laws, and Regulation of Worker Health and Safety ● 557

Other relevant statutes in the Federal Republic of limited to industrial and commercial establishments. Germany are the following: the Law for the Preven- These facilities are subject to requirements specific to tion of Harmful Effects on the Environment Caused the type of danger or inconvenience involved. This de- by Air Pollution, Noise, Vibration, and Similar termination rests largely in the hands of local author- Phenomena (Federal Emission Control Law) (37), the ities, who have a continuing right of access to the reg- Law on Disposal of Wastes (36). Act on Regulation of ulated facilities, Failure to comply with the law may Matters Relating to Water (Federal Water Act) (35), and result in administrative and criminal penalties. No the Waste Water Charges Act (Waste Water Law) (38). rules specifically aimed at biotechnology facilities have A Committee of the German Society for Chemical yet been adopted under the authority of this law. Engineering (Deutsche Gesellschaft fur chemisches Ap- The Chemicals Control Law of France (45), which paratewesen E. V.) completed a study of the risks spe- predates the Sixth Amendment to the EEC’S dangerous cifically associated with biotechnology and of the rele- substances directive, would apply to chemical com- vant statutory and regulatory provisions that could be pounds produced by biotechnology. This law aims to used to control those risks (34). The study concluded protect human beings and the environment against that adequate legal authority exists in the Federal Re- risks arising from both naturally occurring and in- public of Germany for regulating the kinds of hazards dustrially produced chemicals. Any producer or im- most likely to arise in connection with biotechnology. porter seeking to import or manufacture commercially United Kingdom. —Responsibility for protection a chemical which has never been placed on the French of the environment in the United Kingdom lies primar- market before must notify the relevant authority, pro- ily with the Department of the Environment. In addi- vide certain information, and submit to whatever con- tion, a Royal Commission on Environmental Pollution ditions may be imposed. * was established in 1970 to advise the government on Two other statutes would be particularly relevant environmental issues. As in the United States, much to biotechnology. They are the Law on Waste Disposal environmental regulation in the United Kingdom is the and Recovery of Materials (43) and the Act on the Ad- responsibility of local governments. ministration and Classification of Waters and the Con- Although the United Kingdom has an extensive stat- trol of Water Pollution (42). utory environmental protection scheme, there is no legislation or regulation specifically concerned with SWITZERLAND environmental impacts of biotechnological products Although the Swiss rDNA research guidelines pro- and processes. Companies using biotechnology, there- hibit the release of biological agents containing rDNA fore, would be subject to the general environmental into the environment, they do not mention effects on protection laws and regulations. the environment from other forms of waste which The Control of Pollution Act of 1974 (53), provides may result from applications of biotechnology. These in chapter 40 for licensing of sites for the disposal of would presumably be regulated in Switzerland under ‘(controlled waste, ” defined as household, industrial, Article 24 septies (seventh) of the Federal Constitution, and commercial waste, both on land and in water. The which gives the Federal Government far-reaching penalties for unlicensed disposal are fines and im- powers to pass environmental laws. prisonment. The law is to be phased in between July Legislation under this article has been sparse, how- 1983 and July 1986. Waste products of biotechnologi- ever, and there are apparently no nonfederal rules in cal processes would appear to be covered by this law. Switzerland on air pollution, noise abatement, or France.—The principal environmental protection waste disposal. Only in the area of water pollution has agency in France is the Ministry of the Environment legislation been enacted. The Water Protection Act of (Ministdre de lEnvironnement). Environmental protec- October 8, 1971 (51), seeks to ensure the quality of tion legislation applies broadly to activities that de- the nation’s water by means of sweeping protective grade the environment in a variety of ways. The touch- measures which cover all natural, artificial, ground, stone of most regulation is not the nature of a partic- and surface waters. ular activity, but whether it produces environmentally In addition, Article 6 of the Federal Act on Work adverse effects. To the extent that biotechnological in Industry, Trade, and Commerce (52) requires em- products and processes produce such effects, they ployers to protect the area surrounding their business would be subject to these laws. enterprise from harm or discomfort by taking all The most general environmental statute is the Law measures shown necessary by experience and found on Installations Classified for Purposes of Environmen- to be technically feasible and appropriate. tal Protection (44). This law covers all types of risk to humans and the environment resulting from the ac- ● Decree No. 79-35 desrribes the technical dossier to be prot’ided when pro- tivities of various types of facilities, including but not viding notice concerning a new chemical substance (41), 558 ● Commcial Biotechnology: An International Analysis

JAPAN Regulation of worker health Specific measures governing environmental effects and safety of biotechnology applications have not been prepared by the Japanese Government. The regulations appli- UNITED STATES cable to biotechnology are those applicable to all in- The Occupational Safety and Health Administration dustry. The agencies with responsibility for environ- (OSHA), which is part of the U.S. Department of Labor, mental protection in Japan include the Environmen- is the agency primarily responsible for worker safety tal Protection Agency, the Ministry of International and health. OSHA’S authority derives from the Occu- Trade and Industry (MITI), the Ministry of Health and pational Safety and Health Act of 1970 (29 U.S.C. Welfare, and the Ministry of Agriculture, Forestry, $$651-678) which creates a broad mechanism for pro- and Fishery. The Environmental Protection Agency tecting workers from workplace hazards, Section has jurisdiction over basic policy, general coordina- 5(a)(1) of the act requires U.S. employers to furnish tion of governmental pollution control activity, budg- their employees with a workplace “free from recog- etary policy, and research and investigation. nized hazards that are causing or are likely to cause The Basic Law for Environmental Pollution Control death or serious physical harm.” Section 5(a)(2) re- (46) establishes fundamental national principles and quires employers to comply with safety and health policies and establishes the basic regulatory frame- standards set by the U.S. Secretary of Labor. Under work for environmental protection in Japan. The law a recent U.S. Supreme Court decision (62), the Secre- applies to air, water, soil, and other pollution. It em- tary of Labor can promulgate permanent standards powers the Central Government to promulgate and for toxic substances or harmful physical agents only enforce environmental quality standards necessary to after a finding that the standard is “reasonably protect the public health and conserve natural re- necessary to remedy a significant risk of material sources. This and other environmental laws are sup- health impairment.” Section 6(c) of the act permits the plemented by and implemented through Cabinet Secretary of Labor to promulgate emergency tempor- orders issued by the Prime Minister, and through ary standards after a finding that employees are “ex- ministerial orders and Environmental protection Agen- posed to grave danger.” The statute also creates the cy notifications. Administrative guidance is used to National Institute for Occupational Safety and Health regulate pollution from specific industrial plants and to gather data, assess risks, and recommend safety and industries. Local governments have responsibility with health standards to OSHA. Other sections grant OSHA the Central Government in monitoring pollution and authority to require record keeping and medical sur- for regulation, and they may set more stringent stand- veillance and to enforce the act and its regulations ards than those set by the Central Government. through civil and criminal penalties. Japan’s Basic Law for Environmental Pollution Con- Given the language quoted above regarding risk and trol is supplemented by laws aimed at specific types hazard, the applicability of the Occupational Safety of pollution. These include the Air Pollution Control and Health Act to biotechnology would be limited Law (47), the Water Pollution Control Law (49) and when risk is conjectural. However, the act would be the Waste Management Law (48). applicable to large-scale processes using known human Finally, the Chemical Substances Control Law (50) toxins, pathogens, or their DNA. It also would be ap- requires manufacturers to notify the Japanese Govern- plicable to physical hazards presented by the fermen- ment and to test all new chemical substances to be tation process, such as temperature, pressure, and tox- produced in quantities exceeding 100 kilograms. ic solvents. OSHA has not promulgated health and safe- Chemicals are tested for their biodegradability and ty standards for bioprocesses and has made no state- bioaccumulation. Manufacturers and importers of ments on how it might apply the act to biotechnology. chemical substances must notify MITI of their intent OSHA arguably has authority to require a medical to use or market a new chemical. Japan’s Environmen- surveillance program, although this is not clear cut. tal Protection Agency monitors the effect of chemicals Section 8(c)(1) of the Occupational Safety and Health in the air and water, and the Ministry of Health and Act requires employers to “make, keep and preserve” Welfare administers laws on chemical products. such records as the U.S. Secretary of Labor prescribes App. F—Recombinant DNA Research Guidelines, Environmental Laws, and Regulation of Worker Health and Safety ● 559 by regulation as “necessary or appropriate for the en- the biotechnology industry is left to the discretion of forcement of this act or for developing information each member state. regarding the causes and prevention of occupational Federal Republic of Germany.-The rDNA re- accidents and illness.” Further, section 8(c)(2) of the search guidelines of the Federal Republic of Germany act authorizes the Secretary of Labor to require em- (57) provide specifically for the health-monitoring and ployers to “maintain accurate records of, and to make training of laboratory workers. Each worker at an periodic reports on, work-related deaths, injuries and rDNA laboratory that is above the lowest containment illnesses other than minor injuries . . . .“ Since the pur- level must have a pre-employment examination by an pose of a surveillance program would be to develop authorized doctor. If the results of this examination information on any occupational disease related to reveal a susceptibility to hazards which may be in- biotechnology, section 8(c)(1) of the Occupational Safe- volved in the contemplated research, the worker may ty and Health Act would seem to apply. In addition, not be employed. Appropriate immunizations are re- the information developed in such a program would quired for work with pathogenic microorganisms. also be the kind of information necessary for compli- Blood serum from the worker must be taken at the ance with regulations promulgated under section first examination and at the end of employment and 8(c)(2). Employers, on the other hand, might argue that stored until at least 2 years after the end of participa- both sections require an initial showing that biotech- tion in the research. All workers must receive instruc- nology causes occupational disease. tion before the research begins and annually thereafter in the methods to be used, the conceivable hazards EUROPEAN ECONOMIC COMMUNITY COUNTRIES: of the experiment, and the protective measures to be FEDERAL REPUBLIC OF GERMANY, applied. UNITED KINGDOM, AND FRANCE - The Federal Republic of Germany’s general worker European Economic Community.–Although health and safety regulations would also apply to com- its powers in the area of worker health and safety reg- mercial uses of biotechnology. At the Federal level, ulation are limited and indirect, the EEC has attempted substantive workplace health and safety requirements to ensure at least minimal protection for most indus- are stated in the Act Respecting Plant Physicians, Safe- trial workers. In 1980, the EEC adopted a directive that ty Engineers, and Occupational Safety Specialists (55), * required each member state to adopt a variety of in the Ordinance Respecting Workplaces (56),** and measures to protect workers’ health and safety (54). * in rules that are issued by the Dangerous Industrial The directive covers work that does or may involve Substances Committee (Ausschus fur Gefahrliche a “chemical, physical or biological agent . . . likely to Arbeitsstoffe) of the Federal Ministry of Labor and be harmful to health.” The directive is quite general; Social Affairs (Bundesministerium fur Arbeit und the specific content and substance is left to the discre- Sozialordnung) concerning the marketing and han- tion of the member states. dling of dangerous substances (70). The directive does not refer explicitly to rDNA work Within this Federal framework, a significant regu- or other applications of biotechnology. Thus, the ques- latory role is played in the Federal Republic of Ger- tion of how worker health and safety laws will affect many by accident insurance funds. These funds are authorized by statute to issue regulations setting stand- ● The required measures include the following: ards for workplace health and safety (58). When ap- 1. limitations on the use of chemical, physical or biological agents in the workplace; proved by the Federal Minister of Labor and Social 2. limitations on the number of workers exposed or likely to be exposed Affairs, the regulations become binding on covered to such agents; 3. engineering controls; employers. The funds, which are organized by indus - 4. establishment of exposure limit values for such agents and methods of assessing their level; 5, safe working procedures and methods; ● The Act Respecting Plant Physicians, Safety Engineers, and Occupational 6. collective protection measures; Safety Specialists requires each employer to appoint a plant physician and 7. individual protection measures, where exposure cannot reasonably an occupational safety specialist. The appointed physician must conduct med- be avoided by other means; ical examinations of employees, advise the employer concerning health and 8. hygiene measures; safety precautions (including technical equipment and personal protective 9. information for workers on potential risks associated with the expo- devices), supervise workplace safety, investigate and report to the employer sures to such agents, technical preventive measures workers should on the causes of work-related illnesses, and instruct employees concerning take, and precautions to be taken by the employer and the workers; the dangers to which they are exposed in the course of their work and the 10. use of warning and safety signs; measures available to avert such dangers. 11. surveillance of workers’ health; ● ● Section 3(1)1 of the Ordinance Respecting Workplaces imposes a general 12. maintenance of current records of exposure levels, workers exposed, obligation on employers to operate workplaces in accordance with both the and medical records; law and the “generally recognized rules of safety engineering, occupational 13. emergency procedures; and medicine and hygiene and any other scientifically established findings in the 14. if necessary, general or limited bans on an agent from which protec- labor field.” Its specific requirements, however, relate to physical design and tion cannot be adequately ensured. construction. 560 ● Commercial Biotechnology: An International Analysis try, are authorized not only to promulgate the appli- France.—The guidelines for rDNA research in cable standards, but also to enforce them through in- France contain no provisions dealing expressly with spections and fines. Because all employers must carry the health or the health-monitoring of laboratory accident insurance, the funds have a large role in oc- workers. The guidelines do require, however, that cupational safety and health. scientists and technicians be familiar with the physical United Kingdom. -Guidelines promulgated by and biological containment measures involved in rDNA GMAG contain specific requirements regarding the research and be prepared to take emergency action health and safety of laboratory workers who are in- in the event of an accident. volved in rDNA research (67,68,69) (see discussion of The formulation and implementation of general pol- “Recombinant DNA Research Guidelines” above). Each icy on the prevention of occupational hazards in laboratory must appoint a supervisory medical officer France is the responsibility of the Central Council for with experience in public health, infectious diseases, the Prevention of Occupational Hazards (Conseil Cen- or occupational medicine, and conduct health reviews tral pour la Prevention des Risques Professionally). So of all workers before they start work involving genet- far, the council has not specifically addressed worker ic manipulation. The reviews are designed to check health problems arising from biotechnology. workers for particular susceptibilities and to assist in Specific employee health and safety regulations are determining whether any laboratory-contracted ill- promulgated and enforced in France by the Minister nesses have developed. If a worker’s medical history of Labor, who is in charge of conditions in industrial indicates that the worker’s participation in genetic and commercial establishments, and by the Minister manipulation may be particularly hazardous, appro- of Agriculture, who is granted the same authority over priate steps may be required to prevent his or her ex- agricultural facilities. posure to genetic manipulation work. The institution An occupational safety and health committee must must also investigate any unexplained illiness, and if be set up in any industrial establishment normally a laboratory contracted infection is suspected, the in- employing 50 or more workers (59,60). The commit- stitution must inform both the worker and the work- tee advises management on safety procedures and peer’s physician as well as GMAG and other authorities. riodically inspects the establishment to ensure that the Companies using biotechnology in the United King- safety laws and regulations are being applied. It also dom must also fulfill the obligations imposed on vir- is supposed to take immediate action to avert immi- tually all employers and manufacturers by the Health nent danger at the facility and to conduct an inquiry and Safety at Work Act of 1974 (66). In general, an into the causes of any accident or serious occupational employer must ensure so far as reasonably practicable disease. that employees are not exposed to health and safety The manufacture of chemical substances potential- risks and to inform them of the risks that are created. ly harmful to workers is also regulated by statute (61). Employees also have certain obligations under the act. Prior to the marketing of any substance or prepara- Health and safety regulations in the United Kingdom, tion that may involve a danger to workers, the manu- under the Health and Safety at Work Act, are promul- facturer, importer, or seller must file with a Govern- gated by the Secretary of State, on the advice of the ment-approved laboratory the information necessary Health and Safety Commission. The Health and Safe- to assess the risks of the manufacturing process. If the ty Commission also supervises efforts to improve chemical substance has already been placed on the worker health and safety, makes necessary investiga- market, its manufacture, sale, transfer, or use may be tions, and may approve codes of practice for particular restricted or prohibited in the interests of occupational industries. health and safety, There is no code of practice for biotechnology other than the GMAG guidelines for rDNA research. If a SWITZERLAND broader code were developed, it would be only advisory; violation of a code is not per se a violation of By following the U.S. guidelines for rDNA research, the Health and Safety Work Act but is only evidence Switzerland applies to rDNA work the worker health tending to show a violation of the act. HSE (and local and safety rules set out therein. Thus, each research authorities) enforce the act through appointed inspec- institution in Switzerland must ensure that laboratory tors, who may issue “notices” prohibiting certain ac- workers receive appropriate training, determine tivities as too risky or requiring remedial actions. whether a health surveillance program is appropriate, Violators of the act are subject to civil and criminal and report to the Commission for Experimental Ge- penalties. netics any work-related accidents or illness. The re- App. F—Recombinant DNA Research Guidelines, Environmental Laws, and Regulation of Worker Health and Safety “ 561 sponsibility for assessing the training provided to per- cial Journal of the European Communities 23(C214):7-8, sonnel and the adopting emergency plans for acciden- Aug. 21, 1980. tal spills and personnel contamination rests with the 2. Council of the European Communities, ‘(Council Recom- institution’s biohazards committee. The biological safe- mendation of 30 June 1982, No. 82/472 /EEC, Concern- ty officer must report work-related accidents or ill- ing the Registration of Work Involving Deoxyribonucleic Acid (DNA),” Official Journal of the European Commu- nesses and assist in developing emergency plans. The nities 25 (L213):15-16, July 21, 1982. group leader is obligated to train and supervise his 3. Federal Republic of Germany, Bundesministerium f~ or her staff. Forschung und Technologies (Federal Ministry for Science Worker health and safety not specifically related to and Technology), “Richtlinien zum Schutz vor Gefahren rDNA research is regulated in Switzerland on the can- durch in-vitro neukombinierte Nukleinsauren” (Guide- tonal rather than the nonfederal level. In one canton, lines for the Safe Handling of Recombinant Nucleic Acid Geneva, an advisory committee has been established (DNA)), appearing in 4. u“berarbeitete Fassung, Bonn, to serve as a channel of communication between pub- Aug. 7, 1981. lic authorities and business and to develop proposals 4. Fildes, R. A., Chairman, Industrial Biotechnology Associa- on worker health and safety. The committee meets tion Committee on Industrial Applications and Scale-Up, remarks in Recombinant DNA Technical Bufletin (NIH) four times a year (63). The other cantons do not have 5:196-197, December 1982. such committees. 5. France, “Les lois Gouvernant 1a R~cherche du DNA Re- combinaisant” (Guidelines on Recombinant DNA Re- JAPAN search), adopted Dec. 13, 1977. The basic law governing worker health and safety 6. Gartland, W., Director, Office of Recombinant DNA Ac- in Japan is the Industrial Safety and Health Law of tivities, National Institutes of Health, Bethesda, Md., personal communication, Aug. 22, 1983. 1972 (64). * This law imposes on employers health and 7. Genetic Engineering News, “Regulatory Update: Univer- safety obligations which are comprehensive in scope sities To Follow in Easing DNA Rules,” September/Octo- but very general in actual language. Among these ob- ber 1982, p. 23. ligations is the duty to take necessary measures to pre- 8. Japan Economic Journal, “Biotechnology Development vent health impairment caused by substances, agents, Role Mounts With New Entrants,” Mar. 16, 1982, p. 16. and conditions found in the workplace. The law vests 9. Japan Economic Journal, “Easing Recombinant DNA broad discretion in the Japanese Ministry of Labor to Rules to Western Levels is Recommended,” Aug. 3, 1982, determine when regulation is appropriate and what p. 9. kinds of precautions an employer must take. Employ- 10. Japan Economic Journal, “Biotechnology is Entering Sec- ers who manufacture, import, or use “chemical sub- ond Stage of Its Boom, ” Sept. 28, 1982, p. 9. 11. Japan, “Kumikae DNA jikken shishin” (Guidelines for Re- stances” may be subject to special requirements. Med- combinant DNA Experiments) (Cabinet Prime Minister, ical examinations must be conducted on all employees, Aug. 27, 1979, as amended on Apr. 7, Nov, 7, 1980, and but employers may also be required to provide special Apr, 1, 1981, Tokyo, Japan). tests for employees engaged in harmful work. At the 12. Nature, “Watchdog To Bark Less Often,” 302:467, 1983. present time, no regulations have been addressed spe- 13. Rorsch, A., Genetic Manipulations in Applied Biology— cifically to biotechnology. A Study of the Necessity, Content, and Management Prin- The Industrial Safety and Health Law includes a ciples of a Possible Community Action, contract no. stringent enforcement mechanism. Substantial crimi- 346-77-7 ECI, NL, submitted to Directorate General nal penalties and fines are imposed for violations. For “Scientific and Technical Information and Information Management Management,” Commission of the European the most serious violations, offending employers may Communities, Brussels, Belgium, 1979. also be ordered to close or alter their operations. 14. Switzerland, “Les lois Gouvernant la Reserche du DNA Appendix F references * * Recombinaisant” (Guidelines on Recombinant DNA Research). RECOMBINANT DNA RESEARCH 15. United Kingdom, Genetic Manipulation Advisory Group, GUIDELINES REFERENCES “Prospective New Basis for the Categorisation of Genetic Manipulation in the United Kingdom, ” Nature 1. Commission of the European Communities, “Draft Coun- 276:104-108, 1978. cil Recommendation Concerning the Registration of 16. United Kingdom, Genetic Manipulation Advisory Group, Recombinant DNA (deoxyribonucleic acid) Work,” Offi- GMAG Note No. 1, “Local Safety Committees in Genetic Manipulation Laboratories,” London. 17. United Kingdom, Genetic Manipulation Advisory Group, “This discussion is based on a 1980 publication of the Japanese Govern. ment entitled f,abour Law of Japan (65), and does not reflect changes that GMAG Revised Note No. 7, ‘Information and Advice on may have been subsequently enacted, the Completion of Proposal Forms for Centres (Part A) * “Note: S.Ct = Supreme Court Reporter. and Projects (Part B),” London, May 1979. 562 Commercial Biotechnology: An International Analysis

18. United Kingdom, Genetic Manipulation Advisory Group, mumities 21(L84):43, Mar, 31, 1978, reprinted in 2 Znt!l. GMAG Note No. 8 (March 1979), Note No. 8-Supplement Env’t. Rep. Ref. Fife (Bureau of National Affairs, Wash- 1 (December 1979), Note No. 8-Supplement 2 (December ington, D.C.) 151:1201, 1980), “Self-Cloning Experiments,” London, 1979 and 32. Council of the European Communities, Council Directive 1980. of 18 September 1979, No. 79/831 /EEC, Amending for 19. United Kingdom, Genetic Manipulation Advisory Group, the Sixth Time Directive 67/548/EEC on the Approxima- GMAG Note No. 11, “The GMAG Categorisation Scheme,” tion of the Laws, Regulations and Administrative Provi- London, January 1980. sions Relating to the Classification, Packaging and Label- 20. United Kingdom, Genetic Manipulation Advisory Group, ling of Dangerous Substances, Officiaf Journal of the GMAG Note No. 12, “Large-Scale Uses of the Products European Communities 22(L259):1O, Oct. 15, 1979. of Genetic Manipulation—Work Involving GMAG Vol- 33. Council of the European Communities, Council Directive umes of 10 Litres or More,” London, November 1979. of 17 December 1979, No. 80/684/EEC, on the Protection 21. United Kingdom, Genetic Manipulation Advisory Group, of Groundwater Against Pollution Caused by Certain GMAG Note No, 13, “Genetic Manipulation of Plants and Dangerous Substances, Official Journal of the European Plant Pests,” London, January 1980. Communities 22(L20):43-47, Jan. 26, 1980, reprinted in 22. United Kingdom, Genetic Manipulation Advisory Group, 2 MY. Env’t. Rep. Ref. File (Bureau of National Affairs, GMAG Note No. 14, “Revised Guidelines for the Categor- Washington, D.C.) 151:2.101. isation of Recombinant DNA Experiments, ” London, 34 Deutsche Gesellschaft fur chemisches Apparatewesen, 1980. Arbeitmethoden ffi die Biotechnologie (Work Proce- 23. United Kingdom, Genetic Manipulation Advisory Group, dures for Biotechnology), Frankfurt, 1982. GMAG Note No. 15, “Code of Practice for Genetic Man- 35. Federal Republic of Germany, Act on Regulation of Mat- ipulation Containment Facilities,” London, June 1981. ters Pertaining to Water, Law of July 27, 1957, 1957 24. United Kingdom, Health and Safety at Work Act of 1974, Bundesgesetzblatt llJGBll 1:1110, as amended by Fourth Statutory Instrurnents, Chapter 37. Act for Amendment of Federal Water Act, Apr. 26, 1976, 25. United Kingdom, House of Parliament, House of Com- BGB1 at 1109, reprinted in 3 Int'l. Envl. Rep. Ref. Fife mons Select Committee on Science and Technology, Re- (Bureau of National Affairs, Washington, D.C.) 241:2201. combinant DNA Reseamh-Znten”m Report, vii (London: 36 Federal Republic of Germany, Abfallbeseitigungsgesetz H.M. Stationery Office, Apr. 3, 1979). (Law on Disposal of Wastes), Law of June 7, 1972, 1972 26. United Kingdom, Health and Safety (Genetic Manipula- Bundesgesetzblatt @3GBll at 873:1601, summarized in 3 tion) Regulations, Statutory Instrument 1978 No. 752 lntl. Env’t. Rep. Ref. File (Bureau of National Affairs, (London: H. M. Stationery Office, 1978). Washington, D.C.) 241:0105.

27. U.S. Department of Health, Education and Welfare, Na- 37< Federal Republic of Germany, Law for the Prevention tional Institutes of Health, “Physical Containment Recom- of Harmful Effects on the Environment Caused by Air mendations for Large-Scale Uses of Organisms Contain- Pollution, Noise, Vibration, and Similar Phenomena, Law ing Recombinant DNA Molecules,” Federal Re&”ster of March 15, 1974, 1974 Bundesgesetzblatt D3GB11, 721, 45:24968, Apr. 11, 1980. 1193, as amended by Law Amending the Law To Intro- 28. US. Department of Health and Human Services, National duce the Penal Code, August 15, 1974, 1974 BGB1 at Institutes of Health, “Guidelines for Research Involving 1942, reprinted in 3 Int?. Envl. Rep. Ref. file (Bureau Recombinant DNA Molecules,” Federal Register of National Affairs, Washington, D.C.) 241:1001. 48:24556-24581, June 1, 1983. 38. Federal Republic of Germany, Waste Water Charges Act, Law of Sept. 13, 1976, 1976 Bundesgesetzblatt ~GBl] 1:2721, reprinted in 3 (Bureau ENVIRONMENTAL LAWS AND REGULATIONS Int!l. Env’t. Rep. Ref. We of National Affairs, Washington, D.C.) 241:2301. REFERENCES 39. Federal Republic of Germany, Bundesministerium fh 29. Council of the European Communities, Council Directive Forschung und Technologies (Federal Ministry for Science of 27 June 1967, No. 67/548/EEC, on the Approximation and Technology), “Richtlinien zum Schutz vor ~fahren of Laws, Regulations and Administrative Provisions durch in-vitro neukombinierte Nukleinsauren ” Relating to the Classification, Packaging and Labelling (Guidelines for the Safe Handling of Recombinant Nucleic of Dangerous Substances, official Journal of the Euro- Acid (DNA)), 4. uberarbeitete Fassung, Bonn, Aug. 7, pean Communities 10(196):234, Aug. 16, 1967. 1981. 30. Council of the European Communities, Council Directive 40. Federal Repubiic of Germany, Chemikaliengesetz (Chem- of 4 May 1976, No.-76/464/EEC, on Pollution Caused by icals Act), Law of Sept. 16, 1980, 1980 Bundesgesetzblatt Certain Dangerous Substances Discharged into the Aqua- U3GB11 (Fed. L. Gaz. I), 1:1718, translation reprinted in tic Environment of the Community, Official Journal of 3 lnt~. Env’t. Rep. Ref. FiYe (Bureau of National Affairs, the European Commum”ties 19(L129):23, May 18, 1976, Washington, D,C.) 241:4101. reprinted in 2 Int’1. Env’t, Rep. Ref. Fife (Bureau of Na- 41. France, Decree No. 79-35 Journal Off.iciel de la tional Affairs, Washington, D.C.) 151:2101. Rt?publique Fran~aise (Official Journal), Jan. 17, 1979. 31 Council of the European Communities, Council Directive 42. France, La loi no. 64-1245 du 16 decembre 1964 relative of 20 March 1978, No. 78/319 /EEC, on Toxic and Dan- au regime et repartitions des eaux et ~ la lutte contre gerous Wastes, official Journal of the European Com- la pollution (Law No. 64-1245 of Dec. 16, 1964 on the App. F—Recombinant DNA Research Guidelines, Environmental Laws, and Regulation of Worker Health and Safety 563

Administration and Classification of Waters and the Con- cupational Safety Specialists, as amended, Bundesgestz - trol of Water Pollution), Jounal Officiel de la Republique blatt U3GB11 105:1885, Dec. 15, 1973, translation Francaise (Official Journal), Dec. 16, 1964, pp. 11,258 et reprinted in Le#”slative Series, 1973 -Ger. F.R.2 (Interna- seq. tional Labor Office, Geneva), January-February 1975. 43. France, Law No. 75-633 on Waste Disposal and Recovery 56. Federal Republic of Germany, Ordinance of 25 March of Materials, Journal Officiel de la RdpubLique Frangaise, 1975 Respecting Workplaces, Bundesgesetzblatt IBGB1] (Official Journal) July 15, 1975, excerpts reprinted in 3 32:729, Mar. 25, 1975, translation reprinted in Le#”slative Znff. Env’t. Rep. Ref. File (Bureau of National Affairs, Series, 1975 -Ger. F.R. 2 (International Labor Office, Washington, D.C.) 231:7001. Geneva), September-October 1976. 44. France, La Ioi no. 76-663 du 19 juillet 1976 relative aux 57. Federal Republic of Germany, Bundesministerium f~ installations classes pour la protection de l’environment Forschung und Technologies (Federal Ministry for Science (Law No. 76-663 of July 19, 1976, on Installations Classi- and Technology), ‘( Richtlinien zum Schutq vor @fahren fied for Purposes of Environmental Protection), Journal durch in-vitro neukombinierte Nukleinsauren” (Guide- Officiel de la Rt?publique Fran~aise (Official Journal), pp. lines for the Safe Handing of Recombinant Nucleic Acid 4320 et seq., July 19, 1976, reprinted in 31nt?. Env’t. Rep. (DNA)), in 4. berabeitete Fassung, Bonn, Aug. 7, 1981. Ref. File (Bureau of National Affairs, Washington, D.C.) 58. Federal Republic of Germany, Federal Insurance Code 231:2001. (as amended), translation reprinted in Legislative Series, 45. France, Law No. 77-771 on the Control of Chemicals, 1980Ger. F.R. 1 (International Labor Office, Geneva) $708 Journal Officiel de la R6publique Fran~aise (Official Jour- (as last amended on 18 August 1980), Sozialgestzbuch- nal), July 12, 1977, excerpts reprinted in 3 Int’1. Env’t. Verwaltungsverfahren BGBLI:1467, Aug. 18, 1980. Rep. Ref. File (Bureau of National Affairs, Washington, 59. France, Act No. 73-1195 of 27 December 1973 Respect- D.C.) 231:5001. ing the Improvement of Working Conditions, Journal Of- 46. Japan, Basic Law for Environmental Pollution Control, ficiel de la R6publique Franqaise (Official Journal) Law No. 132 of 1967, as amended, reprinted in 2 Intf. 304:14-146, Dec. 30, 1973, translation reprinted in Env’t. Rep. Ref. File (Bureau of National Affairs, Wash- Legislative Series, 1973-Fr. (International Labor Office, ington, D.C.) 91:0501. Geneva) 3:1-7, May-June 1974. 47. Japan, Air Pollution Control Law, Law No. 97 of 1968, 60. France, Decree No. 74-274 of 1 April 1974, Journal Of- as amended, reprinted in 2 MY. Env’t. Rep. Ref. File ficiel de la Rdpublique Fran~aise (Official Journal), Apr. (Bureau of National Affairs, Washington, D.C.) 91:0901. 5, 1974. 48. Japan, Waste Management Law, Law No. 137 of 1970, 61. French Labour Code, Article L. 231-7, translation as amended, reprinted in 2 Int’1. Env’t. Rep. Ref. File reprinted in Legl”slative Series 1981-Fr. 1 (International (Bureau of National Affairs, Washington, D.C.) 91:2401. Labor office, Geneva) 1:78, 90, JanUaryFebrUw 1982. 49. Japan, Water Pollution Control Law, Law No. 138 of 62. Industrial Union Dept., AFL

Chapter 16: Intellectual Property Law discusses The EPC system and the resulting patents exist in three areas of intellectual property law that are par- parallel with the patent systems of the member coun- ticularly relevant to the commercialization of biotech- tries. The ultimate goal is for each of the member nology: patents, trade secrets, and plant breeders’ countries to adopt in its national law the same substan- rights. That chapter focuses initially on the United tive law of patents set forth in the EPC; in the begin- States and then discusses the laws of the other coun- ning, however, and perhaps always to a certain ex- tries by comparing them to the U.S. laws. This appen- tent, differences in substantive law will exist between dix elaborates on the intellectual property laws of the countries. Enforcement of European patents is han- five countries likely to be the major competitors of the dled by the same national authorities that are respon- United States in the commercialization of biotechnol- sible for handling enforcement of national patents in ogy-Japan, the Federal Republic of Germany, the the EPC member countries (EPC art. 64(3)). United Kingdom, Switzerland, and France—and is the Patentable Subject Matter. Under the EPC, patents basis for the comparisons in chapter 16. The first sec- can be granted for any invention susceptible of in- tion examines the laws of the four European countries, dustrial application* that is new and involves an in- and the second section considers the intellectual prop- ventive step (EPC art. 52(l)). This broad definition is erty law of Japan. narrowed by specific exclusions. Discoveries, scientific theories, and naturally occurring products, for Intellectual property laws of example, are not considered patentable inventions. the Federal Republic of Germany, Methods of treating humans or animals and related diagnostic methods are similarly excluded from patent- the United Kingdom, Switzerland, ability, although products so used are not. Finally, and France plant or animal varieties and essentially biological processes for the production of plants or animals are The Federal Republic of Germany, the United King- not patentable; however, their exclusion does not ap- dom, Switzerland, and France, have created an intel- ply to microbiological processes or the products of lectual property law similar to that of the United such processes (EPC art, 53(a) and (b)). The question States, Important differences exist, however, especially of whether a process is “essentially biological” depends on a country -by+ountry basis. Patent laws, laws of on the extent to which there is technological interven- trade secrets, and plant breeders’ rights in these coun- tion by humans in the process. Under the Guidelines tries are reviewed in the sections that follow. for Examination of the European Patent Office, if such intervention plays a significant part in determining or PATENT LAW controlling the result it is desired to achieve, the proc- Eleven European countries, including the Federal ess would not be excluded (G.E. pt. C(IV)(3.4)). Republic of Germany, the United Kingdom, Switzer- Under EPC articles 52(1) and 53(b), as interpreted land, and France, have agreed to a treaty, the Euro- by the European Patent Office, microbiological in- pean Patent Convention (EPC), that creates a European ventions of the following kind would be patentable: patent system (8). These countries also have patent 1) micro-organisms (including viruses and cell lines), systems created by national laws. 2) processes for making them, 3) processes using them, European Patent Convention.—The EPC 4) products obtained from microbiological processes, and 5) DNA and RNA molecules or subcellular units entered into force on october 7, 1977, and as of January 1, 1983, the treaty had been ratified by (e.g., plasmids) (G.E. pt. C(IV)(3.5-3.6)). The European Belgium, the Federal Republic of Germany, France, the Patent Office also stated that the term “micro-orga- United Kingdom, Luxembourg, the Netherlands, Swit- nism” covers plasmids, zerland, Sweden, Italy, Austria, and Liechtenstein. The one major area that will require further clarifica- EPC establishes a legal system for granting European tion, however, is whether naturally occurring micro- patents through a single supranational European Pat- organisms, subcellular units, or DNA and RNA mole- ent Office and a uniform procedural system with re- cules are patentable. Under the EPC, there appears spect to patent applications, The single European pat- to be no absolute bar, it will simply be a question of ent application, if granted, becomes a bundle of individual European patents, one for each of the countries ● l’he term industrial application includes agricultural applications (EPC art designated by the applicant. 57), This is actually the standard for utility under the EPC.

564 App. G—lntellectual Property Law ● 565

the degree to which such subject matter is naturally publicly available or can be described so as to be available and of the effort required to identify and/or reproducible. isolate it (G.E. pt. C(IV)(2.1)). Deposit Requirements. If a deposit is required, it Novelty. Under the EPC, an invention is new if it is must be made with a recognized depository not later not part of the state-of-the-art on the effective filing than the date the application is filed. The European date of the patent application (EPC art. 54(l)). The EPC Patent Office publishes a list of recognized deposito- provides that the state~f-the-art comprises everything ries, and, since it adheres to the Budapest Treaty, the made available to the public by means of a written European Patent Office also recognizes deposits made or oral description, by use, or in any other way, before pursuant to the treaty. Cultures must be maintained the date of filing of the European patent application for at least 30 years. (EPC art. 54(2) ).* There are no restrictions as regards Since all European patent applications are published the geographical location where, or the language or approximately 18 months after their filing date (unless manner in which, the relevant information is made previously withdrawn) (EPC art. 93(l)), the deposited available to the public. microorganism can become publicly available before This is known as an “absolute novelty standard” be- the patent has been issued. The EPC sets up certain cause certain public disclosures even by the inventor safeguards on access to prevent abuse. * himself/herself before the filing can result in loss of Claims. Claims in an EPC application must define the patent rights. The absolute novelty standard is a ma- subject matter for which protection is sought, be clear jor distinction of European patent law from that of and concise, and be supported by the description (EPC the United States. art. 84; G.E. A(III)(4)-(6)). Standard of Invention. The EPC defines inventive Enforcement. Under the EPC, European patents are step as follows (EPC art. 56): granted for a term of 20 years. Enforcement is han- An invention shall be considered as involving an in- dled by the national courts of the EPC member coun- ventive step if, having regard to the state of the art, tries. The question of infringement is considered it is not obvious to a person skilled in the art. under national law principles, but taking account of This definition parallels the definition of nonobvious - treaty requirements regarding claim interpretation. ness under section 103 of the U.S. patent law (35 U.S.C. European patents may be revoked by a national court 0 1 3)) except that fI03 refers to a person of ordinary on certain specified grounds (EPC arts. 138(1) and skill in the art and also to the differences between the 139(2)). invention and the prior art. Patent Laws of the Federal Republic of Ge~ The European Patent Office’s Guidelines for Exami- many, the United Kingdom, Switzerland, and nation indicate that the test of obviousness to be ap- France.—As described below, the patent laws in the plied by the European patent examiners is consistent Federal Republic of Germany, the United Kingdom, with the objective test under section 103 (G.E. pt. Switzerland, and France vary with respect to certain C(IV)(9.9)). In particular, the European Patent Office provisions regarding patentable subject matter, novel- apparently will consider such factors as unexpected ty, disclosure requirements, or enforcement. advantages, evidence of immediate commercial suc- Patentable Subject Matter. The provisions defining cess, and evidence of long felt need (18,30). patentable subject matter in the patent law of the Fed- Disclosure Requirements. The basic disclosure re- eral Republic of Germany are virtually identical with quirement under the EPC is as follows (EPC art. 83): the corresponding provisions of the EPC. Regarding The European patent application must disclose the biological inventions, the Federal Republic of Germany invention in a manner sufficiently clear and complete has been a pioneer in recognizing the patentability of for it to be carried out by a person skilled in the art. microorganisms per se. After deciding in 1969 that This enablement requirement has as its essential ele- patents could be obtained for inventions in the field ment the concept of the reproducibility or repeatabili- of biology (22), the German Federal Supreme Court ty; i.e., the making of the invention must not be de- specifically held in 19i’.5 that micro-organisms per se pendent on chance. For micro-organisms, enablement constituted patentable subject matter (2). Therefore, generally is satisfied by depositing a culture of the in line with EPC law, the same categories of biologi- micro-organism in a depository to which the public has access and referencing the depository and file number in the patent application. However, a deposit “’1’he safeguards are as follows” 1) the recipient may not pass the sample need not be made if the micro-organism is already on to anyone else unless or until the application is abandoned or all Euro- pean patents ha\e expwed, Z) the recipient can onlj use the micro-organism for experimental purposes until the application is abandoned or a patent “Implicit in the concept of the stateaf-the.art is the concept that the public Issues, 3) the patentee ran elect to permit samples to be git,en only to certain ctisrlosure must be enabling neot ral experts (WC Rule 28(3)-(4)). 568 Commercial Biotechnology: An International Analysis

cal inventions are patentable in principle according requirements (West German patent law sec. 35(2), to West German law. * 1981) is identical to article 83 of the EPC, i.e., enable- In its Patent Act of 1977, the United Kingdom ment of a person skilled in the art. However, there adopted the EPC definition of patentable subject mat- are certain differences in practice regarding biologi- ter. The British Patent Office has taken the position cal inventions. By court decision, a new micro-orga- that all of the five general categories of biological sub- nism cannot be patented unless the application dis- ject matter listed above are patentable (27). closes a reproducible method of producing it. Thus, Section 1a of the Swiss Patent Law corresponds to a deposit without an enabling written description is EPC Article 53(b), stating that “micro-biological meth- inadequate to support a claim to the microorganism ods and products obtained thereby shall be patent- itself (3,26). This is in marked contrast to the law of able.” There is no specific provision in the law which the other countries. On the other hand, a deposit alone states that ‘(discoveries” are not patentable subject mat- is sufficient to support a claim to a method of using ter, although prior case law recognizes such an ex- a new micro-organism (32). A required deposit must clusion (5). be made no later than the filing date (or the priority Nevertheless, it appears that Swiss practice varies date) (32). Although the applicant must furnish samples considerably from that under the EPC. According to of the deposit to third parties after publication of the the Swiss Patent Office, micro-organisms per se are application, the applicant can require that the samples not patentable, including human-made ones. The Pat- not be removed from the Federal Republic of Germany ent Office has apparently not yet taken a position on and not be passed on to others. the patentability of DNA and RNA molecules or sub- The British Patents Act, in section 14(3), has the same cellar units (7). enablement standard as the EPC. In the case of an in- As to the remaining categories of subject matter invention involving a microorganism, the application as volving microorganisms, the Swiss law provides for filed must contain the relevant information on the patent protection in the same manner as the EPC. Fur- characteristics of the micro-organisms, to the extent thermore, since microbiological processes are explicit- known to the applicant. The required deposit must be ly patentable, some protection is obtainable for micro- made no later than the filing date or the priority date organisms per se under Swiss law, because section 8 (British Patent Office Rule 17(1) (1978)). Samples will of the Swiss Patent Act provides that the protection be publicly available when the application is published of a patent claiming a process shall extend also to the 18 months after the priority date. Those who request immediate products of the process. samples must undertake not to pass them onto others The substantive law regarding patentable subject and to use them only for experimentation until the matter in France corresponds to the EPC, specifically patent is granted or the application is abandoned in all respects which are relevant to microorganisms. (British Patent Office Rule 17(2) (1978)). However, article 7 of the French patent law (1978) ex- The Swiss Patent Act, in section 50 (1978), contains cludes patents on plant varieties to the extent to which the same enablement standard as the EPC. The Patent such varieties are protectable under French plant pro- Ordinance, section 26(6) (1977), also requires that the tection legislation. description explain how the invention may be used Utility. All of the EPC countries have adopted the industrially. In the case where the micro-organism is EPC requirement for utility-that the invention be use- not publicly available or cannot be described in an en- ful in industry (including agriculture) (24). However, abling manner, a deposit in a recognized depository Swiss law restricts the concept of industrial use by ex- is required. The application must identify the deposi- cluding private use and use for research (15). tory, the deposit number, and the date of the deposit Novelty. The Federal Republic of Germany, United (Swiss Guidelines for Examination, Z-14.3 and 14.4, Kingdom, and France have adopted the EPC absolute May 12, 1980). In the case of a microaganism that novelty standard in their latest national patent laws is available to the public, identification of a known (24). Switzerland also has adopted the absolute novel- source need not be disclosed in the application as or- ty standard with one technical exception relating to iginally filed. Such information (e.g., reference to a prior filed Swiss or EPC applications (Swiss Patent deposit that was publicly available on the application Law, art. 7a). filing date) can be added to the application after the Disclosure and Deposit Requirements. The statutory filing date (Swiss Guidelines for Examination, Z-13.2, provision of West German law governing disclosure May 12, 1980). Since Swiss applications are not published before the patent is granted, culture samples ● The German Federal Patent Court has also upheld a patent on a microorganism obtained as a pure culture fmm an unpurified, naturally occur- are not required to be furnished until the patent is ring state through a selective culture process (16). granted. Then samples are released only to identified App. G—intellectual Property Law ● 567 parties, who undertake not to pass them on (Swiss Swiss law defines infringement to include any un- Patent Ordinance, sec. 27(6)). lawful utilization of the patent invention, including im- The French patent law, in article 14bis (1978), sets itation. patent protection for a process also extends forth the same standard of enablement as the EPC. to products which are directly made from the process. Publicly available micro-oganisms need not be depos- The patent rights begin at publication, but suit for ited. Required deposits must be made in a Govern- damages may be initiated only after grant. Criminal ment-authorized depository no later than the priori- sanctions may also be imposed as well as confiscation ty date. A regulation under the statute (Decree No. and destruction of the infringing goods. 79-822 on Sept. 19, 1979, amended by Decree No. 81- Infringement in France is defined broadly to include 865 issued on Sept. 11, 1981) contains provisions re- the acts of manufacture, offer, commercial disposal, garding the content of a French patent application use, or import of the patented product. However, for relating to a microorganism that are consistent with actions other than manufacturing or importing, there EPC Rule 28. Thus, the application must contain is no liability unless the acts were committed with (French patent law, art. 10): knowledge of infringement. Process patents extend ● the available information as to the characteristics coverage to products obtained directly by the process. of the micro-organism, and provisional rights for published applications are lim- ● an identification of the depository and deposit ited to reasonable compensation. Suit maybe brought number. before grant but will probably be suspended until Access to the deposit, which is granted at the time of after grant. publication, can be limited to recognized experts until In countries with national laws providing for pro- the patent is granted or the application is abandoned visional protection after preliminary publications— (French patent law, art. 31). namely, the Federal Republic of Germany, the United Claim Practice. Claims acceptable under EPC prac- Kingdom, and France—there should be no difference tice should be acceptable in the four countries. Swit- in treatment between published national applications zerland, however, will not accept claims to a micro- and published European applications. In Britain and organism per se. France, damages may be recovered for published na- Enforcement. * Subject to specific requirements con- tional or European applications. Moreover, in France, tained in the EPC regarding claim interpretation, Eu- damages are recoverable from the time of notification ropean patents as well as national patents are inter- to the infringer of the patent application contents. preted and considered with respect to the questions Only reasonable compensation may be obtained in of both infringement and validity in accordance with West Germany. national law in the EPC member countries. The EPC also provides for provisional protection In the Federal Republic of Germany, an infringer is after publication of a European patent application. broadly defined as any person who makes use of a Generally, the right is limited to recovery of damages patented invention. Protection for a patented process after the patent issues. extends to the product directly obtained by that proc- In Switzerland, on the other hand, provisional pro- ess. Provisional rights for reasonable compensation are tection is not provided. But, in ratifying the EPC, given for applications which have been published but Switzerland has provided a provisional remedy for not yet granted. European patent applications. Infringement was defined for the first time in the Remedies for infringement include injunctions and new British law, and a separate Patent Court was es- monetary damages. In addition, as a general rule, the tablished for the purpose of trying patent infringe- loser pays most or all of the costs of litigation of ment cases. Infringement includes the acts of making, the winning party. Finally, in most cases, the infring- using, importing, disposing of, or offering to dispose ing goods will be destroyed or handed over to the of an infringing product. Similar provisions are pro- patentee. vided with regard to a process and with regard to a Criminal sanctions exist in the national patent laws product obtained by a patented process. Provisional of the Federal Republic of Germany and Switzerland, rights are given for published applications, and full but they are not of much practical importance. recovery for damages from the date of publication may be obtained after grant. The 1977 act also pro- LAW OF TRADE SECRETS vides that the scope of the patent may extend beyond the literal meaning of the words of the claims. National laws that protect trade secrets, confidential information, and know-how (hereinafter some- ● The discussion in this section is based substantially on ch. HI in Schwaab times referred to collectively as “proprietary informa- and Thurman (24). tion”) are designed to prevent the misappropriation 588 ● Commercial Biotechnology An International Analysis

of a competitor’s technical and commercial informa- data that would or potentially could give the holder tion. These laws coexist with the patent laws of the a competitive advantage would satisfy the require- various countries and are a necessary adjunct to those ments for an industrial secret. laws in order to provide basic protection in many Substantial civil and criminal liabilities for violation areas where the patent laws do not reach. of trade secret rights are written in statutory law. The There are no treaties, such as the EPC for patents, most pertinent provisions are in the German Unfair dealing with the international protection of proprie- Competition Law of 1909 (UWG, Gesetzgegen den untary information. Thus, when a question involving lauteren Wettbewerb). An employee who wrongfully trade secrets comes before the European Court of Jus- communicates an industrial or commercial secret may tice, it will be decided generally in accordance with be imprisoned for up to 3 years and fined. If the em- the national laws of the member states, much like U.S. ployee uses the secret abroad, or knows it is to be used Federal Courts are governed by State law in trade se- abroad, the prison sentence is increased to up to 5 cret cases. years. Civil penalties and a civil right of action for Federal Republic of Germany.—The West Ger- damages or an injunction are also available (6,20,33). man law dealing with trade secrets has at least two United Kingdom.—The British courts, much like components, “industrial secrets” and “commercial their American counterparts, have refrained in most secrets. ” Although no distinction is made in enforce- instances from adopting a hard and fast definition ment of rights as to one type or the other, the fact of the term “trade secret. ” One definition is as fol- that both are protected makes it clear that not only lows (31): technical secrets are protected, but also secret com- 1. It consists of information; mercial or business information, 2. The information must be secret either in an ab- With respect to the elements for establishing pro- solute or a relative sense; tectable industrial and commercial secrets, the Ger- 3. The possessor must demonstrate that he has acted man Supreme Court has stated on several occasions with an intention to treat the information as a that such a secret maybe any fact that is: 1) connected secret; with a business, 2) known only to a small number of 4. The secret information must be capable of indus- persons, 3) for which its possessor has a justifiable in- trial or commercial application; and terest in keeping secret, and 4) for which its possessor 5. The possessor must have an interest in the infor- has manifested an express or recognizable intent to mation worthy of legal protection, bearing in keep secret (33). mind English principles of equity. This will gen- The West German law is more liberal than the U.S. erally be an economic interest. law as to the degree of public knowledge required to The English (as well as the other Europeans) are destroy a trade secret. In the Federal Republic of Ger- rather parochial in their approach to the question of many, if information is discernible only with a great whether something is secret. They are concerned most deal of work and expense, it is still protectable as an with public knowledge in their own country. For ex- industrial or commercial secret. Thus, for example, ample, knowledge by other people outside of the even the purchase of a machine does not destroy the United Kingdom would not be as great a threat as secret nature of its contents if the purchaser must knowledge of a few people inside of the United dismantle, tear apart, and put in substantial time and Kingdom (31). effort to uncover its secrets (33). Further, knowledge One possible problem for biotechnology in Great Bri- by a small group of persons, particularly if they are tain is the requirement that information must have not competitors, will not destroy the secret nature of some industrial or commercial use in order to qualify an industrial or commercial secret. as a trade secret. Thus, research data or abstract ideas As in the United States and the United Kingdom, not capable of being used commercially in the near neither novelty nor technical advance need be estab- future may not be a trade secret (31). Such informa- lished in order for information to be classified as an tion may be protectable, however, as “confidential in- industrial or commercial secret in West Germany. formation” (23). While English legal scholars have One element of a trade secret is whether the infor- debated the degree of secrecy necessary for informa- mation gives its possessor an advantage in competition to be protected as confidential, it is clear that the tion which would be lost if it were disclosed to com- degree necessary to protect such information pursu- petitors. But at least one commentator has suggested ant to a confidentiality agreement is less than that re- that the industrial or commercial secret need not be quired to establish a trade secret. The British “con- actually industrially or commercially utilized at the fidential information” approach might well be the way time of its loss (4). Thus, it would appear that research to avoid the problem raised by some U.S. cases which App. G—intellectual Property Law ● 569 have indicated that technical information will not be France.—French law, like West German law, protected if it is not developed to the stage of prac- rather than following the single concept of “trade tical application (9). secret” found in the U.S. and English law, segregates Enforcement of trade secret law in the United King- the secrets into “manufacturing secrets” (secret de dom is by way of civil actions for damages. Unlike fabrique) and ‘(commercial secrets” (secret de com- other major industrialized countries, the United King- merce) (10). A commercial secret is treated by the com- dom has no specific statute making misappropriation mentators similarly to a manufacturing secret, al- of trade secrets a crime, and there has been no signifi- though there is no direct reference to commercial se- cant prosecution under more general theft or conspir- cret in the French Code (10), For information to be acy statutes. a manufacturing secret, it must be: 1) relatively secret, Switzerland.—Swiss law recognizes “industrial 2) of industrial application, 3) of commercial or market secrets” and “commercial secrets.”* The elements of value, 4) a secret of the factory; and 5) the misap- protectable industrial and commercial secrets are propriator must know it is a secret (10). quite similar to those under West German law. Knowl- The difficulty for researchers is the requirement of edge by a small number of people, or public availabili- industrial application. The majority view seems to be ty, but only after substantial expense or effort, does that to be a manufacturing secret, the secret informa- not defeat the secrecy of the information (19,20). tion must either be suitable for immediate industrial There must be an intention to maintain the secrecy application or have already been used industrially. For of the information and an intent in maintaining its example, a process not yet applied industrially, but secret for the purpose of enhancing economic or com- used only in research and experimentation cannot petitive position (19). One additional element to the be a manufacturing secret. Mere unapplied, theoreti- Swiss law, however, is that the secret must have a rela- cal ideas of a technical or scientific nature do not tionship to a particular business enterprise. Secrets qualify (10). held by professors, scientists, factory workers, and Misappropriation of manufacturing secrets by an others not engaged in business do not qualify as in- employee is a criminal violation under article 418 of dustrial and commercial secrets, unless, of course, the French Penal Code, if the employee has the requi- they own or participate in a business and the secret site criminal intent for doing the act for his or her own is possessed by the enterprise rather than themselves benefit (10). Disclosure to aliens or non-French resi- as individuals (19). dents is punishable by significantly higher fines and Switzerland’s Unfair Competition Law of 1943 spe- much longer prison terms. cifically prohibits the misappropriation of industrial or commercial secrets, and contains sections establish- PLANT BREEDERS’ RIGHTS ing both civil and criminal liability. One who is injured The important provisions of the plant breeders’ by an act of unfair competition may obtain injunctive rights laws of the Federal Republic of Germany, the relief and damages (19). United Kingdom, Switzerland, and France are as Switzerland has a wide variety of criminal statutes follows. prohibiting misappropriation of industrial and com- Federal Republic of Germany.—Article 2(3) of mercial secrets and various other types of industrial the Federal Republic of Germany’s Law on the Pro- espionage. The Unfair Competition law provides that tection of Plant Varieties (text of May 20, 1968) covers those guilty of the same acts of unfair competition both sexually and asexually reproduced varieties. The discussed above shall be punished by a fine or impris- variety must be new, sufficiently homogeneous, and onment, on complaint of the aggrieved party (19). stable. Novelty exists when the variety is clearly dis- Thus, Switzerland has a formidable array of civil and tinguishable by at least one important morphological criminal liabilities to discourage industrial espionage or physiological characteristic from any other varie- and misappropriation of propriety information. ty, the existence of which is a matter of common knowledge at the time for which protection is applied. Common knowledge is defined in terms of absolute ● ’I’he Swiss Supreme Court has defined “industrial secret” as (BGE 64 II novelty in Germany, with commercialization of the 66) (19): All facts related to a manufacturing process or method and neither variety in Germany prior to filing the application con- in the public domain nor generally a~ailable, in the secrecy of which stituting a statutory bar (art. 2(3)). Homogeneous the holder has a justified interest and which he actually wishes to be means plants of the variety must be identical in all maintained secret, can be the subject matter of an ldustrial secret. and “commercial secret” as (BGE 74 Ii’ 103) ( 19): their essential characteristics (art. 5). Stability is The term “commercial trade secret” encompasses basically all facts demonstrated when plants of the variety retain their of economic life in the maintenance of secrecy of which an interest essential characteristics true to the definition of the worthy of protection exists,

25-56 I O - 84 - 37 570 ● Commercial Biotechnology An International Analysis

variety after each successive reproduction or repro- rial. Further, every holder of plant breeders’ rights ductive cycle (art. 6). must ensure that, throughout the period for which Article 36 provides that as a part of the examina- the rights are exercisable, he or she is in a position tion procedure, the variety must be grown, either by to provide reproductive material that is capable of pro- the Federal Office of Plant Varieties or a delegated out- ducing the variety, and the holder must provide such side service. The holder of the protection right also information and facilities as the plant variety rights is required to submit to the Federal Office of Plant office may request for the purpose of fulfilling the Varieties, upon request, material for establishing the maintenance requirements. If plant material cannot continued existence of that variety. If the holder is be so provided, the protection rights shall be termi- unable to do so, the protection right ceases (arts, 16 nated (pt. I(6)). and 20). The law provides for a Plant Variety Rights Tribunal The duration of protection or grant is for 20 years, having jurisdiction over cases brought under the act, except for certain varieties for which it is 25 years (art. with the tribunal being authorized to sit in any desig- 18). The law provides for criminal penalties compris- nated place in Great Britain to hear any proceedings, ing fine or imprisonment of a term of up to 1 year Switzerland.—Switzerland ratified the 1978 (arts. 48 and 49). The holder of the protection right UPOV Text on June 17, 1981, Under Swiss law, sexu- may claim remuneration from any person who has ally and asexually reproduced varieties are covered. propagated material without authorization in the in- Protected varieties must be novel, stable, and suffi- terval between the publication of the application and ciently homogeneous. The variety is considered novel the grant of title of protection (art. 47(4)). unless, at the time the application is filed, the variety United Kingdom.-The Plant Varieties and Seed has already been offered for sale or marketed in Swit- Act of 1964 covering United Kingdom is the basis for zerland or for more than 4 years outside of Switzer- adherence to the UPOV 1961 Convention, with ratifica- land. A “variety” refers to any cultivar, clone, line, stock, tion being effective September 17, 1965. * The act cov- or hybrid and is considered new if it is clearly distin- ers both sexually and asexually reproduced plant ma- guished by one or more important features from any terials. other variety whose existence is generally known at The new variety must be distinct, uniform, and sta- the time the application is filed. ble. To meet the first requirement, it must be clearly Variety protection precludes another, without the distinguishable by one or more important morpholog- consent of the holder, from producing propagation ical, physiological, or other characteristics from any material of the protected variety with a view to other variety whose existence is a matter of common marketing it, offering it for sale, or selling it in the knowledge at the time of the application (pt. II, 1(1)). course of business. Propagation material includes The variety must be sufficiently uniform or homoge- seeds, fruits, or vegetative material. Protection is for neous (pt. II(4)). The variety must be stable in its essen- a term of 20 years following issue, but it can be ex- tial characteristics—i .e., it must remain true to its tended in certain cases. description after repeated reproduction or propaga- The applicant is required to deposit propagation mation (pt. II(5)). terial for purposes of conducting examination for veri- There is an absolute novelty requirement, that is, fying the stated characteristics of the plant. The title the variety may not have been offered for sale or sold of protection can be annulled when the title holder in the United Kingdom prior to the filing of the appli- cannot supply a propagation material capable of pro- cation. Where such sales or offers for sales are made ducing the new variety with its morphological and outside the United Kingdom, a grace period of 4 years physiological characteristics as defined when the right is provided prior to the filing of the application (pt. was granted. 11, (2)(1) and (2)). Action for variety infringement is brought in the The scope of protection afforded by the rights in- canton of the defendant’s place of residence in Swit- clude the exclusive right to produce or propagate the zerland. Intentional infringement can be punished by variety for the purpose of selling the variety or parts imprisonment for up to 1 year or by a fine. or products of the variety (pt. II, 3(1) and (2)). The term France.—Although France was an early ratifier of of protection ranges from 15 to 25 years, depending the 1961 UPOV Convention Text, and a signatory to on the type of plant. the 1978 Text, it has not yet ratified the latter. France A growing trial is required during the examination continues to operate under the Law on the Protection period, thus requiring the submission of plant mate- of New Plant Varieties, Law No. 70-489 of June 11, 1970, “For further information about UPOV, see Chapter 16: Intellectual Prop. Both sexually and asexually produced plant materials ertbv Law, of all species are covered, including bacteria, although App. G—intellectual Property Law . 571 the schemes are limited to specified varieties. For a of Working Standards for micro-oganism inventions variety to be “new, ” it must be distinct from similar in November 1979, and in August of 1980, it issued known varieties, by reason of one characteristic that a Classification of Inventions Relating to Genetic Engi- is important, specific, and subject to little fluctuation, neering (14). * According to these guidelines, recom- or more than one characteristic where the combina- bination of the genes of higher animals is not per- tion thereof is such as to give it the quality of a new mitted, so that inventions in that area are thought to plant variety (ch. I, sec. 1). Further, the variety must not be patentable (14). not have been exploited in France, or appear in speci- In the intervening years, the greatest obstacle to fied publications, before the filing of the application securing patent protection for microbiological inven- in France; if so, a valid certificate cannot be issued. tions in Japan was the rDNA research safety guidelines The variety must be homogeneous in all of its charac- published by the Science and Technology Council and teristics, and must remain stable—i.e., it must remain the Ministry of Education. These guidelines original- identical with its original definition at the end of each ly permitted only E. coli bacteria to be genetically propagating cycle (ch. 1, sec. 1). An application for modified. In January 1980, yeast strains were also in- each new variety fulfilling the above requirements cluded. Since then, other microorganisms have been must be given a denomination and a sample to be left included. * * Any rDNA inventions that were not di- in a collection (ch, II, sec. 2). rected to subject matter approved by the safety guide- The plant variety certificate confers on the certifi- lines were considered to fall into the category of in- cate owner the exclusive right to produce, import into ventions “likely to injure the public health” and thus France, sell, or offer for sale all or part of the plant were precluded from patenting under article 32(2) of (ch. II, sec. 3). The certificate is valid for 20 years from the patent law (13). the date of issue, although this period shall be ex- Subject to the above considerations, therefore, the tended to 25 years if the constitution of the elements following five basic categories of biotechnological infor production of the species requires a considerable ventions appear to be patentable: 1) micro-oganisms, time. 2) processes for producing micro-organisms, 3) proc- The breeder must at all times keep a vegetative col- esses using micro-organisms, 4) products obtained lection of the plant variety (ch. 1, sec. 9). If the owner from microbiological processes, and, 5) DNA and RNA is unable to furnish the administration at any time molecules or subcellular units. with the elements of reproduction or vegetative prop- Novelty.—Under article 29 of the Japanese Patent agation so that the specified characteristics of the Act (1978), an invention is novel if it is not worked or variety can be ascertained, the rights of the owner will publicly known in Japan, or it is not described in a be forfeited (ch. IV, sec. 22). publication anywhere prior to the application filing Chapter IV, section 23 relates to infringement, which date (or priority date). A 6-month grace period is pro- is broadly defined. It provides that any violation of the vided in article 30 (1978) for: 1) experimentation, pub- rights of the owner of a new plant variety certificate lication, and papers presented before scientific orga- shall constitute an infringement for which the of- nizations by the applicant, 2) unauthorized disclosure fender shall be liable. by a third party, and 3) displays at authorized exhibits. Utility.—The standard of utility is one of industrial Intellectual property law of Japan applicability, similar to the EPC. Processes in the field of medicine, diagnosis, therapy, and pharmacology in Having discussed the patent law, trade secret law, which the human body is an indispensable element are and plant breeders’ rights in the European competitor excluded from patentability by the Japanese Manual countries, we turn now to Japan. for Examination and by court decision, as not being usable in industry (11). PATENT LAW Standard of Invention. -Under article 29(2) of the Japanese Patent Act, a claimed invention is not pat- Patentable Subject Matter.–The Japanese Pat- entable, even if novel, if it ‘(could easily have been ent Act contains the following broad definition of patentable subject matter (art. 29(1), 1976): made, at the filing of the application, by a person with Any person who has made an invention which can ordinary skill in the art to which the invention per- be utilized in industry may obtain a patent . . . . tains,” This standard is similar to the concept of obvi- Until 1979, the Japanese Patent Office took the posi- ousness under U.S. law, except that U.S. law focuses tion that micro~rganisms were unpatentable because they are not industrially applicable. After reversing *The guidelines also mention vectors, DNA molecules, and enzymes. that position, the Japanese Patent Office issued a set * “See Chapter 15: Health, Safety, and Enn”rvnmental Regulation for details. 572 ● Commercial Biotechnology: An International Analysis on the difference between the claimed invention and After acceptance and grant, the patentee has the right the prior art. to injunctive relief as well as monetary damages and, Disclosure Requirements. -Disclosure require- in theory, criminal sanctions (29). ments for inventions under article 37 of the Japanese Patent Act (1976) require that an application be accom- LAW OF TRADE SECRETS panied by a specification setting forth a detailed ex- There are no specific statutes assigning liability for planation of the invention including the purpose, con- misappropriation of trade secrets;* thus, one must rely struction, and effect of the invention to the extent that on general principles of Japanese civil law (see 17). any person having an ordinary knowledge in the tech- That is, an injured party may sue under general tort nical field to which the invention belongs may easily law principles. * * Employees, however, are viewed as make it. This is basically an enablement standard. having an implied contractual obligation not to misap- Deposit Requirements.—A micro-organism propriate or improperly disclose trade secrets of their must be deposited except in the case where: employer. . it cannot be preserved in a depository for tech- The Japanese Penal Code does not contain a provi- nical reasons or cannot be controlled under safe sion specifically punishing misappropriation of trade conditions; or secrets, manufacturing secrets, or commercial secrets. . it is readily available to those skilled in the art (e.g., Criminal liability can only attach through the general a commercially available microorganism or one sections of the penal code dealing with larceny, em- constituting a stock culture listed in a catalog bezzlement, receiving stolen property, fraud, etc. published by a reliable depository) (35). Misappropriation of trade secrets has been successful- The situation is unclear in the case of micro~rganisms ly criminally prosecuted under such general statutes for which an enabling disclosure is presented in the in Japan (see 12). patent application (35). Trade secret protection in Japan for any type of Japan is bound by the Budapest Treaty, and there- technology is seen as very unsatisfactory. Liability fore, it must accept deposits made thereunder, with- for misappropriation has been the exception rather out requiring deposit in Japan. For those deposits not than the rule. In fact, one commentator has described made under the Budapest Treaty, the minimum re- Japan as the world’s leading country for industrial quired maintenance period for the culture deposit is espionage (34). the lifetime of the Japanese patent (28). Generally, no sample of a deposited culture will be PLANT BREEDERS’ RIGHTS furnished to third parties (without consent of the depositor) until the patent application is accepted and A Seed and Seedling Law in Japan, enacted July 10, published for opposition. After publication, access is 1978, conforms to the provisions of the UPOV Trea- granted on the condition that the party will not fur- ty, which Japan has signed (21). The details of the nish the sample to others (28). Japanese legislation are similar in essential respects Claims Practice. -There are no formal limitations to the EPC countries discussed previously. on the basic type, style, or category of claims (1). Appendix G references* * * Enforcement.—Infringement is defined in article 101 and 3(2) of the Japanese Patent Act (1978) to in- 1. Aoki, A., et al., Japanese Patent and Trademark Law, clude the acts of making, using, selling, and importing (Lausanne: Seminar Services, 1976), distributed by Bu- the patented article and/or patented process, including reau of National Affairs, Washington, D.C. importing an article produced by a patented process. 2. Baekerhefe (Baker’s Yeast), International Review of In- There is a presumption that a claimed process for pro- dustrial Property and Copyright Law 6:207 (1975). ducing a novel product has been used to produce the 3. Bakterienkonzentrat, Gewerblicher Rechtsschutz und product whenever found in Japan (art. 104, 1978). Urheberrecht, 263, 1981. It is the predominant view that claims in a Japanese 4. Baumbach-Hefernahl, A., Wettbewerbs und Waren- patent define the outer boundary of the invention and zeicher, 9th ed. (Munich: C. H. Beck’she Verlag, 1964). that only in rare instances is it possible to establish “While the term “trade secret” is sometimes used in Japanese law, one is infringement for anything outside of the literal lan- more likely to find the terms “industrial secret” and “commercial secret” uti- guage of the claims, i.e., there is no traditional doc- lized, in a manner similar to that of German law (34). ● ● The general tort principle is set out in art, 709 of the Japanese Civil Code trine of equivalents (29). as follows: “A person who, willfully or negligently, has injured the right of Article 65(3) of the Japanese Patent Act provides that another is bound to compensate him for the damage which has arisen there- from,” after the first publication of a Japanese application, ● ● ● Note: R.P.C. = Reports of Patent, W@, and Trade Mark Cases (Great the applicant has a right to reasonable compensation. Britain). App. G—lntellectual Property Law . 573

5. Braendli, P., “Das neu schweizerische Patentrecht,” Gew- 21. Plant Variety Protection-Number 28, Newsletter, UPOV, erblicher Rechtsschutz und Urheberrecht, International April 1982. Part, 1979, p. 1. 22. Rote Taube (Red Dove), International Review of Industrial 6. Cohn, E. J. (cd.), Manual on German Law $7.182, j7.194 Property and Copyright LAW, 13s,, 1970. (London: Ocean Publications, Inc., 1971). 23. Saltman Engineering Co., Ltd. v. Campbell Engineering 7. Comte, J. L., Deputy Director, Swiss Patent Office, per- Co., Ltd., 65 R.P.C. 203, 1948, sonal communication to R. Schwaab, OTA contractor, 24. Schwaab, R., and Thurman, R., International Law: EPC Feb. 16, 1982. & PCT Practice and Strategy (Washington D.C.: Patent 8. Convention on the Grant of European Patents, 2d. ed. Resources Institute, 1980). (Munich: European Patent Office, 1981). 25. Schwaab, R., Jeffery, D., and Conlin, D., “US, and Foreign 9. Cornish, W. R., “Protection of Confidential Information Intellectual Property Law Relating to Biological Inven- in English Law,” International Review of’industrial Prop- tions,” contract report prepared for the Office of Tech- erty and Copyright Law 6:43-46, 1975. nology Assessment, U.S. Congress, February 1983. 10. Harle, Y. R., “Trade Secrets and Know-How in French 26. 7

University/industry relationships in biotechnology Monsanto’s participation in the program will begin were the focus of the discussion in Chapter 17: Univer- with a $3 million grant the first year (1982) and rise sity/Industry Relationships. Material on selected uni- annually to accommodate expansion in the number versity/industry agreements is presented below. Also and scope of research projects involved. Washington described are guidelines for university/industry re- University faculty members will beat liberty to publish search adopted by the National Association of Land results of any research done under the Monsanto Grant Colleges and the 1982 Pajaro Dunes Conference, funding. Monsanto will exercise the right of prior selected statements on patent rights and commingling review of draft materials, because they may contain of research funds, and university policies on patents, potentially patentable technical developments. If they consulting, and sponsored research in the United contain patentable developments, Monsanto can re- States. quest a short delay of submission for publication or other public disclosure in order to begin the patent Selected university/industry process. Monsanto will pay for and carry out the en- agreements in biotechnology tire patent application process. If Monsanto does not elect to license a patent, the university is free to license Selected university/industry arrangements in bio- the patent to others. technology are discussed below. The arrangements Washington University will retain patent rights, were selected for discussion because they represent while Monsanto will have exclusive licensing rights. different approaches to university/industry relation- Royalties will go to Washington University for support ships, because they are relatively large agreements, of its education and research programs-not to individ- and because some of them have raised issues central ual researchers. The portion of royalty normally go- to university/industry agreements. The agreement being to the individual will instead be channeled to his/ tween the Whitehead Institute and the Massachusetts her laboratory to support more research. Institute of Technology (MIT) is not strictly a uni- During the third year of the 5-year agreement, the versity/industry agreement, but has been included be- entire program will be reviewed by a panel of dis- cause it raises issues in university/industry relation- tinguished scientists who are independent of both ships and because it is a product of industrial interest Monsanto and Washington University. in biotechnology research. The schedule for funding in millions of dollars is as follows (11,13): RESEARCH PARTNERSHIPS The schedule for funding in millions of dollars is as follows (11,13): Monsanto/Washington University. -Washing- Contract Exploratory Specialty Contract year ton University and Monsanto (U. S.) have a 5-year re- year projects projects total budget newable contract totaling $23.5 million. Under the con- 1982 -83 ...... $1.5 $1.5 $3.0 tract, individual research projects in biotechnology will 1983 -84 ...... 1.6 2.2 3.8 1984 -85 ...... 1.7 3.0 4.7 be carried out by cooperative arrangements involv- 1985 -86 ...... 1.8 3.8 5.6 ing Washington University faculty and Monsanto sci- 1986 -87 ...... 1.9 4.5 6.4 entists. About 30 percent of the research will be fun- Total $8.5 $15.0 $23.5 damental research (terminology of the agreement) and The process by which the agreement between 70 percent will be special research directly applicable Washington University and Monsanto came about had to human disease. The contract between Washington some major strengths, First, individuals from Monsan- University and Monsanto establishes an 8-person ad- to and Washington University met continually over a visory committee made up of 4 members from each period of 2% years to discuss the project. Second, institution. This committee will solicit research pro- members of the university faculty and administrative posals from the faculty of Washington University and staff and representatives of the company held a 3day from researchers at Monsanto, review and approve retreat to discuss the interactions and what form they the proposals on the basis of individual merit, distrib- should take. Furthermore, the Washington Universi- ute appropriate funding, and act as a liaison between ty/Monsanto agreement is unlike other agreements in the university and Monsanto. that it is intended to be a cooperative research agree-

574 App. H—Selected Aspects of U.S. University/Industry Relationships in Biotechnology . 575

ment with industrial and university scientists work- the peer review process. The department will report ing together on research projects. In other agree- to a scientific advisory committee of two members ments, the explicit purpose has been to allow industry from Mass General, two from Hoechst, and two from to gain a window on the technology and educate its elsewhere. The committee’s review, however, may not personnel. be the equivalent of the critical peer review of pro- Hoechst/Massachusetts General HospitaL—A posals at NIH. The department will be physically sep- $70 million agreement between Massachusetts General arate from Mass General, and all equipment and phys- Hospital, a teaching hospital associated with Harvard ical plant will be paid for by Hoechst. Department University, and the West German company Hoechst scientists will generally be free to collaborate with will create a department of molecular biology at Mass others but will have to obtain written permission from General and will provide support for the department Hoescht. Dr. Goodman hopes to collaborate with Dr. for 10 years. The department of molecular biology will Philip Leder who has a 5-year $6 million research be headed by Dr. Howard Goodman and will eventual- agreement with DuPont, Whether Hoechst will grant ly have a staff of about 100 persons. Hoechst will fund this request will probably depend on the nature of the basic research in eukaryotic cell gene regulation, collaboration. somatic cell genetics, microbial genetics, virology, im- Whitehead Institute/Massachusetts Institute munology, and plant molecular biology. of Technology.—Whitehead Institute, a biomedical The department faculty will be regular members of research institute administratively separate from MIT, the staff of Mass General and will be nominated for has been provided for by Edwin C. Whitehead, the membership on the faculty of the Harvard Medical President of Technicon Corporation. Whitehead has School. Faculty duties will primarily consist of bequeathed about $2o million to build the structure, research for the department of molecular biology. $5 million annually to operate it through the year Faculty may “also devote a reasonable amount of time 2003, and a gift of $100 million upon his death. White- to faculty duties other than research and to consulting head has also given $7.5 million to MIT plus support for non-profit-making entities so long as such activi- moneys estimated to be worth about $1 million a year ties do not interfere materially with their research ac- for faculty, graduate students, and research assistants tivities under the agreement. ” in MIT’s biology department. Hoescht has the right to send up to 4 individuals to The Whitehead Institute is headed by a 14-member work and be trained in the department at any one time board of directors that includes 3 MIT directors, 3 of and to send up to 40 individuals over the life of the the Whitehead children, and David Baltimore, the di- contract. The individuals that Hoechst sends, however, rector of Whitehead Institute who is serving a renew- must have qualifications acceptable to the department. able 5-year term. Whitehead Institute faculty will have The contract between Hoechst and Mass General joint appointments with MIT but will be paid entirely states that the scientists in the department of molecu- from Whitehead Institute funds. Faculty appointments lar biology are free to collaborate with others but that will be proposed by Whitehead Institute according to “research collaborations funded in part by the Com- the research needs of the institute and in consultation pany and in part by others shall take into account the with the appropriate MIT department. Appointees will interest of the Company in obtaining exclusive, world- follow the rules and regulations of MIT with regard wide licenses. ” If Hoechst cannot obtain an exclusive to teaching, consulting, tenure, benefits, salaries, etc. license from such collaboration, it must be assured of It is expected that 10 to 15 appointments will be made a nonexclusive license. during the first 7 or 8 years, Graduate students will All faculty in the department have the right to pub- also be supported. lish but must submit early drafts of all manuscripts Whitehead Institute will retain the patent rights on from Hoechst-sponsored research not less than 30 any inventions arising from the research. After deduc- days prior to the submission of the manuscript for tion for expenses, the royalty will be shared according publication. to the following formula: one-half to the inventor and Mass General will hold any patents that may arise one-half shared by Whitehead Institute and MIT. The out of the Hoechst-sponsored research. The hospital term of the agreement is 10 years, with a 5-year re- will grant Hoechst an exclusive worldwide license for newal and 2 years written notice necessary for termi- the life of the patent. Hoechst will pay the hospital nation. If the agreement should be terminated, facul- royalties at rates that give “due consideration” to the ty will be given the choice of joining the MIT or White- fact that Hoechst paid for the research (2,10). head Institute faculty. The exclusive funding may preclude department sci- Prior to the signing of the agreement, the agreement entists from seeking grants from the U.S. National In- was extensively discussed by MIT faculty and admin- stitutes of Health (NIH), thereby taking them out of istrators. Some were concerned that an imbalance in 576 Commercial Biotechnology: An International Analysis the MIT biology department might result from the ad- The remaining 30 percent of the equity in Engenics dition of 15 new faculty members in molecular biol- is shared by the line officers and the consultants Char- ogy; other important specialties would have less rep- ming Robertson (Chairman of the Chemical Engineer- resentation. Since the members of the faculty of ing Department at Stanford), Abdul Matin (Professor Whitehead Institute, though approved by MIT, would at Stanford’s Medical School), and Harvey W. Blanch be chosen for their research contributions to White- (Professor of Chemical Engineering at the University head Institute rather than to MIT’s educational or re- of California, Berkeley). search needs, there was also concern over the possi- CBR can use all capital appreciation or dividends bility that the loyalty of the Whitehead Institute faculty from the equity in Engenics only for the support of would be divided. Other concerns centered on con- university research. Any patents resulting from CBR- flict of interests. Some faculty thought that the findings sponsored research will be held by the university at of Whitehead Institute could turn up in the investment which the work was performed, with CBR, Engenics, portfolio of Whitehead Associates, Edwin H. White- and the six corporate sponsors receiving royalty-bear- head’s venture capital firm. Furthermore, since David ing licenses, Negotiations at the time of the patent will Baltimore has equity in the Collaborative Research determine the terms of the license. Investigators per- Company, and several other proposed faculty of forming CBR-sponsored research will retain the right Whitehead Institute consult for the company, there to publish their findings. were concerns that the link between Collaborative and CBR is currently funding three university research

Whitehead Associates might be too close. After exten- contracts. One is a 4-year $970)000 contract with Drs. sive discussions, the MIT faculty decided that the pos- Robertson and Matin, both of Stanford, as principal itive aspects of the arrangement outweighed these coinvestigators. The second contract is a 5-year concerns and voted overwhelmingly to approve the $783,000 contract with Dr. Blanch, of the University agreement. MIT’s Board of Trustees would not have of California, Berkeley, as the principal investigator. approved the arrangement without faculty support. This contract is funded by both CBR and Engenics, Furthermore, a special committee will be appointed because University of California policy stipulates that to monitor the arrangement so that any misunder- licensing agreements cannot be made with nonprofit standings can be avoided (3). organizations. The third contract is with Anthony Sin- sky at MIT. No data on the amount of this contract PRIVATE CORPORATIONS are available. Dr. Sinsky is on the Scientific Advisory Engenics/Center for Biotechnology Re- Board of Engenics (68). search and Stanford University.-The for-profit Neogen/Michigan State University Founda- company Engenics was established in September 1981, tion and Michigan State University. -Neogen along with the nonprofit Center for Biotechnology was f~unded in July of 1981 by the Michigan State Research (CBR). The purpose of CBR is to support basic University (MSU) Foundation, an independent non- and applied biotechnology research at universities, profit fundraiser and disburser of donations and royal- disseminate the results of such research to the public, ty income to MSU. Neogen, which was organized to and facilitate the conversion of knowledge into prod- seek venture capital for limited partnerships to devel- ucts and processes. The purpose of Engenics is to op and market innovations arising out of research at carry out research and process development and to MSU, was formed for several reasons: MSU wished establish new businesses. Although the two organiza- to retain faculty members who are getting lucrative tions are separate, they have the same six corporate offers from other small companies; MSU would like sponsors and will work in close cooperation. to allow faculty to develop their entrepreneurial tal- CBR is receiving $2.5 million from its six corporate ents and remain at the university; and a company such sponsors over a period of 4 years. The six sponsors as Neogen can help diversify Michigan’s economy. The of CBR are Elf Technologies, Inc. (a U.S. venture capital company was organized with full knowledge of the subsidiary of Elf Aquitaine), General Foods, Koppers board of trustees, the administration, and the faculty Co. Inc., Bendix Corp., Mead Corp., and McLaren Pow- of MSU. er and Paper Co. (a subsidiary of Noranda Mines). CBR Neogen limited partnership purchases are being holds about 30-percent of the equity in Engenics, equi- managed by an investment firm in Detroit. The MSU ty that was issued to Engenics in exchange for options Foundation, which purchased $100,000 of stock when to licenses under university patents. The same six cor- the company was founded, will soon purchase another porations that sponsored CBR paid $7.5 million for a $130,000 of stock, and Doan Resources is buying total of about 30 percent of the equity in Engenics. $250,000 in stock. App. H—Selected Aspects of U.S. University/Industry Relationships in Biotechnology . 577

One project (a parasite diagnosis project) is ready NASULGC’S Division of Agriculture. Work is now to begin (funded at $455,000) and two projects are underway to draw up guidelines for NASULGC’S Divi- awaiting funding. Neogen will be able to buy title to sion of Agriculture. The committee that is drawing up any resulting patents from MSU for the parasite diag- these guidelines is headed by Dean F. A. Wood of the nosis project. The money will be paid through the MSU University of Florida. Foundation to Neogen. The ESCOP document of November 1981 is summar- Patents will usually be applied for by MSU. The pat - ized below because it addresses issues that are com- ents will be assigned by MSU to the MSU Foundation mon to most industry/university relationships in bio- for subsequent sale to Neogen in exchange for stock. technology. As noted in that document, the SAES have Inventors will receive a 15-percent royalty or can ex- five general concerns (5): change this for a l-to 2-percent stock option in Neogen. 1. As publicly supported institutions, the SAES will need Because Neogen is tied to the MSU Foundation, MSU to assure that industrial relationships generate an receives moneys from successful commercialization end result in the interest of the general public. This of products or processes and the individuals are re- end result should reward the industrial investor but warded commensurate with their efforts. The basic avoid placing such an investor in an unwarranted position of financial advantage through privileged use research takes place on the campus of MSU, but com- of information or technology partly derived from re- mercialization will be moved off-campus to a nearby search using public funds; nor should a curtailment research park in order to avoid conflicts of interest. of new information to the public occur. The MSU faculty and administration were aware of 2. The SAES are greatly concerned about the curtail- and/or participated in the founding of the company, ment of communication on early research results and and there is a scientific advisory board that reviews about the constraints on sharing of germplasm the projects, thus preserving the principle of peer emerging due to concerns . . . for protecting poten- view. tially patentable research results. . . . 3. There is general concern in the academic community about the drain of scientific manpower from the Guidelines for industrial sponsorship universities to industry. . . . of university research in 4. There is concern that individual scientists may place themselves in the positions of compromise or con- biotechnology flict of interest as they establish personal relationships with industry as contractors, consultants or in- NATIONAL ASSOCIATION OF STATE UNIVERSITY stitutional officers. AND LAND GRANT COLLEGES, DIVISION OF 5. There is concern on the Part of both scientists and AGRICULTURE the SAES that through industrial sponsorship of re- A document titled “Genetic Engineering Policy for search, there may be introduced an undesirable level the State Agricultural Experiment Stations” was of direction of effort by industry. adopted by the Experiment Station Committee on Pol- The guidelines set forth in the ESCOP document are icy (ESCOP) in November 1981 at a meeting held in subsumed under the three major issue areas outlined conjunction with the fall meeting of the National below (5): Association of State University and Land Grant Col- A. Institutional relationships 1) Maintain SAES management control of leges (NASULGC). ESCOP, headed by Dean Clarke of research: Texas, was brought together after Clarke and several Consensus: SAES should retain ihe ability to other members observed that several State Agricul- manage research programs, and control the direc- tural Experiment Stations (SAES) were being simuha- tion of new investigations, regardless of the source neously approached by industry to do genetic re- of support, including situations in which one or search. Since there were no policy guidelines for the several firms may sponsor research at several in- new field of biotechnology, SAES often found them- stitutions. selves in a weak position during contract negotiations. 2) Strong basic research and graduate education Thus, ESCOP was formed to draw up guidelines. capability: Because the field of “genetic engineering” is chang- Consensus: SAES should maintain and expand the basic research capability in genetic engineering rapidly, the November 1981 ESCOP policy docu- ing and related areas within the domain of public- ment is regarded by ESCOP as an interim document ly supported institutions. subject to annual revision, if necessary. In addition, 3) Faculty-industry relations@: Clarke is collecting copies of legal documents from Consensus: Scientists should maintain close com- SAES institutions and will develop an aggregate sum- munication with institutional administrators in mary of appropriate components of general agree- development of relationships and commitments ments to be made available to all members of with the commercial sector. Institutional guidelines 578 “ Commercial Biotechnology: An International Analysis

should be developed which assist the scientists in generally should not be assigned for sole use by avoiding institutional or personal conflicts of a sponsoring firm. interest. 10) Tax code implications: B. Technical relationships Consensus: When sponsored research is moti- 4) Publication and communication: vated by certain interpretations of Tax Code Sec- Consensus: The ability to publish and exchange tion 1235, exclusive licensing or co~wnership of information is essential and must be secured in patent rights is a preferred alternative for the in- agreements. In some instances, publications or institution, since the institution maintains a vested formation exchange may need to be temporarily interest and some ownership of patent rights in- delayed to allow time for an institution or spon- volving the scientist, the institution, and the firm sor to assure adequate patent protection. The final may require unique documentation. Careful atten- decision to defer or modify a publication should tion to these rights and relinquishments is sug- reside with the public institution. gested. 5) Trade secrets and confidential information: Consensus: Protection of “trade secrets” or “con- PAJARO DUNES CONFERENCE, MARCH 1982 fidential information” for more than a very limited The March 1982 Pajaro Dunes Conference period should be avoided by public institutions. Ad- on uni- vance review by a private sponsor, to avoid pre- versity/industry relationships in biotechnology, which mature release of information, may be advisable was financed by the Henry J. Kaiser Family Founda- but should not become a mechanism to “shelve” tion, was organized principally by Donald Kennedy, useful information or unpatentable technology. the President of Stanford, and included the Presidents 6) Patent rights and premature disclosure: of Harvard, Derek Bok; California Institute of Tech- Consensus: SAES should retain the right to par- nology, Paul Gray; and the University of California, ticipate in the decisions related to the disposition David Saxon. Also invited were an administrator and of intellectual and real property and patent rights two faculty from each university. Leading industrial- resulting from research. Retained ownership of ists were also invited, among them representatives patents by the SAES is preferred. In any agreement, the SAES should retain the right to use dis- from Beckman Instruments, Inc.; Syntex Corp.; Cetus coveries and inventions from SAES research to ex- Corp.; Cabot Corp.; Applied Biosystems, Inc.; Damon tend and enhance public research and education. Corp.; Gillette Corp.; Eli Lilly and Co.; E. I. du Pent The need of private sponsors to obtain a return de Nemours; and Genentech Corp. A statement draft- on investment must be recognized, and agreements ing guidelines and principles emerged from the con- may provide for special licenses for patents origi- ference, although Kennedy and others stressed its role nating from sponsored research. as a draft of the process of policy formation rather 7) Biosafety of recombinant DNA: than a statement of policy. Consensus: SAES must retain responsibility for The premise of the Pajaro Dunes Conference was review and decisions in the release or distribution that collaboration between universities and industry of laboratory research products, although some research may be supported by outside sponsors. will benefit all parties, including the general public, c. Fiscal and management relationships if the university’s ideals are not distorted. The general 8) Grants and income earnings: consensus was as follows (9): Consensus: Extending knowledge and develop- . . . research agreements and other arrangements ing new technology while serving the public inter- with industry (must) be so constructed as not to pro- est should be the prime motivations in agreements mote a secrecy that will harm the progress of science; between SAES and the private sector. Royalty in- impair the educational experience of students and come from discoveries originating under such postdoctoral fellows; diminish the role of the univer- agreements should be recognized as a secondary sity as a credible and impartial resource; interfere with consideration. the choice by faculty members of the scientific ques- 9) Licensing responsibilities and performance tions they pursue, or divert the energies of faculty expectations: members and the resources of the university from pri- Consensus: SAES should assure that “due dili- mary educational and research missions. gence” clauses are included in contracts to assure The consensus of the Pajaro Dunes Conference with that new technology is not shelved and the public respect to specific issues is discussed further below. interest is served while private investment in com- Disclosure of Research Agreements—On this mercialization is respected. Assignments of rights topic, the following views were expressed (9): or licensing of patents for commercial use should In order to satisfy the faculty and general public that be considered separately from contractual defini- the role of the university is being maintained, con- tion of research to be conducted. Initial or devel- tracts should be made public. This could involve pub- opmental processes and pervasive technology ul- lication of relevant provisions of research contracts timately leading to improved biological materials with industry or, alternatively, examination by a facul- .

App. H—Selected Aspects of U.S. University/Industry Relationships in Biotechnology 579

ty committee or some other competent body of all re- these relationships. Rather than producing some def- search contracts to assure that terms are consistent inite guidelines regarding the structuring of such rela- with university values. * tionships, however, Pajaro Dunes Conference partic- Patents and Licenses.—The consensus on pat- ipants provided only general principles underlying ents and licenses was as follows (9): general university policies. The traditions of open research and prompt transmission of research results should be maintained. However, it is appropriate for the institution to file Selected statements on patent rights for patent coverage; actions which might require brief and commingling of research funds delays in publication or other public disclosure. Re- ceipt of proprietary information may occasionally be Since one of the purposes of the 1980 U.S. pat- desirable to facilitate research. These situations must ent law (Public Law 96-517) is to foster coopera- be handled on a case-by-case basis so as not to violate the educational process or the traditions of openness. tive research arrangements among government, There was a disagreement on the issue of whether universities, and industry, one question that im- exclusive rights should be given, although the docu- mediately arises is how the establishment of pat- ment does appear to favor the granting of exclusive ent rights is affected by potential commingling licenses (9): of funds. Circular A-124 issued by the U.S. Of- Some people fear that allowing a single firm the sole fice of Management and Budget (OMB) sets out right to develop a patent will necessarily remove com- some guidance on this (4): petition, slow the development of the patent, or even prevent development altogther. This fear is exagger- Notwithstanding the right of research organizations ated. . . . Thus, universities should be able to negotiate to accept supplemental funding from other sources exclusive licenses provided that exclusivity seems im- for the purpose of expediting or more comprehensive- portant to allow prompt, vigorous development of the ly accomplishing the research objectives of the govern- patent to occur. ment sponsored project, it is clear that the Act would In license negotiations, the consensus was that the remain applicable to any invention “conceived or first actually reduced to practice in performance” of the university should insist on a requirement of due dili- project. Separate accounting for the two funds used gence on the part of the licensee in developing and to support the project in this case is not a determin- using the patent. ing factor. The situation is more difficult when a sponsor re- To the extent that a non-government sponsor estab- quests the right to exclusive licenses on all discoveries lishes a project which, although closely related, falls made as a result of the research funded by the com- outside the planned and committed activities of a gov- pany (9): ernment funded project and does not diminish or dis- Some of us believe that such exclusive rights are an tract from the performance of such activities, inven- appropriate quid pro quo for the funds provided for tions made in performance of the non-government research. Others believe that the university should be sponsored project would not be subject to the condi- willing to agree to provide instead nonexclusive roy- tions of the Act. An example of such related but sepa- alty-free licenses to the sponsor, but should not give rate projects would be a government sponsored proj- up its right to examine the appropriateness of exclu- ect having research objectives to expand scientific sivity for each invention on a case-by-case basis. understanding in a field with a closely related industry Conflict of Interest—-Discussion focused on two sponsored project having as its objectives the applica- aspects of the problem. The first was the propriety tion of such new knowledge to develop usable new of a university’s taking an equity position in a com- technology. The time relationship in conducting the two projects and the use of new fundamental know- pany in which one of its faculty is a major stockholder ledge from one in the performance of the other are or officer. Most were against such investments (9): not important determinants, since most inventions rest It is not advisable for universities to make such in- on a knowledge base built up by numerous independ- vestments unless . . . there are sufficient safeguards ent research efforts extending over many years. to avoid adverse effects on the morale of the institu- Should such an invention be claimed by the perform- tion . . . . ing organization to be the product of non-government The second and really complex issue, conflict of in- sponsored research and be challenged by the sponsor- terests, was avoided by participants entirely. Issues ing agency as being reportable to the government as related to university/industry relationships are not a “subject invention, ” the challenge is appealable . . . . new, and the Pajaro Dunes Conference participants An invention which is made outside of the research were all experienced with and knowledgeable about activities of a government funded project but which in its making otherwise benefits from such project *Harvard has elected to keep its contracts confidential and Stanford is without adding to its cost is not viewed as a “subject following an informal policy of full disclosure (1], invention, ” since it cannot be shown to have been “con- —

580 “ Commercial Biotechnology: An International Analysis

ceived or first actually reduced to practice” in per- Selected university policies formance of the project. An obvious example of this is a situation where an instrument purchased with UNIVERSITY PATENT POLICIES government funds is later used, without interference with or cost to the government funded project, in mak- To analyze the patent policies of universities in the ing an invention all expenses of which involve only United States, OTA reviewed documents on the pat- non-government funds. ent policies of the following 32 universities: Members of the Advisory Committee to the Direc- 1. Alabama/Birmingham, 16. Miami, University of tor of NIH asked Mr. Dietrich of OMB for some guid- University of 17. Michigan, University of ance on problems posed by commingled funds. Die- 2. Arizona, University of 18. Minnesota, University of 3. Boston University 19. Northwestern University trich noted that application of OMB and the Depart- 4. California 1nsitute of 20. Ohio State University ment of Health and Human Services cost-accounting Technology 21. Pennsylvania, University and auditing principles can resolve some of the issues. 5. California, University of of He stated that one good way to distinguish between 6. Case Western Reserve 22. Purdue University commingled funds is to determine whether a project University 23. Rochester, University of 7. Colorado, University of 24. Rockefeller University was supported through direct costs (in which case the 8. Connecticut, University of 25. Rutgers University patent regulations would likely apply) or by indirect 9. Cornell University 26. Southern California, costs (in which case the regulations would likely not 10. Georgia, University of University of apply). He then provided an assessment of some 11. Indiana University 27. Stanford University 12. Iowa, University of 28. Vanderbilt University specific cases (12). 13. Johns Hopkins University 29, Virginia, University of In a situation where privately supported work is 14. Maryland, University of 30. Washington University done in a building previously constructed with Gov- 15. Massachusetts Institute of 31. Washington, University of ernment funds, the Government obtains no patent Technology 32. Wisconsin, U. of rights in inventions developed through those private funds. In general, the patent policies of the 32 universities Similarly, in a situation where privately supported OTA sampled define the obligations and rights of the work is done using equipment previously purchased university and the university researchers who prod- with Government funds, the Government obtains no uce inventions that have commercial potential. They patent rights in inventions developed through those also recognize the rights of outside sponsors. Typically, private funds; however, it does if the equipment is university patent policy documents state that the rela- currently operated under Government support. tionships defined between the university and inven- If a single individual spends one-half time on a project supported with Government funds and one-half tor are subject to the obligations that the inventor has time on a privately supported project, the Govern- made in return for outside support from either private ment obtains patent rights only if the privately sup- or government sources. In some cases, an industrial ported project is directly dependent on ideas or ma- sponsor may have retained the right to the invention terials generated in the publicly supported project. (because most universities grant only nonexclusive Similarly, if a scientist spends 10 years on a publicly licenses if they own the patent, subject to a short ex- supported project and then 10 years on a privately clusive licensing period to help commercialize the in- supported project, the Government obtains no pat- vention) and also may have defined how royalties are ent rights to the invention developed under private to be shared. Thus, for example, the Stanford patent support unless it is clear the idea was conceived with policy document notes: public funds. In practice, the great majority of inventions arise In the case of a team working on a single project with from externally funded research covered by agree- both public and private support, the Government ments containing patent provisions. Some agreements would obtain patent rights. permit the University to retain title and grant license For inventions resulting from normal intellectual in- rights to the sponsor; some provide for the reverse tercourse in which two individuals, one privately and or defer allocation of rights. one publicly supported, exchange information, the The crucial issue, therefore, seems to be the pa- Government would obtain no patent rights unless not there is intent to commit fraud (e.g., the scientist on tent agreements between universities and their republic funds provides information to the scientist in searchers (i.e., what is covered in the documents OTA the private sector to increase the marketability of reviewed), but the terms of contracts from external an invention and then shares in the profits). sponsors to individual researchers. App. H—Selected Aspects of U.S. University/Industry Relationships in Biotechnology . 581

Most university patent policies cover anybody work- not seem to be related to whether the inventor rather ing with university facilities, although individual than the university owns the invention. On the ques- universities vary in the degree of specific identification of ownership, universities having the right to take tion of personnel types. Most of them also cover stu- ownership have the option to do so. Conversely, the dents, although MIT excepts students from the provi- inventor can petition to have the invention assigned sion and Johns Hopkins invites students to “take ad- to him/her if the university does not diligently pur- vantage of the mechanisms set forth herein. ” Univer- sue its commercial applications. sity employees who produce inventions on their own Royalties, after deduction for expenses and the in- time and without substantial use of university re- ventor’s share, may be assigned to a number of univer- sources own their inventions, but all 32 universities sity activities, Some universities place the remaining invite them to use the university’s commercialization royalty income in their general operating funds; often, mechanism, however, royalties are assigned to “research” or to All 32 universities require researchers to report in- “research and training” either through stipulation or ventions with potential commercialization promptly through a separate fund set up for that purpose (e.g., so that the university can assess their potential and Cal Tech’s California Institute Research Foundation). file for a patent. Some universities (e.g., University of Some universities also allocate a share to the inven- Pennsylvania) also require delay in publication of the tor’s department, division, and/or area of activitiy (e.g., findings to allow for filing of a patent. Since publica- the University of Colorado allocates a 25-percent share tions prior to patenting can make an invention nonpat- each to the discoverer, to an account for support of entable, the practice of requiring a delay in publica- the discoverer’s research, to the discoverer’; depart- tion is probably common even at universities whose ment or primary administrative unit, and to the documents do not explicitly mention it. university). University administrative mechanisms have been set The crucial issue is the commercialization stipula - up to evaluate inventions, to settle disputes, and to at- tions that are attached to funds provided by outside tempt commercialization. Many universities use the sponsors, public and private. The patent policies services of commercialization firms such as Research discussed here are subject to these external conditions, Corporation of New York and Battelle Development and, as the Stanford document states, external spon- Laboratories. Other universities have their own com- sorship of university research is more the rule than mercialization ventures (e.g., the Wisconsin Alumni the exception. Research Fund at the University of Wisconsin). The sharing of royalties varies with each universi- UNIVERSITY POLICIES ON CONSULTING ty. Almost all the universities use the U.S. Govern- ment’s stipulation that no more than 15 percent of The policies on consulting of five major U.S. univer- gross royalty income is to go to the inventor, but they sities (Harvard, MIT, Johns Hopkins, Stanford, and the usually set this as the minimum share (i.e., many give University of California) are summarized in table H-1 the inventor a bigger share if the stipulations of out- below. side sources do not apply). Private universities have a greater propensity than public universities to give UNIVERSITY POLICIES ON SPONSORED RESEARCH ownership of the invention to the inventor, while the university is given a license. This may not be a substan- The policies on sponsored research of three major tive difference, as the other provisions in university U.S. universities (Harvard, MIT, and Johns Hopkins) policies (commercialization, royalty sharing, etc.) do are summarized in table H-2 below.

25-561 0 - 84 - 38 Table H-l.—Summary of Selected University Poiicies on Consulting

Harvard Massachusetts Johns Johns Harvard Medical Institute of Hopkins Hopkins University of California University School Technology University Medical School Stanford (all campuses) Conflict of interest: . Time for outside ● Time for outside . Outside activities . No formal policy . Time for outside ● Overriding profes- ● Primary respon- involvement involvement may not conflict involvement sional allegiance to sibilities to university regulated regulated with their obliga- regulated the university stressed . Primary commit- ● Primary commit- tions to the ● Primary commit- , Disclosure of poten- ● Outlines specific ex- ment to the univer- ment to the univer- institute ment to the univer- tial conflict situations amples of conflict-of- sity required sity required ● For all those in sity required urged interest situations ● Disclosure of ● Disclosure of decisionmaking . Financial gain ● Prewritten clause to potential conflict potential conflict roles required an- regulated be inserted into all required required nual acknowledge- agreements stating ment in writing of that university condi- the policy tions of employment ● Required prevail before all other disclosure of all agreements outside activities, including financial interests, to institute officers ● Requirement: To seek advice of department head if a potential conflict exists Time regulation: ● 200/0 ● 2x salary . 1 daylweek ● 200/0 ● 200!0 ● 13 days per academic ● No limit on consulting c No dollar amount quarter (13-week days unless time con- quarter) flicts with prima~ responsibility to the university Dlsclosunx . Not required, s Required ● Faculty are re- . Not required . Monthly reporting ● Disclosure of names ● California Political unless potential annually—reported quired to keep of companies you re- Reform Act of 1982, conflict exists to the dean’s office their department quest of dean, pro- requires disclosure of heads continuously vost, etc. faculty member finan- informed on all cial interest in in- outside activities dustrial sponsor of hislher research Annual reports of consulting activities to be supplied to heads of units Table H-l.–Summary of Selected University Poiicies on Consulting (Continued)

Harvard Massachusetts Johns Johns Harvard Medical Institute of Hopkins Hopkins University of California University School Technology University Medical School Stanford (all campuses) Po/icy enforcement: ● Essentially ● Essentially ● Department heads ● Self-enforced ● By department ● Essentially ● By department dean, self-enforced self-enforced are required to director and dean self-enforced variable enforcement register once year- among campuses and Iy faculty members departments ● Minimally by ● By dean outside commit- department ments in terms of: chairman — number of days ● By department spent — nature of the relationship — any significant financial interest the faculty member may have in the company

SOURCE: Management Analysis Center, Inc., “Study of University/Industry Relationships in Biotechnology,” contract report prepared for the Office of Technology Assessment, U.S. Congress, January 19S3; and P.R. Lee, W. Levinson, L.H. Butler, et al., “industrial-Academic Relationships in Biotechnology at Stanford University, University of California, Berkeley, and University of Callfomia, San Francisco,” contract report prepared for the Office of Technology Assessment, U.S. Congress, July 19S2. 584 Commercial Biotechnology: An International Analysis

Table H-2.—Summary of Selected University Policies on Sponsored Research

Harvard University (includes Medical School Massachusetts Institute Johns Hopkins University and Mass. General Hospital) of Technology (includes Medical Schooi) Patent rights: ● Retained by the university ● Retained by the university . Retained by the university License: ● Generally nonexclusive encouraged ● Generaiiy nonexclusive encouraged ● Generalliy nonexclusive encouraged Publication rfghts: ● Guaranteed . Guaranteed . Guaranteed ● Sponsor preview . Sponsor preview deferrals up to 30 . Sponsor preview deferrals up to 120 days days Confidentia//ty: ● No confidentiality of results . No confidentiality of results ● No confidentiality of results Choice of reseach topics: ● Selected by researcher ● Seiected by researcher ● Seiected by researcher . Reviewed by department chairman ● Reviewed by department head ● Reviewed by committees (by Biosafety Committee at the Medical School) Policy enforcement: ● Review by the department chairman. ● A three-stage approvai process is ● Review by the dean and Office for Approval by the Committee on Patents utiiized. The stages are: Sponsored Research (Office of and Copyright required — review by department head Research Administration at the — review by the Office of Sponsored Medical School) Programs — review by dean or provost ● Required disclosure to dean of faculty of all personal and remunerative commitments to potentiai industrial sponsor Policy development: ● Currently underway at alli faculties ● Centrally deveioped policies already . Being developed by divisions under in existence the direction of central administration ● Decentralized development, moving toward greater centralization SOURCE: Management Analysis Center, Inc., “Study of University/Industry Relationships in Biotechnology,” contract repofl prepared for the Office of Technology Assess- ment, U.S. Congress, January 19S3. App. H—Selected Aspects of U.S. University/Industry Relationships in Biotechnology . 585

Appendix H references 8. Muto, F. T., Cooley, Godward, Castro, Huddleson, and Tatum, San Francisco, Calif., personal communication, 1, Broad, W., “Pajaro Dunes: The Search for Consensus, ” 1982. Science 216:155-157, Apr. 9, 1982. 9. Pajaro Dunes Conference, press release, Stanford Univer- 2. Culliton, B, J., “The Hoechst Department at Mass Gener- sity, March 1982. al, ” Science 216:1200-1203. 10. Socolar, M. J., Comptroller General of the United States, 3. Culliton, B. J., “New Bology Foundation Off to a Good letter to Congressman Albert Gore, Oct. 16, 1981. Start,” Science 220:803, 1983. 11 U.S. Congress, House Committee on Science and Tech- 4. Executive Office of the President, Office of Management nology, University/Industry Cooperation in Biotechnol- and Budget, OMB 82-5 Public Affairs Cover Memo for ogy, hearings before the Subcommittee on Investigations OMB Circular A-124 (Patents—Small Firms and Nonprofit and Oversight and the Subcommittee on Science, Re- Organizations), Washington, D.C., released Feb. 12, 1982. search and Technology, House Committee on Science and 5. Experiment Station Committee on Policy, “Genetic Engi- Technology, U.S. Congress, June 16-17, 1982 (Washing- neering Policy for the State Agricultural Stations, ” No- ton, D.C.: U.S. Government Printing Office, 1982). vember 1981. 12 U.S. Department of Health and Human Services, National 6. Lee, P. R., Levinson, W., Butler, L. H., et al., “Industrial- Institutes of Health, Advisory Committee to the Direc- Academic Relationships in Biotechnology at Stanford Uni- tor, “NIH Cooperative Research Relationships With In- versity, University of California, Berkeley, and Univer- dustry,” Bethesda, Md., October 1981. sity of California, San Francisco, ” contract report pre- 13 Washington University, St. Louis, Me., news release, pared for the Office of Technology Assessment, US. Con- distributed at University/Industry Cooperation in Biotech- gress, July 1982. nology, hearings before the Subcommittee on Investiga- 7. Management Analysis Center, Inc., “Study of Universi- tions and Oversight and the Subcommittee on Science, ty/Industry Relationships in Biotechnology, ” contract Research, and Technology, House Committee on Science report prepared for the Office of Technology Assess- and Technology, U.S. Congress, Washington, D. C., June ment, U.S. Congress, January 1983. 16-17, 1982. —

Appendix I List of Acronyms and Glossary of Terms

List of acronyms CSRS -Cooperative State Research Service (U.S.) AAU —American Association of Universities DARPA —Defense Advanced Research Projects AcNPV –Autographa californica nuclear poly - Agency (U.S. Department of Defense) hedrosis virus DECHEMA —Deutsche Gesellschaft ftir Chemisches ACS —American Cancer Society Apparatewesen; German Society for AHF -antihemophilic factor Chemical Engineering @. R. G.) AIDS -acquired immune deficiency syndrome DESAT –Defense Business Advanced Technology ANDA —Abbreviated New Drug Application program (U.S. Department of Defense) ANVAR —L’Agence Nationale de la Valorisation de DFG —Deutsche Forschungsgemeinschaft; Ger- la Recherche; National Agency for the man Research Society (F. R.G.) Funding of Research (France) DHHS —Department of Health and Human Serv- ARES –Applied Research Systems (Netherlands) ices (U. S.) ARS –Agricultural Research Service (U.S.) DM —Deutsche mark AT&T –American Telephone & Telegraph Co. DNA -deoxyribonucleic acid (U.S.) DOD –Department of Defense (U. S.) BCr —Brazilian cruzeiros DOE –Department of Energy (U.S.) BGA –Bundesgesundheitsamt: Federal Health DSM —Deutsche Sammlung von Mikroorga- Office @. R. G.) nismen; German Collection of Micro- BISCT —Biotechnology Institute and Studies Cen- Organisms (F.R.G.) tre Trust (U. K.) EAA –Export Administration Act of 1979 (U.S.) BMFT —Bundesministerium ftlr Forschung und ECUT —Energy Conversion and Utilization Tech- Technologies; Federal Ministry of Science nologies program (U. S.) and Technology @. R. G.) EEC –European Economic Community BRL –Bethesda Research Laboratories (U. S.) EMBL –European Molecular Biology Laboratory BTG –British Technology Group (U.K. Depart- EPA –Environmental Protection Agency (U.S.) ment of Industry) EPC —European Patent Convention CAMR -Center for Applied Microbiology and Re- EPO –European Patent Office (supranational) search (U. K.) ETH —Eidgentissiche Technische Hochschule; CCL

586 App. l—List of Acronyms and Glossary of Terms ● 587

GH –growth hormone MIT —Massachusetts Institute of Technology GMAG -Genetic Manipulation Advisory Group MITI —Ministry of International Trade and in- (U.K.) dustry (Japan) GRAS –generally recognized as safe by qualified MOF —Ministry of Finance (Japan) experts MRC –Medical Research Council (U. K.) GWB -Gesetz gegen Wettbewerbsbeschran- mRNA —messenger RNA kungen; Act Against Restraints of Com- MS —multiple sclerosis petition (F.R.G.) MSG —monosodium glutamate HBsAg —hepatitis B surface antigen MSH —melanoycte-stimulating hormone hCG —human chorionic gonadotropin MSI —Medium-Scale Integration HFCS –high fructose corn syrup NAS –National Academy of Sciences (U. S.) hGH –human growth hormone NASA —National Aeronautics and Space Ad- hI —human insulin ministration (U. S.) HPLC —high-performance liquid chromatogra- NBFs —new biotechnology firms phy NCDRH —National Center for Devices and Radio- H.R. —House of Representatives (U.S. Con- logic Health (U. S.) gress) NCI –National Cancer Institute (U. S.) HSA —human serum albumin NDA —New Drug Application HSE –Health and Safety Executive (U. K.) NIBSC —National Institute of Biological Standards HSV —herpes simplex virus and Controls (U. K.) HSV2 –herpes simplex virus type 2 NIH –National Institutes of Health (U. S.) IBC —Institutional Biosafety Committee NIOSH —National Institute for Occupational Safe- IBM —International Business Machines Corp. ty and Health (U. S.) (U. S.) NLG –Netherlands guilder ICI –Imperial Chemical Industries (U.K.) NRC –National Research Council (Canada) Ifn —interferon NSF —National Science Foundation (U. S.) IMC —International Minerals & Chemicals NYU —New York University Corp. (U. K.) OECD -Organisation for Economic Co-Opera- IND —Notice of Claimed Investigational Ex- tion and Development emption for a New Drug OMB -Office of Management and Budget (U. S.) Ingene —International Genetic Engineering, Inc. OSHA -Occupational Safety and Health Admin- (us.) istration (U. S.) INSERM —Institut National de la Sante et de la OSRD -Office of Scientific Research and Recherche Medicale; National Institute Development (U. S.) of Health and Medical Research (France) OSTP -Office of Science and Technology Policy IOCM —Interkantonale Kontrollstelle ftir (Executive Office of the President, U.S.) Heilmittel: Intercantonal Office for the OTA Office of Technology Assessment (U.S.) Control of Medicaments (Switzerland) PAL —phenylalanine ammonia Iyase IRS –Internal Revenue Service (U. S.) PEPCase –phosphoenol pyruvate carboxylase ITC —International Trade Commission (U. S.) Pm —polyhydroxybutyrate JAFCO —Japan Associated Finance Corporation PMA —Pharmaceutical Manufacturers Associa- JDB —Japan Development Bank tion (U. S.) JETRO —Japan External Trade Organization PTo –Patent and Trademark Office (U. S.) JITC –Japanese Fair Trade Commission (Japan) PVPA –Plant Variety Protection Act of 1970 LSI —Large-Scale Integration (Us.) MAbs —monoclinal antibodies RAc —Recombinant DNA Advisory Committee MAFF —Ministry of Agriculture, Forestry, and (Us.) Fisheries (Japan) R&D —research and development MCC –Microelectronics Computer Corp. (U. S.) rDNA —recombinant DNA MCTL —Militarily Critical Technologies List (U.S. Ri —root-inducing Department of Defense) RuBPCase —ribulose bisphosphate carboxylase MEOR —microbial enhanced oil recovery SAES —State Agricultural Experiment Stations MGH —Massachusetts General Hospital (Us.) MGI –Molecular Genetics, Inc. (U. S.) SBA –Small Business Administration (US.) 588 ● Commercial Biotechnology An International Analysis

SBF –Stiftelsen Bioteknisk Forksning; Biotech- to a microbial antigen following disease, inapparent nology Research Foundation (Sweden) infection, or inoculation. Active immunity is usual- SBIC —Small Business Investment Corporation ly long-lasting. (Compare passive jrnrnunjty.) SBIR —Small Business Innovation Research Adsorption The taking up of molecules of gases, dis- SCP —single-cell protein solved substances, or liquids by the surfaces of SERC —Science and Economic Research Coun- solids or liquids with which they are in contact. cil (U.K.) Aerobic% Living or acting only in the presence of SFr —Swiss francs oxygen. SNDA —Supplemental New Drug Application Affinity chromatography The use of compounds, SOCal —Standard Oil of California such as antibodies, bound to an immobile matrix to SRBCS —sheep red blood cells “capture” other compounds as a highly specific STA –Science and Technology Agency (Japan) means of separation and purification. STU —Stryelsen for Teknisk Utveckling; Na- Amino acid= The building blocks of proteins. There tional Swedish Board for Technical De- are 20 common amino acids. velopment Amino acid sequence The linear order of amino TDC —Technical Development Corporation acids in a protein. (U.K.) Anaerobic Living or acting in the absence of oxygen. T-DNA –transferred-DNA Antibiotk A spedic type of chemical substance that THMs —trihalomethanes is administered to fight infections, usually bacterial Ti —tumor-inducing infections, in humans or animals. Many antibiotics tPA —tissue plasminogen activator are produced by using microorganisms; others are TRP —tangible research property produced synthetically. TSCA –Toxic Substance Control Act (U. S.) Antibody A protein (immunoglobulin) produced by UCLA —University of California, Los Angeles humans or higher animals in response to exposure UCRDO —University Connected Research and De- to a specific antigen and characterized by specific velopment Organization (Israel) reactivity with its complementary antigen. (See also UCSD —University of California, San Diego monoclinal antibodies. ) UCSF —University of California, San Francisco Antidumping laws: Laws that prevent a country U.K. –United Kingdom from exporting goods to another country and sell- UPOV —International Convention for the Protec- ing those goods below cost or more cheaply than tion of New Varieties and Plants in the home market. Antidumping duties may be im- U.s.c. —United States Code posed by a country to offset damages sustained from USDA —U.S. Department of Agriculture dumping. In the United States, the antidumping law USM –Unlisted Securities Market (U. K.) most relevant to biotechnology is Section 337 of the UWG -Gesetz gegen den unlauteren wettbe- Tariff Act of 1930 (19 US.C. 1337). werb; Unfair Competition Law of 1909 Antigem A substance, usually a protein or carbo- (F.R.G.) hydrate which, when introduced in the body of a VLSI —Very-Large Scale Integration human or higher animal, stimulates the production Vocs —volatile organic compounds of an antibody that will react specifically with it. VST Act –Virus, Serum, Toxin Act of 1913 (U.S.) Antihemophilic factor (AHF): The fraction of WARF —Wisconsin Alumni Research Fund whole blood that contains blood clotting agents. AI-IF WFG —Deutsche Wagnisfinanzierungs-Gesell- is used to treat hemophilia, a set of hereditary schaft; Risk Financing Society (F. R.G.) disorders that prevent blood clotting. WHO —world Health Organization Antimicrobial agenti See antibiotic. Antiserum Blood serum containing antibodies from animals that have been inoculated with an antigen. Glossary of terms When administered to other animals or humans, antiserum produces passive immunity. Accession In biotechnology, the addition of germ- Applied research Research to gain knowledge or plasm deposits to existing germplasm storage banks. understanding necessary for determining the means Acclimatization The biological process whereby an by which a recognized and specit3c need maybe met organism adapts to a new environment. Describes (National Science Foundation definition). (See also process of developing microorganisms that degrade generic applied research.) toxic wastes in the environment. Aromatic compound: A compound containing a Active immunity Disease resistance in a person or benzene ring. Many specialty and commodity animal due to antibody production after exposure chemicals are aromatic compounds. App. l—List of Acronyms and Glossary of Terms . 589

Ascites: Liquid accumulations in the peritoneal cav- Biological oxygen demand (BOD): The oxygen ity. Used as a method for producing monoclinal used in meeting the metabolic needs of aerobic or- antibodies. ganisms in water containing organic compounds. Assay A technique that measures a biological Biological response modifer: Generic term for response. hormones, neuroactive compounds, and immunoac- Attenuated vaccine Whole, pathogenic organisms tive compounds that act at the cellular level; many that are treated with chemical, radioactive, or other are possible targets for production with biotech- means to render them incapable of producing in- nology. fection. Attenuated vaccines are injected into the Biological warfare agents: Biological products or body, which then produces protective antibodies processes that are determined to be useful in against the pathogen to protect against disease. military applications and whose export is restricted Autotrophic: Capable of self-nourishment (opposed for national security reasons. to heterotrophic). Biologics: Vaccines, therapeutic serums, toxoids, Bacillus subtilis @3. subtilis): An aerobic bac- antitoxins, and analogous biological products used terium used as a host in rDNA experiments. to induce immunity to infectious diseases or harm- Bacteria: Any of a large group of microscopic ful substances of biological origin. organisms having round, rodlike, spiral, or filamen- Biomass: All organic matter that grows by the tous unicellular or noncellular bodies that are often photosynthetic conversion of solar energy. aggregated into colonies, are enclosed by a cell wall Biooxidation: Oxidation (the loss of electrons) or membrane, and lack fully differentiated nuclei. catalyzed by a biocatalyst. Bacteria may exist as free-living organisms in soil, Biopolymers: Naturally occurring macromolecules water, organic matter, or as parasites in the live - that include proteins, nucleic acids, and bodies of plants and animals. polysaccharides. Bacteriophage (or phage)/bacterial virus: A Bioprocess Any process that uses complete living virus that multiplies in bacteria. Bacteriophage cells or their components (e.g., enzymes, lambda is commonly used as a vector in rDNA ex- chloroplasts) to effect desired physical or chemical periments. changes. Basic research: Research to gain fuller knowledge BioreactoR: Vessel in which a bioprocess takes place. or understanding of the fundamental aspects of Biosensor: An electronic device that uses biological phenomena and of observable facts without specific molecules to detect specific compounds. applications toward processes or products in mind Biosurfactant: A compound produced by living (National Science Foundation definition). organisms that helps solubilize compounds such as Batch processing: A method of bioprocessing in organic molecules (e.g., oil and tar) by reducing sur- which a bioreactor is loaded with raw materials and face tension between the compound and liquid. microaganisms, and the process is run to comple- Biosynthesis Production, by synthesis or degradation, at which time products are removed. (Compare tion, of a chemical compound by a living organism. continuous processing. ) Biotechnology Commercial techniques that use liv- Betaendorphin: A neuro-active polypeptide with ing organisms, or substances from those organisms, analgesic properties similar to opiate compounds to make or modify a product, and including tech- such as morphine. niques used for the improvement of the character- Biocatalyst: An enzyme that plays a fundamental istics of economically important plants and animals role in living organisms or industrially by activating and for the development of microorganisms to act or accelerating a process. on the environment. In this report, biotechnology Biochemical Characterized by, produced by, or in- is used to mean “new” biotechnology, which only volving chemical reactions in living organisms; a includes the use of novel biological techniques— product produced by chemical reactions in living specifically, recombinant DNA techniques, cell fu- organisms. sion techniques, especially for the production of Biochip: An electronic device that uses biological monoclinal antibodies, and new bioprocesses for molecules as the framework for molecules that act commercial production. as semiconductors and functions as an integrated Callus An undifferentiated cluster of plant cells that circuit. is a first step in regeneration of plants from tissue Bioconversiom A chemical conversion using a culture. biocatalyst. Capacito~ A device that consists of two conductors Biodegradation: The breakdown of substances by insulated from each other by a dielectric. A capaci - 590 Commercial Biotetinology: An International Analysis

current, and introduces alternating current into a uids, or solids in a mixture or solution by adsorp- circuit. tion as the mixture or solution flows over the ab- Carboxylatiom The addition of an organic acid sorbent medium, often in a column. The substances group (COOH) to a molecule. are separated because of their differing chemical Catalysi= A modification, especially an increase, in interaction with the absorbent medium. the rate of a chemical reaction induced by a material Chromosomeex The rodlike structures of a cell’s (e.g., enzyme) that is chemically unchanged at the nucleus that store and transmit genetic information; end of the reaction. the physical structure that contain genes. Catalysfi A substance that induces catalysis; an agent Chromosomes are composed mostly of DNA and that enables a chemical reaction to proceed under protein and contain most of the cell’s DNA. Each milder conditions (e.g., at a lower temperature) than species has a characteristic number of chromo- otherwise possible. Biological catalysts are enzymes; somes. some nonbiological catalysts include metallic com- Clinical triak One of the final stages in the collec- plexes. tion of data for drug approval where the drug is Gelk The smallest structural unit of living matter tested in humans. capable of functioning independently; a microscopic Clone A group of genetically identical cells or orga- mass of protoplasm surrounded by a semipermeable nisms produced asexually from a common ancestor. membrane, usually including one or more nuclei Cloning The amplification of segments of DNA, and various nonliving products, capable alone, or usually genes. interacting with other cells, of performing all the Coding sequence% The region of a gene (DNA) that fundamental functions of life. encodes the amino acid sequence of a protein. Cell culture The in vitro growth of cells isolated Cofactom Additional molecules needed for en- from multicellular organisms. These cells are usually zymatic function. of one type. Colibacillosis A bacterial disease that causes diar- Cell differentiation The process whereby descend- rhea, dehydration, and death in calves and piglets, ants of a common parental cell achieve and main- Commodity chemical=sChemicals produced in tain specialization of structure and function. large volumes that sell for less than $1 per pound Cell fusion: Formation of a single hybrid cell with (500 per kg). (Compare specialty chemicals.) nuclei and cytoplasm from different cells. Commodity controls list (CCL): Large roster of Cell line Cells that acquire the ability to multiply in- items that have been identified under the Export definitely in vitro. Administration Act by the U.S. Department of Com- Cellulase: The enzyme that digests cellulose to merce to require a “validated license” before they sugars. can be exported to certain countries. Cellulose: A polymer of six-carbon sugars found in Complementary DNA (cDNA): DNA that is com- all plant matter; the most abundant biological complementary to messenger RNA; used for cloning or pound on earth. as a probe in DNA hybridization studies. Centrifugc: A machine for whirling fluids rapidly to Compulsory licensing: Laws that require the li- separate substances of different densities by cen- censing of patents, presumably to ensure early ap- trifugal force; also, to whirl in a centrifuge. plication of a technology and to diffuse control over Chakrabarty decision: Diamond v. Chakrabarty, a technology. U.S. Department of Commerce, PTA, sec. 2105, Continuous processing: Method of bioprocessing 1980; landmark case in which U.S. Supreme Court in which raw materials are supplied and products majority held that the inventor of a new micro- are removed continuously, at volumetrically equal organism, whose invention otherwise met the legal rates. (Compare batch processing.) requirements for obtaining a patent, could not be Corn wet milliqp The processing of corn, including denied a patent solely because the invention was hydrolysis of starch, to yield products used for food alive, and chemicals. Chemostat selectiom Screening process used to Cosmid: A DNA cloning vector consisting of plasmid identify micro-organisms with desired properties, and phage sequences. such as micro-organisms that degrade toxic chemi- Countervailing duties Duties charged to import- cals. (See also acclimatization,) ers when their product is determined to cause or Chloroplastcx Cellular organelles where photosyn- threaten material injury to domestic industries pro- thesis occurs. ducing similar products. Chromatography A process of separating gases, liq- Corporate venture capitak Capital provided by App. l—List of Acronyms and Glossary of Terms ● 591

major corporations exclusively for high-risk invest - adsorbent, such as the removal of a product from ments. an enzyme bound on a column. Culture deposits: See accession. Emulsification The process of making lipids solu- Culture medium: Any nutrient system for the arti- ble in water. ficial cultivation of bacteria or other cells; usually Enablement requirement A patent requirement a complex mixture of organic and inorganic mate- for adequate public disclosure of an invention, rials. enabling others in the relevant field of technology Cytoplasm The “liquid” portion of a cell outside and to build and use the invention. surrounding the nucleus. Endorphin& Opiate-like, naturally occurring pep- Cytotoxic: Damaging to cells. tides with a variety of analgesic effects throughout Debt financing: The use of outside or borrowed the endocrine and nervous systems, capital to finance business activities. Enkephalins Small, opiate-like peptides with anal- Deoxyribonucleic acid (DNA): A linear polymer, gesic effects in the brain. made up of deoxyribonucleotide repeating units, Enzynm Any of a group of catalytic proteins that are that is the carrier of genetic information; present produced by living cells and that mediate and pro- in chromosomes and chromosomal material of cell mote the chemical processes of life without them- organelles such as mitochondria and chloroplasts, selves being altered or destroyed, and also present in some viruses. The genetic ma- Equity capitak Capital proceeds arising from the sale terial found in all living organisms. Every inherited of company stock. characteristic has its origin somewhere in the code Equity investment: An investment made in a com- of each individual’s DNA, pany in exchange for a part ownership in that Deposit requirement= Patent requirements for in- company. ventors to turn over at the time of patent applica- Escherichia colJ(E cd): A species of bacteria that tion a sample of the invention which is maintained inhabits the intestinal tract of most vertebrates. throughout the life of the patent. Some strains are pathogenic to humans and animals. Diagnostic products Products that recognize mole- Many nonpathogenic strains are used experimen- cules associated with disease or other biologic con- tally as hosts for rDNA. ditions and are used to diagnose these conditions, Eukaryote A cell or organism with membrane- Dicots (dicotyledons): Plants with two first embry- bound, structurally discrete nuclei and well- onic leaves and nonparallel veined mature leaves. developed cell organelles. Eukaryotes include all Examples are soybean and most flowering plants. organisms except viruses, bacteria, and blue-green Disclosure requirements: A patent requirement algae. (Compare prokaryote,) for adequate public disclosure of an invention that Export controhx Laws that restrict technology enables other people to build and use the invention transfer and trade for reasons of national security, without “undue” experimentation. foreign policy, or economic policy. DNA: Deoxyribonucleic acid. Fatty acids Organic acids with long carbon chains. DNA base pahz A pair of DNA nucleotide bases. Fatty acids are abundant in cell membranes and are Nucleotide bases pair across the double helix in a widely used as industrial emulsifiers. very specific way: adenine can only pair with thy- Feedstocks Raw materials used for the production mine; cytosine can only pair with guanine. of chemicals. DNA probcz A sequence of DNA that is used to detect Fermentation An anaerobic bioprocess. Fermenta- the presence of a particular nucleotide sequence. tion is used in various industrial processes for the DNA sequenc= The order of nucleotide bases in the manufacture of products such as alcohols, acids, and DNA helix; the DNA sequence is essential to the cheese by the action of yeasts, molds, and bacteria. storage of genetic information. Fibrinolytic agents: Blood-borne compounds that DNA synthesis The synthesis of DNA in the labora- activate fibrin in order to dissolve blood clots. tory by the sequential addition of nucleotide bases. Flocculating agent: A reagent added to a disper- Downstream processhqp After bioconversion, the sion of solids in a liquid to bring together the fine purification and separation of the product. particles into larger masses. Drug: Any chemical compound that may be admin- Food additive (or food ingredient): A substance istered to humans or animals as an aid in the treat- that becomes a component of food or affects the ment of disease. characteristics of food and, as such, is regulated by Elution: The removal of adsorbed material from an the U.S. Food and Drug Administration. 592 . Commercial Biotechnology: An International Analysis

Foot-and-mouth disease A highly contagious virus Germ celk The male and female reproductive cells; disease of cattle, pigs, sheep, and goats that is egg and sperm. characterized by fever, salivation, and formation of Germplasnx The total genetic variability available vesicles in the mouth, pharynx and on the feet and to a species. is transmissible to humans. Glycoproteintx Proteins with attached sugar groups. Fractionation (of blood): Separation of blood by Glucose A 6-carbon sugar molecule used as a basic centrifugation, resulting in components sold as energy source by the cells of most organisms. plasma, serum albumin, antihemophilic factor, and Glycosylatiom The attachment of sugar groups to other products. a molecule, such as a protein. Freeliving organisrm An organism that does not Government procurement: The acquisition by a depend on other organisms for survival. government of goods or services. Government pro- Fungus: Any of a major group of saprophytic and curement may stimulate development of technology. parasitic plants that lack chlorophyll, including Growth hormone (GH): A group of peptides in- molds, rusts, mildews, smuts, and mushrooms. volved in regulating growth in higher animals. Gamma globulin (GG): A protein component of Helminth: Parasitic worm. blood that contains antibodies and confers passive Herbicide An agent (e.g., a chemical) used to destroy immunity. or inhibit plant growth; speciilcally, a selective weed Gen~ The basic unit of heredity; an ordered sequence killer that is not injurious to crop plants, of nucleotide bases, comprising a segment of DNA. High performance liquid chromatography A gene contains the sequence of DNA that encodes (HPLC): A recently developed type of chromatog- one polypeptide chain (via RNA). raphy that is potentially important in downstream Gene amplification In biotechnology, an increase processing. in gene number for a certain protein so that the pro- Hormone A chemical messenger found in the cir- tein is produced at elevated levels. culation of higher organisms that transmits regula- Gene expression The mechanism whereby the ge- tory messages to cells. netic directions in any particular cell are decoded Hosti A cell whose metabolism is used for growth and and processed into the final functioning product, reproduction of a virus, plasmid, or other form of usually a protein. See also transcription and foreign DNA. translation. Host-vector system Compatible combinations of Generic applied research Research along the con- host (e.g., bacterium) and vector (e.g., plasmid) that tinuum between the two poles of basic and applied. allow stable introduction of foreign DNA into cells. This research may be characterized as follows: 1) Human chorionic gonadotropin (HCG): A hor- it is not committed to open+mded expansion of mone produced by human placenta, indicating preg- knowledge as university basic research typically is nancy; widespread target of MAb developers to but is less specific (more widely applicable or “ge- diagnose pregnancy at an early stage. neric”) than the typical industrial product or proc- Human insulin (hI): Hormone that stimulates cell ess development effort; 2) it has more welldefined growth via glucose uptake by cells. Insulin deficien- objectives than basic research but is long term rela- cy leads to diabetes. tive to product and process development; and 3) it Human serum albumin (HSA): Abundant protein is high risk, in the sense that the stated objectives in human blood; as a product, used in highest quan- may fail and the resources committed may be lost tities in medicine, primarily in burn, trauma, and for practical purposes. shock patients. Gene transfen The use of genetic or physical ma- Hybrid: The offspring genetically dissimilar parents nipulation to introduce foreign genes into host cells (e.g., a new variety of plant or animal that results to achieve desired characteristics in progeny. from cross-breeding two different existing varieties, Genom= The genetic endowment of an organism or a cell derived from two different cultured cell lines individual. that have fused). Genus A taxonomic category that includes groups Hybridization The act or process of producing of closely related species. hybrids. App. I—List of Acronyms and Glossary of Terms 593

Hybridomm Product of fusion between myeloma cell Lignolytic Pertaining to the breakdown of lignin. (which divides continuously in culture and is “im- Linke~ A small fragment of synthetic DNA that has mortal”) and lymphocyte (antibody-producing cell); a restriction site useful for gene cloning, which is the resulting cell grows in culture and produces used for joining DNA strands together. monoclinal antibodies. Lipid= A large, varied class of water-insoluble Hybridoma technology See monoclinal antibody organic molecules; includes steroids, fatty acids, technology. prostaglandins, terpenes, and waxes. Hydrolysis Chemical reaction involving addition of Liposome transfe~ The process of enclosing bio- water to break bonds. logical compounds inside a lipid membrane and Hydroxylatiom Chemical reaction involving addition allowing the complex to be taken up by a cell. of hydroxyl (-OH) group to chemical compound. Lymphocytetw Specialized white blood cells involved Immobilized enzyme or cell techniques Tech- in the immune response; B lymphocytes produce niques used for the fixation of enzymes or cells onto antibodies. solid supports. Immobilized cells and enzymes are Lymphokine~ Proteins that mediate interactions used in continuous bioprocessing. among lymphocytes and are vital to proper immune Immune response The reaction of an organism to function. invasion by a foreign substance. Immune responses Medical device: An instrument or apparatus (in- are often complex, and may involve the production cluding an in vitro reagent such as MAbs) intended of antibodies from special cells (lymphocytes), as for use in the diagnosis or treatment of a disease well as the removal of the foreign substance by or other condition and which does not achieve its other cells. intended purpose through chemical action within Immunoassay The use of antibodies to identify and or on the body. quantify substances. The binding of antibodies to Messenger RNA (mRNA): RNA that serves as the antigen, the substance being measured, is often template for protein synthesis; it carries the tran- followed by tracers such as radioisotopes. scribed genetic code from the DNA to the protein Immunogenic Capable of causing an immune re- synthesizing complex to direct protein synthesis, sponse. (See also antigen. ) Metabolism: The physical and chemical processes Immunotoxin: A molecule attached to an antibody by which foodstuffs are synthesized into complex capable of killing cells that display the antigen to elements, complex substances are transformed into which the antibody binds. simple ones, and energy is made available for use Interferon (Ifns): A class of glycoproteins (proteins by an organism. with sugar groups attached at specific locations) im- Metabolitcx A product of metabolism. portant in immune function and thought to inhibit Metallothioneins: Proteins, found in higher orga- viral infections. nisms, that have a high affinity for heavy metals. In vitro: Literally, in glass; pertaining to a biological Methanogens: Bacteria that produce methane as a reaction taking place in an artificial apparatus; metabolic product. sometimes used to include the growth of cells from Mic~o~anismw Microscopic living entities; microo- multicellular organisms under cell culture condi- rganisms can be viruses, prokaryotes (e.g., tions. In vitro diagnostic products are products used bacteria), or eukaryotes (e.g., fungi). to diagnose disease outside of the body after a sam- Microencapsulatiom The process of surrounding ple has been taken from the body, cells with a permeable membrane. In vivo: Literally, in life; pertaining to a biological Mixed culture: Culture containing two or more reaction taking place in a living cell or organism. types of microorganisms. In vivo products are products used within the body. Moleculcx A group of atoms held together by Joint venture Form of association of separate busi- chemical forces; the smallest unit of matter which ness entities which falls short of a formal merger can exist by itself and retain its chemical identity. but unites certain agreed on resources of each en- Monoclinal antibodies (MAbs): Homogeneous an- tity for a limited purpose; in practice most joint ven- tibodies derived from a single clone of cells; MAbs tures are partnerships. recognize only one chemical structure. MAbs are Leaching: The removal of a soluble compound such useful in a variety of industrial and medical as an ore from a solid mixture by washing or capacities since they are easily produced in 1arge percolating. quantities and have remarkable specificity. Li@in: A major component of wood. Monoclinal antibody technology The use of hy - Lignocellulose The composition of woody biomass, bridomas that produce monoclinal antibodies for including lignin and cellulose. a variety of purposes. Hybridomas are maintained 594 . Commercial Biotechnology An International Analysis

in cell culture or, on a larger scale, as tumors Nucleic acid= Macromolecules composed of se- (ascites) in mice. quences of nucleotide bases. There are two kinds MonoCots (monocotyledons): Plants with single of nucleic acids: DNA, which contains the sugar de- first embryonic leaves, parallel-veined leaves, and oxyribose, and RNA, which contains the sugar simple stems and roots. Examples are cereal grains ribose. such as corn, wheat, rye, barley, and rice. Nucleotide ba~ A structural unit of nucleic acid. Multigeni~ A trait specified by several genes. The bases present in DNA are adenine, cytosine, Mutagenesicx The induction of mutation in the ge- guanine, and thymine. In RNA, uracil substitutes for netic material of an organism; researchers may use thymine. physical or chemical means to cause mutations that Nucleu~ A relatively large spherical body inside a improve the production of capabilities of organsims. cell that contains the chromosomes. Mutagem An agent that causes mutation. Oligonucleotide~ Short segments of DNA or RNA. Mutant: An organism with one or more DNA muta- Organelhx A specialized part of a cell that conducts tions, making its genetic function or structure dif- certain functions, Examples are nuclei, chloroplasts, ferent from that of a corresponding wild-type and mitochrondria, which contain most of the ge- organism. netic material, conduct photosynthesis, and provide Mutatiom A permanent change in a DNA sequence. energy, respectively. Myelom= Antibody-producing tumor cells. Organic compoundtx Molecules that contain Myeloma cell lin= Myeloma cells established in carbon. culture. Organic micmpollutanti Low molecular weight Neumtrammittemx Small molecules found at nerve organic compounds considered hazardous to junctions that transmit signals across those humans or the environment. junctions. Passive immunity Disease resistance in a person New biotechnology firm (NBF): A company or animal due to the injection of antibodies from formed after 1976 whose sole function is research, another person or animal. Passive immunity is development, and production using biotechnological usually short-lasting. (Compare acti”ve immum”ty. ) means. Patent: A limited property right granted to inventors NIH Guidelineex Guidelines established by U.S. Na- by government allowing the inventor of a new in- tional Institutes of Health to regulate the safety of vention the right to exclude all others from mak- NIH-funded research involving recombinant DNA. ing, using, or selling the invention unless specifically Nitrate A compound characterized by a NO,-group. approved by the inventor, for a specified time Sodium nitrate and potassium nitrate are used as period in return for full disclosure by the inventor fertilizers. about the invention. Nitrogen fixatiom The conversion of atmospheric Pathogem A disease-producing agent, usually nitrogen gas to a chemically combined form, am- restricted to a living agent such as a bacterium or monia (NH~) which is essential to growth. Only a virus. limited number of microorganisms can fix nitrogen. Peptide A linear polymer of amino acids. A polymer Nodukz The anatomical part of a plant root in which of numerous amino acids is called a pdypptide. nitrogen-fixing bacteria are maintained in a sym- Polypeptides may be grouped by function, such as biotic relationship with the plant. “neuroactive” polypeptides. Nodulinw Proteins, possibly enzymes, present in pH: A measure of the acidity or basicity of a solution nodules; function unknown. on a scale of O (acidic) to 14 (basic). For example, Nontariff trade barrien A government regulation, lemon juice has a pi-i of 2,2 (acidic), water has a pH other than a tariff (see below), that directly alters of 7.o (neutral), and a solution of baking soda has the volume or composition of international trade. a pH of 8.5 (basic). Examples include quotas (restrictions on the quan- Pharmaceutical= Products intended for use in tity of goods imported), orderly marketing agree- humans, as well as in vitro applications to humans, ments (by which exporters agree to restrict the including drugs, vaccines, diagnostics, and biological volume of goods exported), exchange controls response modifiers. (which constrain the value of foreign exchange Photorespiratiom Reaction in plants that competes spent rather than the number of units purchased), with the photosynthetic process. Instead of fixing government preferences in purchases, and stand- CO,, RuBPCase can utilize oxygen, which results in

ards and certification systems. a net loss of fixed COZ. App. /—List of Acronyms and Glossary of Terms 595

Photosynthesis The reaction carried out by plants R&D limited partnership: A risk capital source where carbon dioxide from the atmosphere is fixed and tax sheltered mechanism for funding the R&D into sugars in in the presence of sunlight; the of new products. It raises the potential rate of transformation of solar energy into biological return to investors without adding extra cost to the energy. corporation. Plant Patent Act of 1930 (35 U.S.C. ~5161-164): Reagenti A substance that takes part in a chemical Confers exclusive license on developer of new and reaction. distinct asexually produced varieties other than Recombinant DNA (rDNA): The hybrid DNA pro- tuber-propagated plants for 17 years. duced by joining pieces of DNA from different Plant Variety Protection Act of 1970 (7 U.S.C. organisms together in vitro. $2321): Provides patent-like protection to new plants Recombinant DNA technolo~ The use of recom- reproduced sexually. binant DNA for a specific purpose, such as the for- Plasmw The liquid (noncellular) fraction of blood. In mation of a product or the study of a gene. vertebrates, it contains many important proteins Recombinatiorx Formation of a new association of (e.g., fibrinogen, responsible for clotting). genes or DNA sequences from different parental Plasmkb An extrachromosomal, self-replicating, cir- origins. cular segment of DNA; plasmids (and some viruses) Regeneration: The laboratory process of growing are used as “vectors” for cloning DNA in bacterial a whole plant from a single cell or small clump of “host” cells. cells. Polyme~ A linear or branched molecule of repeating Regulatory sequence: A DNA sequence involved subunits. in regulating the expression of a gene. Polypeptide A long peptide, which consists of amino Replication: The synthesis of new DNA from ex- acids. isting DNA and the formation of new cells by cell Polysaccharid~ A polymer of sugars. division. Prior ak Publicly known technology; patent require- Resistance gene: Gene that provides resistance to ments include the demonstration of the novelty of an environmental stress such as an antibiotic or an invention, as distinguished from prior art. other chemical compound. Probtz See DNA probe. Resiston A device designed to limit electron flow in Proinsulim A precursor protein of insulin. an electric circuit by a definite amount, resulting Prokaryot~ A cell or organism lacking membrane- in a limited current or a voltage drop. bound, structurally discreet nuclei and organelles. Restriction enzymew Bacterial enzymes that cut Prokaryotes include bacteria and the blue-green DNA at specific DNA sequences. algae. (Compare eukaryote. ) Ri-plasmid* Plasmid from Agrobactern”um rhizogenes Pmmote~ A DNA sequence in front of a gene that used as plant vector. controls the initiation of “transcription” (see below). RNA Ribonucleic acid. (See also messenger RNA. ) prophylaxis: prevention of disease. RuBPCase (ribulose bisphosphate carboxy- pmteas~ Protein digesting enzyme. lase): An enzyme that catalyzes the critical step of

Protein* A polypeptide consisting of amino acids. In the photosynthetic COZ cycle. their biologically active states, proteins function as Saccharificatiom The degradation of polysac- catalysts in metabolism and, to some extent, as charides to sugars. structural elements of cells and tissues. Scaleup: The transition of a process from an experi- Protoplasm fusiom The joining of two cells in the mental scale to an industrial scale. laboratory to achieve desired results, such as in- Selectiom A laboratory process by which cells or creased viability of antibiotic-producing cells. organisms are chosen for specific characteristics. Protozoa: Diverse phylum of eukaryotic micro- Semiconducto~ A material such as silicon or ger- organisms; structure varies from simple single cells manium with electrical conductivities intermediate to colonial forms; nutrition may be phagotropic or between good conductors such as copper wire and autotrophic; some protozoa are pathogenic. insulators such as glass. Pyrogenicit~ The tendency for some bacterial cells Semiconductor devictx An electronic device that or parts of cells to cause inflammatory reactions in uses a semiconductor to limit or direct the flow of the body, which may detract from their usefulness electrons. Examples are transistors, diodes, and in- as pharmaceutical products. tegrated circuits. Public offering: The Securities and Exchange Com- Semiconductor industry: Companies that manu- mission approved sale of company stock to the facture semiconductor devices. As used in this public, report, the description of the semiconductor in- 596 . Comrnercial Biotechnology: An International Analysis

dustry is that deriving from the period between Subunit vaccine A vaccine that contains only por- 1947 (discovery of the transistor) to the early 1960’s. tions of a surface molecule of a pathogen. Subunit Single cell proteim Cells, or protein extracts, of vaccines can be prepared by using rDNA technology microorganisms grown in large quantities for use to produce all or part of the surface protein mole- as human or animal protein supplements. cule or by artificial (chemical) synthesis of short Slimew Aggregations of microbial cells that pose en- peptides. vironmental and industrial problems; may be symbionfi An organism living in symbiosis, usually amenable to biologic control, the smaller member of a symbiotic pair of dissimilar Sludge Precipitated solid matter produced by water size. and sewage treatment or industrial problems; may Symbiosis The living together of two dissimilar be amenable to biologic control. organisms in mutually beneficial relationships. Small Business Investment Corporations Tariff: Charges levied on importers of a particular (SBICS): private companies licensed by the Small good by a government in return for granting access Business Association (SBA) and owned by stockhold- to the government’s domestic markets, which may ers who have made investments in exchange for occur at the expense of domestic industry; some- equity. SBICS are required by SBA to invest or loan times high tariffs are used to discourage importa- money exclusively to U.S. small businesses. tion and protect domestic industry. somaclonal variatiom Genetic variation produced T-DNA Transfer DNA; that part of Ri or Ti plasmids from the culture of plant cells from a pure breeding that is transferred to the plant chromosome. strain; the source of the variation is not known. Technology transfe~ The movement of technical Specialty chemicals Chemicals, usually produced information and/or materials, used for producing in small volumes, that sell for more than $1 per a product or process, from one sector to another; pound (50c per kg). (Compare commodity most often refers to flow of information between chem”cals. ) public and private sectors or between countries. Speciecx A taxonomic subdivision of a genus. A group Therapeutic= Pharmaceutical products used in the of closely related, morphologically similar individ- treatment of disease. uals which actually or potentially interbreed. Thermophili~ Heat loving. Usually refers to micro- Spectmmetem An instrument used for analyzing the organisms that are capable of surviving at elevated structure of compounds on the basis of their light- temperatures; this capability may make them more absorbing properties. compatible with industrial biotechnology schemes. Starch A polymer of glucose molecules used by some Thmmbolytic enzymes: Enzymes such as strep- organisms as a means of energy storage; starch is tokinase and urokinase that initiate the dissolution broken down by enzymes (amylases) to yield of blood clots. glucose, which can be used as a feedstock for Thrombosis: Blockage of blood vessels. chemical or energy production. Ti plasmid: Plasmid from Agrobacterium tumefa- Startup financing: Financing usually supplied by ciens used as a plant vector. venture capitalist to fund the early R&D, produc- Totipotency The capacity of a higher organism cell tion, sale of a new company’s products. to differentiate into an entire organism. A totipo- Steroid: A group of organic compounds, some of tent cell contains all the genetic information which act as hormones to stimulate cell growth in necessary for complete development. higher animals and humans. Toxicity The ability of a substance to produce a Storage protein genes: Genes coding for the ma- harmful effect on an organism by physical contact, jor proteins found in plant seeds. ingestion, or inhalation. Strairu A group of organisms of the same species hav- Toxim A substance, produced in some cases by dis- ing distinctive characteristics but not usually con- easemausing micro-organisms, which is toxic to sidered a separate breed or variety. A genetically other living organisms. homogeneous population of organisms at a subspe- Toxoid” Detoxified toxin, but with antigenic proper- cies level that can be differentiated by a biochemical, ties intact. pathogenic, or other taxonomic feature. Trade secreti An invention used continuously by its subsidy: A government intervention in the form of holder in his or her business to maintain a com- either grants, loans, or tax preferences that are petitive edge over other competitors who do not directed to a particular domestic industry. know or use it. Trade secrets are often used instead Substrate: A substance acted upon, for example, by of patents to protect production information. an enzyme. Transcription The synthesis of messenger RNA on App. l—List of Acronyms and Glossary of Terms . 597

a DNA template; the resulting RNA sequence is com- or viruses, or portions thereof, injected to produce plementary to the DNA sequence. This is the first active immunity. (See also subunit vaccine.) step in gene expression. (See also translation.) Vecto~ DNA molecule used to introduce foreign DNA Transformation The introduction of new genetic into host cells. Vectors include plasmids, bacterio- information into a cell using naked DNA. phages (virus), and other forms of DNA. A vector Transistor An active component of an electrical cir- must be capable of replicating autonomously and cuit consisting of semiconductor material to which must have cloning sites for the introduction of at least three electrical contacts are made so that foreign DNA. it acts as an amplifier, detector, or switch. Venture capital (venture capital funds): Money Translation: The process in which the genetic code that is invested in companies with which a high level contained in the nucleotide base sequence of of risk is associated. messenger RNA directs the synthesis of a specific Viruw Any of a large group of submicroscopic agents order of amino acids to produce a protein. This is infecting plants, animals, and bacteria and unable the second step in gene expression. (See also trans- to reproduce outside the tissues of the host. A fully cription. ) formed virus consists of nucleic acid (DNA or RNA) Transposable element: Segment of DNA which surrounded by a protein or protein and lipid coat. moves from one location to another among or Viscosity A measure of a liquid’s resistance to flow. within chromosomes in possibly a predetermined Volatile organic compounds (VOCS): Group of fashion, causing genetic change; may be useful as toxic compounds found in ground water and that a vector for manipulating DNA. pose environmental hazards; their destruction dur- Trihalomethanes (THMs): Organic micropollutants ing water purification may be done biologically. and potential carcinogens, consisting of three halide Wild-type: The most frequently encountered phen- elements attached to a single carbon atom; their otype in natural breeding populations. destruction during water purification may be done Yeas& A fungus of the family Saccharomycetacea that biologically. is used especially in the making of alcoholic liquors Turbid: Thick or opaque with matter in suspension. and as leavening in baking. Yeast are also common- Vaccine A suspension of attenuated or killed bacteria ly used in bioprocesses.

25-56 I O - 84 - 39 Appendix J Currency Conversion Factors

The following is a list of conversion factors for cur- 1 dollar = 6.2826 Swedish kroner (Skr) rencies from the countries studied in the report. All 1 dollar = 2.67021 Netherlands guilder (NLG) figures are averages from calendar year 1982 and 1 dollar = 2.4266 German marks 03M) were provided by the International Monetary Fund. 1 dollar = 2.0303 Swiss francs (SWF) 1 dollar = 249.05 Japanese yen (=) 1 dollar = 1.23370 Canadian dollars ($0 1 dollar = 179.51 Brazilian cruzeiros (BCr) 1 dollar = 0.98586 Australian dollars ($A) 1 dollar = 24.267 Israeli shekels (IS) 1 dollar = 0.5i’13 British Pounds (1) 1 dollar = 6.5724 French francs (F)

598 Appendix K Other Contractors, Contributors, and Acknowledgments

Other contractors Acknowledgments

Robert Barker Lynne Alexander Cornell University Office of Technology Assessment Ithaca, N.Y. William Amen, Jr. Keith Gibson Cetus Corp. Medical Research Council Mary Anderson London, England Office of Technology Assessment Loren Graham Roger Andewelt Washington, D.C. U.S. Department of Justice Kozo Yamamura Paul Baumann University of Washington University of California Seattle, Wash. William R. Beisel U.S. Army Medical Research Institute Contributors for Infectious Diseases

James E. Bailey Frederick Betz California Institute of Technology U.S. Environmental Protection Agency Harvey Blanch Judy Blakemore University of California Cetus Corp. Hugh Bollinger Detlef Boldt NPI Embassy of the Federal Republic of Germany Lawrence J. Brady Charles Cooney U.S. Department of Commerce Massachusetts Institute of Technology Corale Brierley Morris Danzig CPC International Advanced Mineral Technologies, Inc. Wensley Hayden-Baillie Mark F. Cantley Porton/LH International Commission of the European Communities Ed Lipinsky Ronald Cape Battelle Columbus Laboratories Cetus Corp. Peter Carlson Hunt McCauley Crop Genetics International N.V. Big Timber, Mont. Roger Morris Earl Cilly University of Minnesota Stanford University Mary Clutter Patrick 0’Connor U.S. National Science Foundation Genetic Sciences International Robert Rabson Stanley Cohen U.S. Department of Energy Stanford University Mark Radcliffe Eileen Collins Brobeck, Phleger & Harrison U.S. National Science Foundation John W. Schlicher Brian Cunningham Townsend and Townsend Genentech, Inc. John Weil Linda Curran (formerly of) Bendix Corp. Batte]le Columbus Laboratories

599 —- .

600 ● Commercial Biotechnology: An International Analysis

Michael Curran Norm Goldfarb Micro Industries Calgene, Inc. Eugene P. Damm, Jr. June Goodfield International Business Machines Corp. East Sussex, England Lee Davenport Michael Gough Greenwich, Corm. Office of Technology Assessment William Davies Tom Graham (formerly at) Armos Corp. Kilpatrick & Cody John Dearden James D. Grant Johns Hopkins University CPC International Arnold Demain Harold P. Green Massachusetts Institute of Technology George Washington University Roger G. Ditzel Lorance Greenlee University of California Agrigenetics Corp. Donald K. Dougall Joe Griffin University of Tennessee Wald, Harkrader, and Ross Sidney Draggan Charles Groginski U.S. National Science Foudnation Vega Biochemical George H. Dummer Ben Hall Massachusetts Institute of Technology University of Washington School of Medicine Diana Dutton Albert P. Halluin Stanford University Cetus Corp. James J. Eberhardt Gerald Hickman U.S. Department of Energy Collaborative Research, Inc. Gerry J. Elman Richard Hill Elman, Shaiman and Moskowitz U.S. Environmental Protection Agency Frederic Eustis Steven Hochhauser Biogen, Inc. Redwood City, Calif. L. Peter Farkas Anne Hollander Craig and Burns U.S. Environmental Protection Agency Norman Fast John Holt Capital Publishing Corp. Eli Lilly & Co. Alan Fechter Jack Houck U.S. National Science Foundation Endorphin, Inc. Andrew J. Ferrara John Jennings Collaborative Research, Inc. Pharmaceutical Manufacturers Association Philip Filner Elmima Johnson ARCO Plant Cell Research Institute US. National Science Foundation William Finnerty David Kabikoff University of Georgia Hybritech, Inc. James E. Flinn Paul Kesselring Battelle Columbus Laboratories Swiss Federal Institute of Reactor Research Gene Fox George H. Kidd ARCO Plant Cell Research Institute (formerly of) International Plant Research Institute Orrie M. Friedman Wayne Kindsvogel Collaborative Research, Inc. Zymos Corp. James Glavin Jay Kingham Genetic Systems Corp. Pharmaceutical Manufacturers Association App. K—Other Contractors, Contributors, and Acknowledgments ● 601

Jay Kraemer Kay Noel Fried, Frank, Harris, Shriver, & Kampelman Cetus Corp. Sheldon Krimsky John R. Norell Tufts University Phillips Petroleum Co. Lawrence P. Kunstadt Michael G. Norton Novatech Resource Corp. British Embassy Stephen E. Lawton Thomas C. O’Brien Pierson, Ball, and Dowd (formerly of) U.S. National Bureau of Standards Jeff Lepon David V. O’Donnell Kornmeier, McCarthy, Lepon & Harris Commonwealth of Virginia Morris Levin Sandra Panem U.S. Environmental Protection Agency Brookings Institution Warren Levinson Richard Pearson Massachusetts General Hospital University of Sussex Herman Lewis Joseph Perpich U.S. National Science Foundation (formerly of) Genex Corp. Malcolm D. Lilly George Pierce University College, London Battelle Columbus Laboratories Charles R. Lipsey .Jean-Claude Pinon Finnegan, Henderson, Farabow, Garrett and Embassy of France Dunner Harvey S. Price Max Lyon Industrial Biotechnology Association Genetic Systems Corp. Frank Pugliese Hugh Macki U.S. Food and Drug Administration Cruachem, Inc. William H. Rastetter Bruce F. Mackler Genentech, Inc. Meyer, Failer, and Weisman Neils Reimers William E. Marshall Stanford University General Foods Corp. David Rosenbloom James McAlear Boston, Mass. Gentronix International, Inc. Roy Rothwell James McCullough University of Sussex U.S. Congressional Research Service Robert Ryan Donald E. McElmury U.S. Office of Naval Research CPC International Louis G. Santucci Thomas O. McGarity Pharmaceutical Manufacturers Association University of Texas at Austin Ken Sargeant Bruce Merchant Commission of the European Communities U.S. Food and Drug Administration Holly Schauer Larry Miike U.S. Department of Agriculture Office of Technology Assessment Stanley Schlosser Teri Miles U.S. Patent and Trademark Office Office of Technology Assessment Charles D. Scott Elizabeth Milewski Oak Ridge National Laboratory U.S. National Institutes of Health David Seligman Henry Miller Hoffmann-La Roche, Inc. U.S. Food and Drug Administration Al Shapero Charles Muscoplat Ohio State University Molecular Genetics, Inc. 602 Commercial Biotechnology: An International Analysis

Stuart Shemtob Ezra Vogel U.S. Department of Justice Harvard University Gerald D. Shockman Don Wallace Temple University Georgetown University Law Center Alexander W. Sierck William J. Walsh, III Beveridge and Diamond U.S. Department of State David Silberman Amy Walton Agrigenetics Corp. U.S. National Science Foundation Allen Singer Daniel Wang National Academy of Sciences Massachusetts Institute of Technology Ira Skurnick Robert Warren U.S. Defense Advanced Research Projects Agency U.S. Naval Air System Command Hedy Sladovich Rick Weber (formerly of) E. F. Hutton US. National Institute of Mental Health Ed Soule William A. Weigand Weyerhauser Co. (formerly of) U.S. National Science Foundation Gary Steele Barry Weiner Genentech, Inc. Enzo Biochem R. W. Stieber Bruno O. Weinschel Merck & Co., Inc. Weinschel Engineering Eliezer Tal Philip J. Whitcome Inter-American Development Bank Amgen Masami Tanaka Bill Williams Ministry of International Trade and Industry ARCO Plant Cell Research Institute (Japan) John Wilson Fred Tarpley (formerly of) Bendix Research Georgia Institute of Technology Phyllis Windle Ron Taylor Office of Technology Assessment Hybritech, Inc. Zachary Wochok Albert H. Teich Monsanto Co. American Association for the Advancement of James Womack Science Massachusetts Institute of Technology Elizabeth Terry Jim Young U.S. Central Intelligence Agency Zoecon Eleanor Thomas Oskar Zaborsky U.S. National Science Foundation (formerly of) U.S. National Science Foundation Susan Thompson Michael E. Zacharia U.S. Food and Drug Administration U.S. Department of Commerce Sue Tolin U.S. Department of Agriculture Index .

Index

Abbott Laboratories, 149, 196 generic applied research, 312 Abello Co. (F. R.G.), 130 international comparisons, 317 acquired immunedeficiency syndrome (AIDS), 125, 132 issues and options, 325 Advanced Genetic Sciences, Inc., 82 National Institutes of Health, 310, 323 Agent Orange, 222 National Science Foundation, 310 Agricultural Genetics (U.K.), 71, 82, 320, 425 USDA, 311, 323 Ajinomoto Co., 83, 131, 196, 197, 505 Baxter Travenol Laboratories, 134, 196 Allied Corp., 82 Baxter, William, Assistant Attorney General, 436 American Association for the Advancement of Science, Bayer Co., 83 309 Beckman Instruments, 87, 88 American Association of Universities, 421 Becton Dickinson Co., 145 American Cancer Society, 123 Beecham Co. (U.K.), 75 American Commercial Co., 87 Bell Laboratories, 308, 532 American Cyanamid, 80, 81, 167 Berkey Photo, Inc. v. Eastman Kodak Co., 440 American Hospital Supply, 196 Bethesda Research Laboratories, 84, 199 American Society for Engineering Education, 341 bioelectronics, 7, 253-256 Amgen Co., 80, 130, 149, 167 biochips, 254 Amicon Co., 54, 88 biosensors, 253 analysis, framework for, 263-266 future research, 256 competitiveness in biotechnology, factors influencing, bioengineering, novel techniques, 3, 4, 25 263 Biogen Co., 99, 101, 122, 133, 134 firms commercializing biotechnology, 265 Bio Logicals, 85, 90 Anheuser Busch, 102, 247 Biopol@, 211 animal agriculture industry, 6, 79-81, 162-171 bioprocessing separation and purification animal nutrition and growth promotion, 167 instrumentation, 88 commercial aspects of biotechnology, 169 bioprocess technology, 5, 44-57 diagnosis, prevention, and control of animal diseases, biocatalyst, 51 162 continuous bioprocessing, 48-50 animal vaccines, 163, 164 culture of higher eukaryotic cells, 55 monoclinal antibody diagnostic products, 162 essentials, 46 future research, 186 monitoring and associated instrumentation, 52 genetic improvement of animal breeds, 168 priorities for future research, 56 Animal Vaccine Research Corp., 99 processing modes, 47 Applied Biosystems, 84, 87, 148 raw materials, 51 antitrust law, 435-449 separation and purification of products, 54 biotechnology licensing agreements, 447 steps in, 46 biotechnology research joint ventures, 446 BioSearch Co., 84, 87 European Economic Community, 441 Biotechnica International, 80, 82 findings, 448 Bio-Technology General Corp., 80, 82, 167 issue, 449 Biotechnology Industrial Associates, 99 relevant U.S. and foreign antitrust laws, 438 Biotechnology Institute and Studies Centre Trust, 320 research joint ventures, 435 Blanch, Harvey, University of California, Berkeley, 44, technology licensing, 437 576 ARCO, 82 Boehringer Ingleheim (F. R.G.), 75 Arkansas, 384 Boehringer Mannheim (F. R.G.), 82, 199 Armour Pharmaceutical, 134 Bok, Derek, president, Harvard University, 421 Aronson v. Quick Point, 399 Brazil, 527 Atlantic Richfield Co., 228 Bristol Myers, 102 Australia, 523 British Technology Group, 320 automated DNA and peptide synthesizers, 86 Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purpose of Bailey, James, California Institute of Technology, 44 Patent Procedure, 389 Baltimore, David, 575 Burroughs-Wellcome (U.K.), 130, 171 basic and applied research, U.S. Government funding of, 307-328 Calgene Co., 421 Department of Defense, 311 Cambridge Reports, Inc., 496, 497 Department of Energy, 311, 323 Canada, 525 findings, 323 Canadian Development Corp., 247

605 —.— —

606 Commercial Biotechnology: An International Analysis

cancer treatment, 126 future research, 230 cell fusion, 3, 4, 174 grease decomposition, 223 Celltech (U.K.), 71, 87, 125, 200, 320, 425 heavy metal contamination, control of, 221 Centocor Co., 92, 144 microbial enhanced oil recovery, 228 Cetus Corp., 80, 82, 90, 92, 99, 101, 122, 148, 166 microbially produced compounds in oil wells, use of, Chiron Corp., 80, 137 229 Ciba Geigy Co., 74, 75 microbiological mining, 226-228 City of Hope Medical Center and Research Institute, 42, commercial aspects of biotechnology in, 228 121 concentration of metals, 227 Cohen-Boyer patent, 389, 390, 411, 478 mineral leaching, 226 Collaborative Research Co,, 84, 200 microorganisms in oil wells, use of, 229 Columbia University, 421 organic micropollutants, control of, 220 commodity chemicals and energy production, 237-249 slime control, 223 biomass resources, 239 toxic waste treatment, 222 lignocellulose, 241 treatment of nontoxic liquid and solid wastes, 217 conversion of biomass to commodity chemicals, 242 hydrolysis, 243 Enzo Biochemical, 148, 149 pretreatment, 242 E. R. Squibb, 121 future research, 248 established U.S. companies, 99-1o3 international research activities, 247 collaborative ventures with U.S. NBFs, 103 microbial production, 244 investments in biotechnology, 99 Commission of European Communities, 441 role in U.S. competitiveness in biotechnology, 102 Commodity Control List, 455, 456 European Economic Community (EEC), 358, 365, 366, companies commercializing biotechnology 435, 441, 461, 551, 556, 559 in the United States, 67-70 European Molecular Biology Laboratory, 89 Congress: European Patent Convention, 393, 395, 397, 564 Subcommittee on Investigations and Oversight, 492 European Patent Office, 393 Subcommittee on Science, Research, and Technology, 492 Florida State University, 421 congressional interest, 22, 325, 347, 376, 403 Fluor Co., 101 Connaught Laboratories, 134 food additives, 6 Cooney, Charles, MIT, 44 France: Coordinating Committee for Multilateral Export antitrust laws, 444 Controls, 455 Biotechnology Mission, 477 Cornell University, 244 competitiveness, 8, 9 Corning Glass, 99 environmental control, 557 Creative Biomolecules, 84, 87 export controls, 459 Cruachan Chemicals Co., 87 financing and tax incentives, 519 Cutter Laboratories, 144 funding of biotechnology, 317 government funding of basic and applied research, David, E., 413 519 definitions of biotechnology, 3, 503 government targeting policies, 477, 518 Demain, Prof. Arnold, 344 intellectual property law, 564 Demon Biotech Corp. (U.S.), 43 industry, 518 Diamond Shamrock, 81, 99 Institut Pasteur, 140, 322, 339, 343 Diamond v. Chakrabarty, 386, 387, 391, 392, 394, 400, investment control laws, 461 403 law of trade secrets, 569 Du Pent, 82, 99, 102 Ministry of Health, 369 Ministry of Research and Industry, 477 Eastman Chemicals, 202 National Biotechnology Committee, 478 Ecogen, Inc., 82 National Center for Scientific Research, 343, 426 Elf Aquitaine (France), 12, 75 National Control Commission, 359, 554 Elf-Bioindustries, 76 patent law, 565 Elf-Bioresearch, 76 personnel availability, 339, 520 Eli Lilly & Co., 54, 80, 92, 99, 102, 121, 122, 127, 130, pharmaceutical industry, 75 150, 168, 446 plant breeders rights, 57o environmental applications, 217-230, 555 R&D SUPPOrt, 482 commercial aspects of biotechnology in, 224 rDNA research control, 359, 554 conventional wastewater treatment process, regulation of biotechnology products, 369 improvement of, 219 research, 322 Index ● 607

undergraduate and graduate education, 343 Goodman, Howard, 575 university/industry relationship, 426, 520 Gore, Cong. Albert, 419, 421, 495 worker health safety, 560 grants, 347 Fuqua, Congressman Don, 315 Green Cross Co., 133, 135, 137, 481 Guide to Research Joint Ventures, 439 Gaden, Elmer, University of Virginia, 44 Gulf Universities Research Consortium, 421 G. D. Searle, 102 Gellman Research Associates, Inc., 91 Hagiwara Institute of Health, 420 Genencor, 99, 103, 200 Harvard University, 412, 414, 417, 421 Genentech (U.S.), 42, 53, 66, 80, 85, 90, 92, 93, 95, 96, health, safety, and environmental regulation, 355-378 98, 99, 101, 121, 127, 128, 133, 142, 150, 164, 167, environmental regulation, 371-373 376, 384 findings, 374 generic applied research, 8, 14 issue and options, 376 Genetica Co., 76 rDNA research guidelines, 356 Genetic Sequence Data Bank (GENBANK), 89 approved requirements, 358 Genetics Systems Co., 92, 144 containment requirements, 358 Genex Corp., 80, 84, 93, 98, 99, 101, 133, 167, 197, 200 effect on competitiveness, 359 Georgetown University Medical Center, 89 enforcement, 359 German Cartel Office, 443 scope, 357 German Research Society, 342, 424 regulation of biotechnology products, 359 German Society for Chemical Engineering, 424, 510 European Economic Community, 365-370 Germany, Federal Republic of @. R.G.): United States, 360-365 antitrust laws, 442 worker health and safety regulation, 373-374 competitiveness, 8, 9, 424 Henkel Co., 202 Control Commission for Biological Safety, 552 Hewlett-Packard, 53, 84, 88, 90 Dangerous Industrial Substances Committee, 559 Hoechst (F. R.G.), 12, 74, 83, 122, 130, 343, 417, 510, 575 environmental control, 556 Hoffmann-La Roche, Inc. v. Golde, 384 export controls, 458 Hoffmann-La Roche (Switzerland), 12, 74, 75, 92, 125, Federal Environmental Agency, 556 130, 420 Federal Health Office, 366 Human Services Research, 91 Federal Ministry of Science and Technology (BMFT), Humulin”, 446, 538 18, 317, 338, 424, 476, 478, 481, 510, 511 financing and tax incentives for firms, 511 ICI (U.K.), 12, 75, 204, 211 government funding of basic and applied research, Idaho, 384 317, 511 Idaho National Engineering Laboratory, 228 government targeting policies, 476, 510 impact on reseach community, 25 intellectual property law, 395, 396, 564 Industrial Biotechnology Association, 421 law of trade secrets, 568 industrial development of, 5, 9 Max Planck Society, 342, 511 Integrated Genetics Co., 149 Ministry of Education, 476 intellectual property law, 383-405 NBFs, 71 evaluation of effectiveness, 400 organization of basic and applied research, 318 foreign countries, 401 patent law, 565 United States, 400 pharmaceutical industry, 74, 75 findings, 401 plant agriculture industry, 82 issue and options, 403 plant breeders rights, 569 United States, 384-393 personnel availability and training, 337, 512 law of trade secrets, 384 R&D SUPPOrt, 481 patent law, 385 rDNA research control, 359, 552 plant breeders’ rights statutes, 392 regulation of biotechnology products, 366 U.S. and foreign, comparison of, 393 Risk Financing Society, 512 patent law, 393 specialty chemicals industry, 83 plant breeders’ rights, 399 Society for Biotechnology Research, 82, 318, 319, 478 trade secret law, 398 summary of biotechnolo~, 510 Intelligenetics Co., 84 undergraduate and graduate education, 342 international competitiveness factors: university/industrial relationships, 423, 512 analysis of, 8-10 worker health safety, 559 antitrust laws, 18 Gist-Brocades NV, 199 financing and tax incentives for firms, 12 Glaxo (U.K.), 12, 75 government funding of basic and applied research, 13 Goodfield, June, 495 government targeting policies, 19 608 Commercial Biotechnology: An International Analysis

health, safety, and environmental regulation, 15 organization of basic and applied research, 318 intellectual property law, 16 C)saka University, 423 personnel availability and training, 14 patent law, 571 public perception, 20 personnel availability, 337, 508 technology transfer, investment and trade, 18 personnel engaged in rDNA R&D, 506 university/industry relationships, 17 pharmaceutical industry, 76, 77, 78, 79 International Congress of Plant Tissue and Cell Culture, plant agriculture industry, 83 179 plant breeders’ rights, 572 International Genetic Engineering, 82 R&D SUPPOI’t, 480 international technology transfer, investment, and trade, rDNA research control, 359, 554 453-470 rDNA technology expenditures, 505 export controls and biotechnology, U.S. and foreign, regulation of biotechnology products, 37o 455 Science and Technology Agency, 86, 317, 341, 423, findings, 468 480, 506 issue, 470 specialty chemicals industry, 83 patent law provisions, 459 summary of biotechnology, 505 compulsory licensing, 460 support firms, 84, 86 national security restrictions, 459 targeting policies, 475 regulation of technology imports and foreign Tokyo University, 341 investment, 461 trade barriers, 464 trade barriers affecting biotechnology products, 463 transnational training, 343, 344 trade laws, 467 Tsukuba Science City, 481 International Union for the Protection of New Varieties undergraduate and graduate education, 341 and Plants, 392 university/industry relationships, 422, 508 Intervet Corp., 166 University of Tsukuba, 341 Israel, 524 worker health safety, 561 Japanese Cancer Institute, 131 Japan: Johns Hopkins University, 412, 414, 417 amino acids, 196 Johnson & Johnson, 149, 254 antitrust laws, 445 Associated Finance Corp., 507 KabiGen AB, 127, 128 bioprocessing, 12 KabiVitrum AB, 128, 133 Biotechnology Forum, 478 Kansas, 384 biotechnology projects, 318 Keidanren survey, 76, 77, 79, 344, 345 competitiveness, 7, 9, 11, 21 Kelco Co., 210 Council for Science and Technology, 475 Kennedy, Donald, 308 diversification of chemical, food processing, and textile Kohler, George, 39 and pulp processing companies into Kyowa Hakko Co., 83, 196, 197 pharmaceuticals, 76, 77 environmental control, 588 export controls, 458 Lawless, E. W., 490 Fair Trade Commission, 445 legislation: financing and tax incentives, 13, 507 Act Against Restraints of Competition (F. R.G.), 442 funding of biotechnology, 317 Act Concerning Prohibition of Private Monopoly and intellectual property law, 393, 396, 397, 402, 571 Maintenance of Fair Trade (Japan), 445 investment control laws, 462 Act No. 77-806 (France), 444 joint ventures in pharmaceutical applications of Agricultural Chemicals Law (Japan), 464 biotechnology, 78 Basic Law for Environmental Pollution Control (Japan), Keidanren (Japan Federation of Economic 558 Organizations), 76, 77, 79 Chemicals Act (F. R.G.), 556 law of trade secrets, 572 Chemicals Control Law (France), 557 Ministry of Agriculture, 317, 476, 506 Chemical Substances Control Law (Japan), 558 Ministry of Education, 423, 555 Clayton Act, 438, 439 Ministry of Finance, 445 Clean Air Act, 556 Ministry of Health, 77, 37o Clean Water Act of 1977, 555 Ministry of International Trade (MITI), 9, 12, 78, 83, Competition Act of 1980 (U.K.), 443 86, 317, 341, 423, 445, 458, 476, 479, 481, 506, 507, Control of Pollution Act of 1974 (U.K.), 557 558 Export Administration Act, 455, 456, 470 New Technology Development Fund, 423, 481 Fair Trading Act (U.K.), 443 Nikkei Sangyo Shimbun (Japan Industrial Daily), 77, 79 Federal Cartels Act (Switzerland), 444 index ● 609

Federal Food, Drug, and Cosmetic Act (FFDCA), 360, Mitsui Toatsu Chemicals, 198 361, 362, 363, 365, 376, 377 Miyoshi Oil and Fat Co., 206 Federal Insecticide, Fungicide, and Rodenticide Act Molecular Biology Institute, 418 (FIFRA), 365, 555 Molecular Genetics, Inc., 80, 82, 166, 167 Federal Trade Commission Act, 438 monoclinal antibodies (MAbs) technology, 5, 8, 25, 38-43 Foreign Exchange and Foreign Trade Control Law industrial uses for, 43 (Japan), 458, 462 large-scale production of, 42 Federal Water Pollution Control Act, 555 preparation, 40 Health and Safety at Work Act of 1974 (U.K.), 560 sheep red blood cells (SRBCS), 39 Health Research Education Act of 1983, 495 and rDNA technology, 42 H.R. 3577, 405 Monsanto, 80, 82, 99, 101, 167, 197, 417, 574 Import, Export, and Customs Powers Act (U.K.), 458 Motulsky, A. G., 498 Industrial Safety and Health Law (Japan), 561 multidisciplinary nature of biotechnology, 25 International Emergency Economic Powers Act, 458 McDonnell Douglas, 54 Law on the Reform of Drug Legislation (F. R.G.), 366 McTaggart, John, 88 Marine Protection, Research and Sanctuaries Act of 1972, 556 National Academy of Sciences, 26, 332 Medicines Act of 1968 (U.K.), 367 National Aeronautics and Space Administration, 54, 123, Occupational Safety and Health Act of 1970, 374, 558 314, 315 Patent Act of 1977 (U.K.), 566 National Assessment of Education, 496 Pharmaceutical Affairs Law (Japan), 370, 464 National Biomedical Research Foundation, 89 Plant Patent Act of 1930, 392, 399, 400, 404 National Cancer Institute, 123 Plant Variety Protection Act, 392, 399, 400, 404, 460 National Council of Churches, 493 Price Ordinance No. 15-1483 (France), 444 National Institutes of Health, 84, 89, 119, 123, 127, 151, Public Health Service Act, 360, 361 307, 308, 310, 312, 313, 335, 343, 348, 357, 358, 360, Public Law 96-517, 411, 419 371, 372, 418, 489, 491, 551 Research Association Law (Japan), 445 National Institute of Occupational Safety and Health, 373 Sherman Act, 438 National Research Council, Canada, 244 Small Business Innovation Development Act, 313 National Science Foundation, 91, 228, 247, 309, 310, 312, Solid Waste Disposal Act, 556 313, 315, 316, 327, 335, 347, 348 Swiss Patent Act, 566 Netherlands, 522 Tariff Act of 1930, 467 new biotechnology firms (NBFs), 6, 7 11, 12, 13, 65, 66, Toxic Chemicals Law (Japan), 464 91-98 Toxic Substance Control Act (TSCA), 365, 371, 372, collaborative ventures with established foreign com- 555 panies, 108 Trade Act of 1974, 453, 466, 469 commercial pursuits of, 93 Virus, Serum, Toxin Act of 1913, 363, 365, 377 emergence and financing, 92 Water Protection Act (Swiss), 557 future prospects, 95 Lilly, Malcolm, 342 joint ventures, NBFs and established firms, listing of, local efforts to promote biotechnology development in 104 United States, 26 licensing, 454 Los Alamos National Laboratory, 89 role in U.S. competitiveness, 97 Lubrizol Co., 101 New Drug Application (NDA), 361 New England BioLabs, 84, 199 Massachusetts General Hospital, 144, 343, 417, 418, 419, New England Monoclinal Resources, 94 424, 510, 575 New York University (NYU), 142 Massachusetts Institute of Technology (MIT), 344, 412, Nippon Oil and Fat Co., 206 414, 417, 418, 421, 575 Nippon Zeon Co., 86 Max Planck Institute for Biotechnology, 164 Norden Co., 80 Max Planck Institute for Plant Research, 82, 425 Norman Research Institute, 423 Merck Co., 137, 201 North Carolina Biotechnology Center, 26, 75, 418 messenger RNA (mRNA), 34 Notice of Claimed Investigational Exemption for a New Mexico, 238 Drug (IND), 360 Michigan State University, 418, 576 Novo Industri A/S, 121, 199, 247 Microelectronics Computer Corp., 447 Nucleopore Co., 54, 88 Militarily Critical Technologies List, 457 Nucleotide Sequence Data Library, 89 Millipore Co., 54, 88 Nucleic Acid Sequence Database, 89 Milstein, Cesar, 39 Minnesota, 384 Occupational Safety and Health Administration (OSHA), Mitsubishi Chemical Co., 76, 133, 505 374, 558 610 Commercial Biotechnology: An International Analysis

Oppenheimer & Co., 94 disease-suppressive and growth-regulating micro- Organization for Economic Cooperation and Develop- organisms, 184 ment, 71 foreign, 82 organization of report, 27 future research, 186 Organon Co., 130 methods of plant cell culture, 175 OTA/NAS survey of personnel needs of firms in the microbially produced insecticides, 183 United States, 547 nitrogen fixation, 181 photosynthetic efficiency, 180 Paris Convention, 460 plant growth rate, 180 Paul Ehrlich Institute, 366 plant-produced pesticides, 181 Perkin Elmer Co., 88 primary plant products, 178 Perlmann, David, 336 secondary compounds from plants, 179 personnel and training, 331-350 specific plant characteristics, improvement of, 174 availability of personnel in the United States, 335 United States, 81 categories of technical expertise, 333-335 uses of micro~rganisms for crop improvement, 181 findings, 345 vector construction and transformation, 176 issues and options, 347 P-L Biochemical Co., 84, 87, 199 labor force, size and growth of, 332 Pope John Paul II, 493 personnel availability in other countries, 336 President’s Commission for the Study of Ethical Prob- secondary school education, U.S. and other countries, lems in Medicine and Biomedical and Behavioral 339 Research, 493, 494, 495 translational training, 343 public perception, 489, 499 undergraduate and graduate education, U.S. and other arguments raised, 492 countries, 340 difficulties in weighting the risks, costs, and benefits, Petroferm, 229 494 Pfizer Co., 102, 229 factors influencing, 490 pharmaceutical industry, 72-79, 119-152 findings, 499 antibodies, 143 implications for competitiveness, 497 blood products, 131-136 influence of the media, 495 antihemophilic factor (AHF), 133, 134 issues, 499 human serum albumin (HSA), 132 surveys, 496 thrombolytic and fibrinolytic enzymes, 134 commercial aspects of biotechnology, 150 Quidel Co., 94 DNA hybridization probes, 148-149 drug delivery systems, 123 recombinant DNA technology (rDNA), 3, 4, 5, 25 foreign companies, 74 environmental regulation, 355 future research, 151 guidelines, environmental laws, and regulation of human growth hormone, 127 health and safety, 550-561 interferon gene cloning projects, companies involved, in industrial processes, 37-38 128 preparing rDNA, 36, 37 lymphokines, 130 structure and function, 33-36 melanocyte stimulating hormone (MSH), 128 Reckitt & Colman (U.K.), 130 monoclinal antibodies, 143-147 regulation of worker health and safety, 558 diagnostic products, 144 research funding, U.S. Government, 14 preventive and therapeutic products, 147 Rhone Poulene (France), 12, 74, 75, 76 neuroactive peptides, 128 Roussel Uclaf Co., 130 proteins being developed with rDNA technology, 129 R&D expenditures, 75 Salt Institute, 99 regulatory proteins, 120 Sandoz Co., 74, 130 human insulin, 120 Sanofi Co., 75 interferon, 122-126 Saudi Arabia, 238 top 20 U.S. and foreign companies, 73 Schering AG (F.R.G.), 75, 84 U.S. companies, 72 Schering-Plough (U.S.), 150 vaccines, 136, 143 Science 71”mes, 496 bacterial disease vaccines, 139 Scripps Clinic and Research Foundation, 134 parasite disease vaccines, 140 SDS Biotech Corp., 81 viral disease vaccines, 136 Shell, 82 Pharmacia, 88 Showa Denko, 81, 83 plant agriculture industry, 6, 172-186 SmithKline Beckman, 80 commercial aspects of biotechnology, 185 Soviet Acquisition of Western Technology, 458 Index ● 611

specialty chemicals industry, 6, 83-84, 195-212 Takara Shuzo Co., 86 amino acids, 195-198 Takeda Co., 76, 130 aspartic acid, 198 Taniguchi, Dr. Tadalsugi, 131 g]utamic acid, 196 targeting policies in biotechnology, 425 lysine, 197 findings, 482 methionine, 195 industrials’ role in policy formulation, 478 phenylalanine, 198 issue, 483 tryptophen, 197 policy goals, 479 aromatic specialty chemicals, 208 policy implementation, 480 commercial aspects of biotechnology in, 211 timing and coordination, 475 complex lipids, 205-207 Techniclone Co., 94 fatty alcohols, 206 Toray Industries, 197, 505 microbial oils, 206 Transgene (France), 71 sopherolipids, 207 Treaty of Rome, 441 enzymes, 198-200 future research, 212 U.N. Industrial Development Organization, 26 polysaccharide copolymers, 209 United Kingdom: single-en protein (SCP), 202,205 antitrust laws, 443 production plants, 204 biochemical supply, 86 steriods, 207 bioprocessing, 12 vitamins, 200-202 biotechnology centers, 319 Speywood Laboratories, 134 Center for Applied Microbiology, 320 Stanford Research Institute, 308 competitiveness, 8, 9, 425 Stanford University, 411, 412, 414, 415, 418, 420 Department of Industry, 477, 478, 482 Sumitomo Chemical Co., 76, 505 environmental control, 557 support firms, U.S. and foreign, 84-91 export controls, 458 product areas: financing and tax incentives, 514 biochemcial reagents, 85 Genetic Manipulation Advisory Group, 358, 515, 553, instrumentation, 86 560 software, 89 government funding of basic and applied research, Sweden, 520-522 312, 513 Swiss Serum and Vaccine Institute, 140 government targeting policies, 477, 513 Switzerland: Health and Safety Executive, 358 antitrust laws, 444 Imperial College, 342, 425 Commission for Experimental Genetics, 554 industry, 513 Commission for the Encouragement of Scientific intellectual property laws, 399, 564 Research, 322 law of trade secrets, 568 competitiveness, 8, 9 Medical Research Council, 338, 425 environmental control, 557 Monopolies and Mergers Commission, 443 export controls, 459 patent law, 565 Federal Institute of Technology, 320, 426 plant agriculture industry, 82 Federal Office of Public Health, 37o plant breeders rights, 57o government funding of basic and applied research, organization of basic and applied research, 319 517 personnel availability and training, 338, 514 industry, 516 R&D SUPPOI’t, 482 intellectual property laws, 564 rDNA research control, 358, 552 Intercantonal Convention for the Control of regulation of biotechnology products, 367 Medicaments, 370 Science and Economic Research Council, 338,425 law of trade secrets, 569 summary of biotechnology, 512 patent law, 565 financing, 514 personnel availability, 338, 517 funding, 513 plant breeders rights, 57o industry, 513 rDNA research control, 554 personnel, 514 regulation of biotechnology products, 37o targeting, 513 research, 320 undergraduate and graduate education, 342 tax incentives, 517 university/industrial relationship, 425, 515 summary of biotechnology, 516 University Grants Committee, 342 university /indudstry relationship, 426 worker health safety, 560 worker health safety, 560 United States v. Penn~lin Chemical Co., 439 Synagogue Council of America, 493 University Genetics, 148 — —.

612 . Commercial Biotechnology: An International Analysis

University/industry relationships, 411-427 U.S. Department of Justice, 436, 438, 439, 440, 441 commingling of funds, 419 U.S. Department of Transportation, 314 consulting arrangements, 416 U.S. Environmental Protection Agency (EPA), 183, 314, effectiveness in biotechnology, 413 360, 371, 372 guidelines for industrial sponsorship, s77 U.S. federally funded research in biotechnology, 310-312 industrial associates programs, 417 U.S. Federal Trade Commission, 438 intellectual property, 419 U.S. firms commercializing in biotechnology, list of, 542 issue, 429 U.S. Food and Drug Administration (FDA), 16, 81, 121, Pajaro Dunes Conference, 578 150, 355, 376, 377 patent rights and commingling of research funds, 579 Bureau of Foods, 362 private corporations, 418, 576 National Center for Devices and Radiologic Health, 362 research contracts, 417 Office of New Drug Evaluation, 361 research partnerships, 417 regulation of biotechnology products, 360 selected agreements, 574 U.S. General Accounting Office, 361, 372 tangible research property, 420 U.S. International Trade Commission, 391, 467 university policies, 580-584 U.S. Naval Research Laboratory, 315, 316 University of British Columbia, 244 U.S. Navy, 315 University of California, Berkeley, 384, 411, 413, 418, U.S. Nuclear Regulatory Commission, 314 420 U.S. Office of Management and Budget, 92, 419 University of California, Davis, 415, 421 U.S. Patent and Trademark Office, 386, 389, 390, 403, University of California, San Diego, 149, 420 459 University of California, San Francisco, 127, 137, 413 U.S. semiconductor industry and biotechnology, a com- University of Geneva, 222 parison, 531-541 University of ~.orgia, 229 Bell Telephone Labs, 532 University of Gottingen, 222 development of U.S. industry, 532 University of Lueven (Belgium), 135 role of universities, 536 University of North Carolina, 244 role of U.S. Government, 533 University of Pennsylvania, 144 semiconductor devices, terminology and evaluation, University of Virginia, 341 531 University of Washington, 144, 149, 418, 574 structure of U.S. industry, 537 University of Wisconsin, 411, 412 U.S. Small Business Administration, 91, 313 Upjohn Pharmaceuticals, 133 Set Aside Program, 316 U.S. Agency for International Development (AID), 26, U.S. Supreme Court, 374, 386, 391, 400, 439 142 U. S. S. R., 204, 527 U.S. Air Force, 315 U.S. Army, 315 Valentine, Ray, 421 U.S. competitiveness, 7, 8 Varian Co., 88 antitrust laws, 18 Vega Biotechnologies, 84, 87 commitment to basic research, 14 Vellucci, Alfred, 489 intellectual property system, 17 NBFs, 11 Wang, Prof. Daniel, 344 patent law, 16 Ward, Dr. David C., 148, 149 training of personnel, 15 Washington, 384 U.S. Department of Agriculture, 164, 238, 310, 314, 347, Waters Technologies, 88 360, 373 Wisconsin Alumni Research Foundation, 411 Plum Island Animal Disease Facility, 164 Wellcome Research Laboratories (U.K.), 12, 75, 164 venture capital, 12, 71 Whitehead, Edwin C., 575 U.S. Department of Commerce, 200, 455, 457, 468 Whitehead Institute, 418, 575 U.S. Department of Defense (DOD), 254, 310, 312, 313, White House Office of Science and Technology Policy, 314, 316, 327, 415, 457 458 Defense Advanced Research Projects Agency, 312, 315 World Health Organization (WHO), 142 Defense Business Advanced Technologies, 314 W. R. Grace, 196, 228 U.S. Department of Energy (DOE), 228, 247, 310, 312, 314, 316, 349 Xoma Co., 94 U.S. Department of Health and Human Services, 315 Public Health Service, 315 Yale University School of Medicine, 148 U.S. Department of the Interior, 228, 314 Yankelovich, Skelly, and White, survey, 497

U . S . GOVERNMENT PRINTING OFFICE : 1984 0 - 25-561