Social

1
Social economic aspects of biotechnology

• Erik Mathijs
• Division of agricultural
• and food economics
• K.U.Leuven

2
Introduction

• A reminder the potential of biotech
• Three sets of issues
• Overview of the 3 lectures
• Lecture 1

3
The potential of life sciences and biotechnology

• Enabling technology (like IT) wide range of
  purposes for private and public benefits
• Health care
• Agro-food
• Non-food uses of crops
• Environment

4
Health care

• To find cures for half of the worlds diseases
• To replace existing cures becoming less effective
  (e.g., antibiotics)
• To enable cheaper, safer and more ethical
  production of traditional and new drugs and
  medical services (e.g., growth hormone,
  haemophiliacs free from AIDS)

5
Health care

• To provide personalised and preventive medicine
  based on genetic predisposition, targeted
  screening, diagnosis and innovative drug
  treatments (pharmacogenomics)
• To offer replacement tissues and organs (stem
  cell research, xenotransplantation)

6
Agro-food

• Disease prevention
• Reduced health risks
• Functional food
• Reduced use of pesticides, fertilisers and drugs
• Use of more sustainable agricultural practices
  (e.g., conservation tillage)
• Fight hunger and malnutrition (lecture 3)

7
Non-food uses of crops

• Complex molecules for the manufacturing, energy
  and pharmaceutical industries
• Biodegradable plastics, biomass energy, new
  polymers, etc.

8
Environment

• Bioremediation of pollluted air, soil, water and
  waste
• Cleaner industrial products and processes (e.g.
  enzymes or biocatalysis)

9
Main  societal  issues three sets of questions

• Economic, social and ethical benefits and costs
  of biotech products
• Regulatory responsability
• Legal and effective ownership of genetic material

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Set One Impact

• Benefits e.g., reduced use of chemicals, plants
  with desirable characteristics, more food
• Costs e.g., environmental and food safety
  hazards, distributional impacts, ethical
  considerations (intrusion of humans into natural
  processes, repress technologies with potential of
  humanitarian benefits)

11
Set Two Regulation

• Have governments adequately assessed the possible
  health and environmental effects?
• Has adoption been rushed as a result of
  commercial pressures?
• Should one wait until long-term studies of the
  effects can be concluded?
• Or is it enough to deduce from scientific
  studies?
• What are the implications for international trade?

12
Set Three Property Rights

• Who owns the genetic material?
• Science enforces intellectual property rights
  (e.g., terminator technology)
• Control shifts to the private sector and raises
  concerns

13
Overview

• Lecture 1 Exploring the Economics of
  Biotechnology (by Erik Mathijs)
• Lecture 2 GMOs in Food Economic Impact on
  Various Stakeholders in the EU and in the World
  (by Koen Dillen)
• Lecture 3 Prospects of Biotechnology in
  Developing Countries (by Eric Tollens)

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Lecture 1 Exploring the Economics of
Biotechnology

• Who are the stakeholders?
• An overview of the conference  Science and
  Cents Exploring the Economics of
  Biotechnology , Dallas, April 2002
• Consumer issues
• Case study Struggle for public opinion and
  regulatory control

15
The stakeholders

• The Private Sector
• Life Science companies
• Other companies, farmers, etc.
• Public interest groups
• Consumer groups
• Environmental groups
• The Public Sector
• Government agencies
• Scientists and the scientific establishment

16
Life science companies

• How does this sector look like?
• How important is this sector?
• What is the current status of this sector?

17
Life science companies structure

• Small number of very large pharmaceutical
  companies GlaxoSmithKline, Merck, Novartis,
  Pfizer, etc.
• Large number of biotech companies Amgen, Chiron,
  Genentech, etc.
• USA dominates
• Other countries are emerging

18
Life science companies structure
World US Europe Canada Asia
Public company data
Revenues (bn) 41.4 30.3 8.3 1.5 1.4
RD expense (bn) 22.0 16.3 5.0 0.6 0.2
Net loss (bn) 12.5 9.4 2.8 0.3 0.1
Employment [phone] 33 8 10
Number of companies
Public 613 318 102 85 108
Private 3749 1148 1776 332 493

19
Life science companies situation

• Too many companies
• Changing character alliance network of specialty
  companies (cfr. ICT industry)
• Critical problems
• Lack of harmonization of regulations
• Public fear and opposition

20
Life science companies future

• Advances in genetic research are setting off an
  industrial convergence that will have profound
  implications for the global economy. Farmers,
  computer companies, drugmakers, chemical
  processors and health care providers will all be
  drawn into the new life-science industry. To make
  the transition successfully, theyll have to
  change the way they think about their businesses.

21
Life science companies future

• Example agriceuticals
• Broccoli against cancer
• Corn against cancer, osteoporosis, heart diseases
• Fruits and vegetables with vaccines agains
  diarrhea, tetanus, diphteria, hepatitis B, cholera

22
Life science companies future

• A single herd of goats may soon replace a 150
  million drug factory.
• Medical research, which has shifted from the in
  vivo study of live organisms to in vitro
  experiments inside labs, is now shifting toward
  in silico research using computers.

23
Life science companies future
Already involved Becoming involved Soon to be involved
Chemicals Pharmaceuticals Agriculture Food processing Mutual funds Law firms Environmental mining Energy Cosmetics Supermarkets Pharmacies Military Computer hardwaresoftware Robotics Household appliances Internet Info services Media
24
Other private actors

• In the case of food
• Food manufacturers (Unilever, Danone,)
• Retailers (Sainsbury, Tesco, Carrefour, Ahold,
  Walmart,)
• Farmers particular worry that they will be
  dependent (contracts, integration) from seed
  companies (e.g., Monsanto)

25
Public interest groups

• Consumer groups (European Bureau of Consumer
  Unions) health concerns
• Environmental groups environmental concerns,
  power concentration concerns
• Greenpeace
• WWF
• Friends of the Earth
• Controversies

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Scientific community

• Universities
• Spin-off companies from universities
• National and international public research
  centres (e.g., developing countries)
• Disagreements between scientists e.g., impact of
  GMOs on biodiversity

28
The public sector government

• Evaluates concerns safety, ethics, environment,
  competition, trade
• Procedure and requirements differ greatly between
  countries
• Stimulates innovation government is a
  substantial source of funds (research subsidies)

29
Science and Cents

• Conference addressing following questions
• Potential economic benefits of biotech?
• Emergence of biotech industry?
• Location of biotech firms?
• Financing of research funding hurdles?
• Legal and regulatory issues?

30
Economic benefits

• Lower overall medical costs 18 more costs vs.
  128 savings in net nondrug medical costs
  (shorter hospital days)
• Higher worker productivity 34 drug costs vs.
  40 less sick days 112 higher performance
• Increased longevity (five months) 12 bn per
  year US expenditure vs. 120 bn per year value
  of increased life expectancy

? Past experience, do not generalize
31
Emergence of the industry

• No incremental progress perfecting existing
  products
• But metamorphic revolutions creating new
  industries
• Many new firms, few incumbents, very unstable
  shake-out will occur
• Biotech hard to imitate, importance of star
  scientists and thus of universities

32
High-risk high-cost RD hurdles

• Only 22 of drugs entering clinical trials
  receive FDA approval. But approval is not
  success
• 1/3 cover out-of-pocket expenses
• 20 top selling drugs gt 80 other drugs
• Earnings arise from a few drugs (cash cows)
• RD costs are high and rising
• 400 mn for new drug, 10-12 years
• 1-2 mn for generic drug, 1-2 years

33
Capturing the returns to research

• Patent reach-through strategies, reaching into
  future revenues from end products
• Reach-through licensing patent holder restricts
  access to users that agree to share a portion of
  revenue from future products
• Reach-through remedy ex post royalty on
  unlicensed use (so only when succesful)
• Reach-through claiming broad patents covering
  future discoveries based on prior inventions

34
Capturing the returns to research

• Arguments contra
• Overcompensation of who rests on their laurels
  vs. who carry research forward
• Too much control to innovators to future research
  (may inhibit innovation)
• Not needed when government funded

35
Capturing the returns to research

• Arguments pro
• Enable researchers to capture the value of their
  discoveries which is more risky than more
  upstream activities
• Helps valuing and financing biotech research for
  example by joint ventures between univs and
  industry

36
Role of venture capital

• Role of VC firms
• VC firms combine managerial with scientific
  talent in picking, funding, advising and managing
  start-ups
• VC firms invest in start-ups directly
• Distribution of returns is highly skewed, with
  few big winners
• VC firms have incentive to diversify
• Rising share of GDP for health care

37
Role of venture capital

• Opportunities for VC firms
• Shift conventional drugs ? genomics ? proteomics
  (potential of customizing drugs)
• Maturation of pharmaceuticals from vertical
  integration to horizontal organization

38
Role of public sector

• Returns to RD and innovation gtgt investments in
  labor or capital
• But still underinvestment by private firms
  because
• High risk premiums, because few winners
• Spill-over effects from inventions

39
Role of public sector

• Public policy options
• Industrial policy cannot deal optimally with
  dynamic environment
• Tax credits risk of reclassifying other expenses
  as RD
• Direct funding of RD risk of political
  influence and lack of accountability

40
Consumer issues

• Why do consumers care?
• Evidence of consumer concerns
• What are consumer concerns?
• The origins of consumer concerns
• Regulatory responses

41
Evidence of consumer concerns

• Growing unease among consumers, but not uniform
  between or within countries
• Diversity reflects consumer heterogeneity and
  different forces affecting consumer attitudes in
  various countries
• Broadly consumers in Europe and Japan more
  negative than North American consumers
• Consumer attitudes towards a new technology are
  constantly changing

42
Eurobarometer 2006
Support for GM foods (percent) EU Member States.
The EU-wide average is 27 percent.
43
Support for GM foods among the "decided"
participants from selected EU Member States
1996-2005 Decided supporters include all
participants who consider GM crops useful,
morally acceptable, and feel they should be
encouraged. Decided supporters may or may not
agree the technology is risky. The decided
non-supporters do not see GM food as useful,
morally acceptable, or worthy of support. Decided
supporters and decided non-supporters added up to
approx. half of all participants.
44
Willingness of Europeans to buy GM food based on
given circumstances Most Europeans would buy GM
food if they were considered healthier and used
less pesticides. But authorisation from the EU
and lower prices don't appear to be enough to get
Europeans to choose GM.
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What are consumer concerns?

• Four broad groups
• Specific food safety concerns
• Transfer of allergens through transgenics (e.g.
  peanut in soybeans)
• Antiobiotic-resistant marker genes
• Fear of the unknown
• fears regarding long-run consequences and
  perceived inability of scientists to predict the
  cumulative effects of consuming GM foods over a
  long period of time
• Ethical concerns consumers believe that genetic
  engineering is unnatural. Patenting genes raises
  ethical concerns over the right to own life
• Environmental concerns

46
What are consumer concerns?

• Difficult to respond to these concerns with the
  standard risk analyis approach (risk assessment
  risk management- risk communication), since the
  problem is one of uncertainty rather than risk
• Risk statistcal probabilities can be attached to
  different potential outcomes
• Uncertainty insufficient information to
  establish probabilities

47
The origins of consumer concerns

• Five interrelated threads
• Lack of understanding of the technology
  confusion over the meanings of terms (biotech,
  genetic engineering, genetically modified, etc.)
• Proliferation of food safety scares BSE, E.
  coli, salmonella, lysteria, dioxin
• Lack of trust in regulatory authorities and in
  the assurances of science
• Technology being producer rather than
  consumer-focused in first wave of GM products
• Influence of interest groups and media

48
Regulatory responses

• Policies governing the approval and regulation of
  GM food differ between countries
• USA and Canada product-based approach, products
  are assessed on their safety regardless whether
  GM or conventional voluntary labelling
• EU process-based approach, separate procedure
  for GM precautionary principle (all potential
  risks must be known and quantifiable) mandatory
  labelling

49
Case study

• The struggle for public opinion
• US strong lobby of life science companies not
  a hot topic for the public
• Europe strong lobby of environmental NGOs hot
  topic for years
• The struggle for regulatory control
• National regulation stakeholder involvement more
  and more important
• International regulation e.g., WTO

50
Case study

• The impact of incomplete institutions and
  information in the global agricultural biotech
  industry
• Two examples
• Dr Arpad Pusztai GM food could be harmful to
  human health (UK, 1998)
• Dr John Losey GM maize is harmful to monarch
  butterflies (USA, 1999)

51
Difference in institutions

• UK weak institution, low trust
• USA strong institution, high trust

52
Dr. Pusztais GM potatoes

• Experiment eating GM potatoes makes rats grow
  slower and impair their immune systems turned
  out not to be true due to very poor experiments
• Scientific reaction The Lancet publishes the
  results despite 6 reviewers rejecting outrage
• Resulting govt regulation mandatory labelling of
  food with gt1 GM, new institutions had to be
  established
• Costs high, consumers do not eat GM food

53
Dr. Loseys Bt maize pollen

• Bt toxin in pollen kills butterfly larvae,
  published in Nature without review
• Scientific reaction a wave of studies to check
  the validity results rejected
• Resulting govt regulation mandatory planting
  restrictions (refuge area), existing institutions
  coped with the problem
• Costs low, consumers continue to eat GM food