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Social & economic aspects of biotechnology

Erik Mathijs

Division of agricultural

and food economics

K.U.Leuven

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Introduction

• A reminder: the potential of biotech

• Three sets of issues

• Overview of the 3 lectures

• Lecture 1

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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

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Health care

• To find cures for half of the world’s 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)

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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)

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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)

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Non-food uses of crops

• Complex molecules for the manufacturing, energy and pharmaceutical industries

• Biodegradable plastics, biomass energy, new polymers, etc.

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Environment

• Bioremediation of pollluted air, soil, water and waste

• Cleaner industrial products and processes (e.g. enzymes or biocatalysis)

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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)

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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?

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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

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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

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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

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Life science companies

• How does this sector look like?

• How important is this sector?

• What is the current status of this sector?

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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

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Life science companies: structureWorld US Europe Canada Asia

Public company data

Revenues ($bn) 41.4 30.3 8.3 1.5 1.4

R&D 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 (000) 194 143 33 8 10

Number of companies

Public 613 318 102 85 108

Private 3749 1148 1776 332 493

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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

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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, they’ll have to change the way they think about their businesses.

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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

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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.’

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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 hardware+software

Robotics

Household appliances

Internet

Info services

Media

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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)

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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

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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)

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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?

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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

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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

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High-risk + high-cost R&D 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 > 80% other drugs– Earnings arise from a few drugs (cash cows)

• R&D costs are high and rising:– $ 400 mn for new drug, 10-12 years– $ 1-2 mn for generic drug, 1-2 years

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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

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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

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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

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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

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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

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Role of public sector

• Returns to R&D and innovation >> investments in labor or capital

• But still underinvestment by private firms because:– High risk premiums, because few winners– Spill-over effects from inventions

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Role of public sector

• Public policy options:– Industrial policy: cannot deal optimally with

dynamic environment– Tax credits: risk of reclassifying other

expenses as R&D– Direct funding of R&D: risk of political

influence and lack of accountability

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Consumer issues

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

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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

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Support for GM foods (percent); EU Member States. The EU-wide average is 27 percent.

Eurobarometer 2006

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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.

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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

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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

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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

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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

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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

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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)

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Difference in institutions

• UK: weak institution, low trust

• USA: strong institution, high trust

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Dr. Pusztai’s 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 >1% GM, new institutions had to be established

• Costs: high, consumers do not eat GM food

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Dr. Losey’s 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