Bio Industry

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Bioindustry: A Description of California's Bioindustry and Summary of the Public

Issues Affecting Its Development

By Gus A. Koehler, PhD.

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BUSINESS NEEDS OF BIOTECHNOLOGY

Moving a promising research discovery to market is a complex, time-consuming and costlyundertaking. The following chapter provides a general overview of how critical businessrequirements come together to shape the way bioindustry develops. These factors include: atrained workforce, access to capital, formation of joint ventures and alliances, and thetechnical and regulatory requirements associated with product development and

manufacturing.

Workforce and Training

Biotechnology research and product development requires highly educated, skilledemployees. As new products enter the manufacturing stage, the employment demand willexpand for skilled technicians who have two years of higher education and intensive jobtraining. Demand for research and development and administrative and marketing staff mayremain the same.255Most Bay Area biotechnology companies have focused on attractinghighly educated professional scientists and devoted relatively little attention to how theyrecruit, evaluate, and hire production workers and lab technicians. Turnover of laboratory

technicians and production jobs is high.256

Two Bay Area community colleges have established a two-year biotechnology certificateprogram. Several other colleges are considering such programs, and the state communitycollege system is developing a statewide program. College programs related to trainingbiotechnology technicians include: animal health technology, animal science/agribusiness,aboriculture/natural resources, electro-mechanical technology and robotics, electronicstechnology, floriculture, food science and technology, horticulture, landscaping, and medicallaboratory technology.257Special training will also be required for service workers employedin bioindustry. For example, janitors and sanitation employees will need to be able to "[work] with sophisticated, expensive, and possibly hazardous materials and equipment."258

Some states (such as Massachusetts and North Carolina) are developing biotechniciantraining programs. For example, the state-funded North Carolina Biotechnology Centerrecently published Teaching Basic Biotechnology: DNA-based Technologies, and producesvideos and other educational materials. The Center encourages local biotechnologycompanies to offer public school teacher training courses.259

The U.S. Department of Energy has provided a grant to the National Education DevelopmentCenter to develop industry-wide skills standards for bioscience technicians. RegionalCalifornia examples of training programs include Berkeley Biotechnology Education, Inc., in

cooperation with Vista Community College, and Amgen company's partnership with VenturaCommunity College. The NOVA Private Industry Council (Santa Clara County) and De
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Anza Community College have also joined together to offer biotechnology industry trainingprograms.

A broader perspective on the competitive importance of California's bioindustry workforcerequirements and training needs can be developed by looking at the workforce needs of

Europe's bioindustry companies. European companies are growing at a rapid rate, requiring aready and increasing supply of trained labor.260

European companies are having trouble finding trained workers to fill research and technicianjobs. The major reasons cited in a recent survey was the failure of colleges and universities toadequately train students to meet the requirements of the industry.

Like Europe, California requires sufficient well-trained personnel to maintain the state'sglobal strategic biotechnology advantage. Careful coordination between Californiacommunity colleges and other training programs and the biotechnology industry is critical.However, many biotechnology companies are apparently unaware of community college

programs and their graduates.261The Bay Area Bioscience Center has developed a plan to abridge this gap including active outreach and marketing by colleges and various suggestionsabout how biotechnology companies can work with colleges to define training needs andtechnical assistance.262

Financing Bioindustry

At all stages of development, bioindustry companies require much capital. Biotechnologycompanies raised an estimated $5.2 billion in 1993, with $2.9 billion coming throughstrategic alliances and $2.3 billion coming through public and private financing. Bioindustry

capital needs and the level of investor risk are directly related to where a company is in theproduct development cycle: research, product development, clinical or field trials (ifrequired), and manufacturing. Currently, about 70 percent of pharmaceutical biotech relatedcompanies have products in the pre-clinical animal testing or human clinical trials stage. Asecond group of companies (about 20 percent) are near the release of important clinical dataabout their product or have completed their clinical trials and are awaiting FDA approval fortheir first products. These expect to become profitable in the last half of the 1990s. Theremaining companies (10 percent) have a product on the market and an established cash flow.263

The bioindustry product development cycles average more than twelve years anddevelopment costs are high. Companies with a product spend as much as 81 percent of theirsales revenues on continuing research and development. Development costs of one newtherapeutic drug average about $125 million.

A typical biotech company needs between $250 million and $500 million to funddevelopment until profitability. To move 50 companies from the clinical trials phase toprofitability could cost $12 to $25 billion. It can cost $150 to $200 million just to build amanufacturing plant for a new pharmaceutical. Typically, a larger firm becomes a majorstockholder once a small research or start-up company's product has been approved andshown to have a significant potential market. Government grants have often made asignificant contribution in the research phase but rank last as a financial source for

manufacturing.
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Survival Index for Biotechnology Companies

Ernst and Young has developed a Net Burn Rate and Survival Index for publicly-ownedbiotechnology companies.264Net Burn rate indicates how much cash is necessary to keep thebusiness operating from month to month. The Survival Index provides a method for

estimating how long it will take a company to exhaust its cash reserves based on itsexpenditure rate. The Survival Index265decreased to 25 months from 34 months in 1994, adecline of 26 percent. An estimated 50 percent of the publicly held companies had less thantwo years of cash to cover their expenses (Table 6). Small, privately held companies were inthe most precarious financial shape. These trends continued into 1994:

While mid-size, large, and top-tier companies managed to lower their net burn rates from lastyear, the small companies group monthly burn increased from $321,000 per month to$423,000. The monthly burn rate for median public company actually increased from$665,000 last year to $726,000 this year. As the same time, the overall survival index for theindustry has declined dramatically, from 25 months in the prior year to just 16 months in thecurrent year.266

Table 7 shows that the Survival Index varies by market segment from year to year: the ag-bioindustry experienced the largest reduction in 1993; therapeutics and suppliers occupiedthis position in 1994.

Private Sources of Capital Investment and Financing

Traditionally, venture capitalists have generally fund much of the early stages of abiotechnology company's growth.267Small biotechnology companies (under 50 employees)have obtained about 30 percent of their financing from venture capitalists. 268In 1995, venturecapitalists shifted proportionately more funding into less risky later-stage companies withproducts already in clinical trials, a broad product platform, or good new research ideas.
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Venture capitalists are helping to support companies they have invested in the regulatoryapproval process.269This trend may change in 1996 which saw a record number of newstartups funded by venture capitalists.270

Private equity sources and profits from operations are the next largest financing source, at

about 20 percent. Initial public offerings and follow-on public offerings provide 10 percent offinancing, and the remainderof the funding is raised through a number of sources, includingdebt, strategic alliances with other firms, and government grants (See Chart 4).

Federal government research and development grants are a significant source of capital for asmall number of firms. For example, six Bay Area biotechnology companies recently won$40.8 million in Defense Department grants to develop new technologies.271

Venture capital investment 1993-1994 was distributed among bioindustry segments as shownin Chart 6.272

Once firms start producing commercial products, sources of financing typically change.Venture capital declines and self-financing through public offerings and strategic alliancesgrow in importance.

Uncertainties about new technologies, product development, product testing and regulatoryapproval, manufacturing cost, and the expected size of the product's commercial market tendto rule out any significant use of debt for guaranteeing loans, particularly for the 90 percentof biotech companies that do not have a proven product.
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In 1995, nationally, the $3.5 billion raised through public offerings was only exceeded by thatin 1991, when about $3.9 billion was raised.Biotechnology public offerings may have beenover-valued in the 1980s. Uncertainties about the impact of federal health policy, unexpecteddelays in clinical or field trials and product problems in highly regarded companies, and thelarge number of biotechnology companies going public made new public equity financing

difficult to secure in 1994. The 1994 readjustment probably brought stock valuation moreinto line with likely payoffs. However, for many small companies, valuation may havedipped below cash value per share at that time.273

The very significant improvement in direct investment in biotechnology in 1995 wasattributable to the pharmaceutical industry who invested $4.5 billion in biotechnology firms.274Some of the larger firms are purchasing whole research firms or are heavily investing in anumber of them. Also, good news from clinical trials and speedier federal approvals mayhave improved the investment atmosphere. Investment managers are most interested ininvesting in the health care services sector, medical-device companies, and in pharmaceuticalstocks.275

International Investment

A 1991 study examined foreign investment in San Francisco Bay Area's bioindustry, lookingat three main sources of foreign capital with ownership implications: equity, acquisitions, andventures or alliances (including licensing and contract research). The study found that:

Over the fifteen year period from 1975-1990, foreign investors provided only around 10% ofthe equity funding for Bay Area bioscience, but more than 50% of the venture or alliance

funds and over 90% of the acquisitions in dollar value. Overall, around 59% of the fundsfrom these three sources originated outside of the U.S., although almost two-thirds of thiswas the result of a single transaction (Hoffman-La Roche's purchase of [of a majority of]Genentech). Even without Genentech, foreign capital composed about 38% of the nominalcapital inflow to Bay area bioscience companies since 1975.276

The level of foreign investment varies with the public offerings market. During marketdownturns, such as occurred around 1984, foreign investment filled the gap left by the dropin domestic public investments. A surge in foreign investment began again in 1988 andcontinued through 1991 and then dropped off.277

The strong emphasis on quarterly earnings that characterizes U.S. capital markets is not wellsuited to many bioscience ventures. In contrast, foreign investors, including the Japanese,take a longer term view .278

Joint Ventures and Alliances

Generally, large firms enter into alliances and agreements with small biotechnologycompanies because the larger firm's market share is perceived to be vulnerable in the long runto biotechnology innovations. Many diversified companies have formed strategic allianceswith small biotechnology companies in order to obtain access to new research in exchangefor financing. Often the alliance requires the smaller firm to sacrifice some degree ofautonomy in order to gain access to capital and markets with high barriers to entry. A 1988study of the Bay Area bio-industry firms with 50 or more employees, found that "41 percent
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are subsidiaries of multi-national corporations and 55 percent have marketing, licensing, jointventure, royalty, and rights agreements with these corporations."279Such alliances may alsoprovide needed operating assistance and expertise as well as forestall bankruptcy.280In 1994,significantly more than half of young companies were gaining a substantial portion of theirrevenue from strategic alliances, medium sized companies about half, and larger companies

only about one-fifth of their revenues in this way.281Such alliances may forestall companyfailures.282

In the San Francisco Bay Area from 1980 to 1990, 153 biotechnology-related strategicalliances were formed, representing at least $1.1 billion in value, nearly one-half from foreignsources, to biotechnology firms.283This, in part, reflects the global nature of thepharmaceutical industry.284

Some analysts have raised some concerns about potential negative effects from foreigninvestments:

Increased chance of locating manufacturing facilities outside California; Loss of intellectual capital and knowledge through the transfer of people to companies

based abroad; and Transfer of critical technologies abroad.285

Studies of the impact of foreign investment have reached different conclusions. Two studiesfound that:

" [F] oreign investment...has helped to smooth out some of the cycles in the publicmarkets. ...The study found little evidence that foreign investment to date has resultedin the transference of jobs or technology leadership from the Bay Area to othercountries." [286]

"Only 15 report having laboratory or manufacturing operations outside NorthernCalifornia, and of the remainder, only 8 percent say they have seriously consideredlocating new facilities elsewhere."287

A more recent study of foreign investment in biotechnology arrived at different conclusions:

"The greatest single motivation for European and Japanese firms to partner with U.S.firms is the desire to acquire technological know-how."288

Parent company employees are trained at the U.S. site with the intent of transferinginformation back to the parent company.

"The transfer of biotechnology into and out of the United States appeared to differbetween the European- and Japanese-owned sites. Technology almost exclusivelymoved from the Japanese-owned sites to their parent firms. There were few examplesof biotechnology coming into the Japanese-owned sites with the exception of someanalytical support from the parent company. For European-owned sites, the flow ofbiotechnology expertise was also mostly out of the United States, but there were alsosome cases of technology transfer into the United States."289

The issues raised by the increasing role of international investment in California'sbiotechnology industry are not unique. It is part of a general international foreign investment

and partnering trend characterized by Japanese and European countries investing moreheavily in the United States.290International corporate clusters are emerging whose members
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are tied together by both equity and non-equity relationships like the need for new productsand access to markets.291A recent RAND study found that such alliances can be beneficial:The results show positive innovation and economic benefits from alliance participation,particularly international R&D alliances. To the extent that cooperating firms generallybenefit from alliance participation, the major policy implication is that government incentives

should be structured to permit or even facilitate, rather than discourage, such alliances.Indeed, international R&D alliances should be encouraged, and "transnational" trade andantitrust policies adopted.292

Government Sources of Investment and Financing

Federal Government Funding

Federal financial support for biotechnology has grown steadily since the mid-1980s. TheFederal FY 1995 biotechnology research budget is $4.3 billion and emphasizes researchrelated to health and the environment.293

The total federal investment in biotechnology was estimated to be approximately $3.5 billionin FY 1991 with nearly 80 percent awarded through the National Institutes of Health.294Otherfederal agencies support biotechnology-related programs in agriculture, energy, andenvironmental research, with additional funding from the National Science foundation,National Institute of Standards and Technology, and the Environmental Technology Institute.The federal government has also fostered joint research and development projects betweenindustry and federally-supported universities and laboratories. Federal policies protect privatesector commercial rights to subsequent discoveries.295

The Federal Small Business Innovation and Research Program (SBIR) funds high-risk smallbusiness research and development efforts that have a good chance of producing a marketableproduct. There are three levels of SBIR loans: research, product development, andcommercialization. Each loan phase is typically for around $100,000. Often companiessuccessfully complete the research phase but require a six-month bridge loan to keepoperating until an SBIR loan is received for the product development or commercializationphases.

The Federal Coordinating Council for Science, Engineering, and Technology, in asupplement to the President's FY 1994 budget, selected biotechnology research for specialemphasis. Twelve federal agencies involved in this research identified four common strategic

objectives for this Biotechnology Research Initiative:

Extend the scientific and technical foundations for future development ofbiotechnology;

Ensure the development of the human resource foundations for the futuredevelopment of biotechnology;

Accelerate the transfer of biotechnology research discoveries to commercialapplications; and

Realize the benefits of biotechnology to the health and well-being of the populationand the protection and restoration of the environment.296

The Federation of American Societies for Experimental Biology issued a report in December1994 , "Consensus Conference on FY 1996 Federal Research Funding in the
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Biomedical and Related Life Science," calling for additional funding, noting its positive

impact on the economy and employment. For the U.S. to keep its current competitive edge,the Federation recommended a 10 percent increase in the National Institutes of Health budgetfor FY 1996, from $11.3 billion to $12.5 billion.297

State Government Funding

According to a 1993 CRB review of state and local economic development programs listedby the Federal Clearing House for State and Local Initiatives, six states have biotechnologyprograms: Massachusetts, North Carolina, Michigan, Colorado, New Jersey, and Washington.298These states and others use a mixture of loan, tax and other incentatives to help fund anddevelop biotechnology in their state. In 1991, 33 states invested an estimated total annual

funding of $150 million in biotechnology.

Higher Education

Twenty-eight of the 33 states that invest in biotechnology relied primarily upon investmentsin higher education institutions to develop new technology.299

Loan Programs

State programs that provide capital funds generally do not provide loan guarantees or loans to

biotechnology companies because:

The amount of capital needed is so great that it would quickly deplete available funds. It is difficult to choose which biotechnology company is most likely to succeed. Loan guarantees for capital equipment that also serves as collateral for the loan are

risky because it is often difficult to resell the highly specialized equipment. Biotechnology companies typically cannot meet the profitability test for government

loan program eligibility. For example, in order to qualify for a federal Small BusinessLoan, a company must show three years of profitability. Biotechnology companieshave too long a research-to-market lag time. This is a "catch 22" because without theloan a company may not be able to complete clinical trials and bring the product to

market.
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Most loans are relatively small compared to the typical capital needs of a biotechnologycompany. Still, state involvement in a biotechnology project can be benefical because it mayattract private investors. Some examples of state loan and other funding programs gleanedfrom a six-state CRB survey include:300

Research: Colorado, New Jersey, North Carolina, and Washington provide someresearch funding. Federal Small Business Innovation and Research Program loans aremade available by New Jersey and North Carolina. None of the states providedfunding for clinical trials. New Jersey makes money available for targeted universityfaculty salaries. Other states allow funds to be spent on research equipment.Washington offers a two-year grant of from $40,000 to $50,000 to university facultywho are able to match it with corporate funds. North Carolina has an economicdevelopment financing program that offers five-year loans of up to $250,000 forbiotechnology research projects. The state then has an option to buy companywarrants if the company makes a public offering. All six states offer loans touniversity/private industry research consortia.

Product development and start-up funding: New Jersey may provide seed capital forfirm start-ups. New Jersey and North Carolina offer small SBIR bridge loans to assistcompanies in the transition between the research and the product development phases.(North Carolina will not make loans for prototype development or scale-up of existingmanufacturing processes.) The loans also help to attract private funding. Bridge loansare one mechanism by which states may leverage federal grants with a relativelysmall amount of state money.

Business incubators: Several states have established biotechnology incubatorprograms. Colorado has established the Colorado Bio/Medical Venture Center and theBoulder Technology Incubator. Massachusetts has created the MassachusettsBiotechnology Research Institute. The University of Alabama has established anOffice for the Advancement of Developing Industries that includes biotechnology.The programs provide business assistance to new bioindustry companies.

Pilot manufacturing plants: The Maryland Bioprocessing Center offers abiopharmaceutical test manufacturing facility at Johns Hopkins which helpscompanies make the transition from research to development and testing, includingtechnical expertise and regulatory guidance.

Manufacturing plant construction: Rhode Island has provided funds to help build aproduction facility. Washington is also considering allowing its ports to use theirbonding capacity to assist new biotechnology companies on port land.

Industrial Development Bonds

New Hampshire recently attracted Alpha-Beta Technology from Massachusetts to a state-owned biotechnology park. It did this by offering the company $30 million in taxableindustrial development bonds (IDBs) to construct a manufacturing facility. Independentexperts evaluated the company's product as being a good risk even though it lacked FDAapproval.

California has also used taxable industrial development bonds to assist biotechnologycompanies. However, obtaining a letter of credit from a bank to guarantee the bonds hasbecome a problem. (A letter of credit is often required to sell taxable industrial development

bonds.) San Diego has issued tax-exempt industrial development bonds to help finance theexpansion of Invitrogen, which is building a manufacturing plant in the city's bioscience
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industrial park.301The city set aside land in the park for the company's expansion that will beused as collateral for the five million dollar loan.

Joint Public/Private Ventures

The Michigan Biotechnology Institute (MBI) brought biotechnology companies together toform the Michigan Biotechnology Association in 1993. MBI will be working with theAssociation and a local business development corporation to develop at least two bio-business incubators and to attract private investment.

Budget Set Aside for Competitive Research Awards

Each year New Jersey sets aside 10 percent of the budget of the state's Advanced TechnologyCenters (one of which is biotechnology-related) to create a competitive research pool of $3 to$4 million. Each Center solicits joint venture proposals from private companies to develop aspecific product. Independent experts review the proposals. Grants may be as high as

$300,000. The center receives exclusive licensing authority or a royalty on a successfulproduct.

Sales Tax Deferral for Products Requiring FDA Approval

The Washington State Legislature is considering a bill that would grant a five-year sales taxdeferral for bioindustry products requiring FDA approval. The company would have six yearsto pay the state back without interest. The deferral would extend to both new and existingcompanies.

Government-Supported Biotechnology Centers

Over the past twenty-four years more than 100 biotechnology centers have been created toserve the needs of the local biotechnology industry. A survey conducted by the Institute forBiotechnology Information found that currently there are "84 biotechnology centers in 32states and the District of Columbia."302These centers are generally supported by stategovernment or regional funding agencies. The majority of the centers responding to thesurvey are university affiliated (77 percent). Eighteen percent are state-supported, stand-alonecenters. Since 1988, there has been an average 50 to 60 percent increase in their budgets,which range from as little as $20,000 to $21.5 million. (Non-university center budgets tend tobe twice as large as university center budgets.) Federal and state governments accounted for

over 60 percent of the funding with industry (14 percent) and universities (15 percent)accounting for the remainder.

According to the survey, the impact of biotechnology centers varied by type of center. Centerdirector self assessments reported, "The highest-rated impact area of the university centerswas `strengthening the research base, followed by `bringing together the biotechnologycommunity.' . . . The non-university centers rated their impact as [strong in] `bringingtogether the business community,' followed by `strengthening the research base,' `assistingnew business development,' and `assisting licensing and technology transfer.' "303Forty-eightof the centers surveyed reported assisting 412 companies with direct financial support. Non-university centers assisted about five times as many companies with financial support as

university centers:
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U.S. biotechnology centers may assist as many as 700 companies with financial support. Thecenters indicated that they are assisting some 624 companies in other ways . . . and all 84centers may be responsible for assisting over 1,000 companies.304

These same biotech centers helped to establish 98 companies, with non-university centersaccounting for the majority. Looked at from the perspective of the entire industry,

biotechnology centers have played an important role in developing new companies, with asmany as one in six having received a significant amount of help.305

It is difficult to know how the companies receiving biotechnology center services would ratethe services. Nonetheless it appears that government-funded biotechnology centers haveplayed a significant role in the research and business development of the industry.

Research and Development Funding

Funding University Research

Major universities with substantial commitments to biological research have beeninstrumental to the creation and growth of California's bioindustry, which is clustered aroundStanford University, and University of California campuses in the Bay Area, Los Angeles,and San Diego (a new cluster is developing around Davis).306The University of Californiaitself supports 22,000 biomedical jobs and spends $700 million annually on biomedicalresearch. Biotechnology patents account for 50 to 75 percent of University of Californialicense revenues.307Intellectual capital produced by the university, in the form of researchersand well trained technicians makes it possible for California's bioindustry to grow.308

University research focuses on basic scientific research while private companies pursue

applied research. A close collaboration permits commercialization of new discoveries andrapid resolution of manufacturing scaling-up problems. The University of California supportsa $1.5 million New Ventures Program to encourage technology transfer.309However,University technology transfer appears to vary by campus. For example, a survey ofbiomedical firms based in Los Angeles County reported that, "unlike [in] other regions, theirability to contact, and partner with the major local research university, University ofCalifornia, L.A., is burdened by red tape, ideological barriers, and a lack of focus andcommitment on the part of the research community."310

Maintaining the University of California's cutting-edge research role requires substantialpublic investment. Research facilities must be upgraded regularly to attract top students and

faculty and to allow state-of-the-art research, which in turn supports development of newindustrial products and techniques. Both the availability of funds for expanding researchfacilities and local concerns about biological research--ethical and environmental issues maylimit the ability to expand.

The growing emphasis on biotechnology-related research has affected university biologyresearch agendas by encouraging a classroom and research emphasis on molecular biology,cloning, and associated methods. There appears to be a corresponding de-emphasis on whole-plant- and whole-animal-level research, such as traditional plant breeding, and a decrease insystems-level research programs, such as agroecology, farming systems, and social impactassessments. This is significant because no one can predict which areas of research might
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lead to the next generation of important discoveries required to extend California'sdominance of biotechnology.311

Private Industry Research Funding

A 1994 survey of 152 biopharmaceutical firms found that they spent $3.1 billion for researchand development in fiscal year 1992, an average of $20.1 million per company. In contrast tothe general decreasing trend for U.S. companies, the surveyed biopharmaceutical firms hadincreased their research expenditures by 89.3 percent 1991.312In 1994, biotechnology publiccompanies increased their research and development funding by 12 percent, up from $3.7billion to $4.1 billion. However, this actually represented a 2 percent drop from the previousyear when measured as a percent of revenues spent on this activity.313Costly clinical producttesting trials account for biopharmaceutical companies' large research outlays.

A 1994 survey of U.S. agbiotech companies found that research funding had increased by43.6 percent in fiscal 1993, for a total of $84.9 million, and an average of $5.7 million percompany.314This increase followed a 39.6 percent increase in research and developmentfunding the previous year. Again, the large increase is due to the significant costs associatedwith moving a product from research through product field testing trials.

Product Development

Completing the research and achieving promising results are only early steps in developingand bringing a biotechnology product to market. Costly field tests, product safety tests and/orclinical trials must be completed and receive a positive review from the federal governmentbefore manufacturing prototypes can be developed or the product marketed. For example,

clinical trials are critical for determining the effectiveness and proper dosage of a new drug.Sharply increasing costs of clinical trials have pushed the current estimated total cost ofdevelopment of each approved drug to $300 million.315

The escalating cost of conducting clinical trials is a major problem for biopharmaceuticalcompanies. A contributing factor is the trend to conduct more complex trials over a longertime in order to test promising compounds for treating more than one illness or condition.Biotechnology companies contend that FDA inconsistency in applying standards, andunpredictability about when FDA reviews will be completed, are major blocks to marketsuccess.316New biopharmaceutical product development and approval time increasedsubstantially from 8.1 years in the 1960s to 15 years in the early 1990s. A significant portion

of this increase is attributable to time spent meeting regulatory review standards.317Recentchanges in the FDA appears to have shortened this process for at least some products in late1995 resulting in increased investments by venture capitalists in the San Francisco Bay Area.318

The most difficult product transition phase is from preclinical research to clinical trials. Thereis a 46 percent probability that a given research project will not make this transition.319Table10 presents the transition probability that "...a [biopharmaceutical] project will reach asubsequent development stage." The development stages are:320

Preclinical stage uses animals to determine the toxicology, pharmacology, andstability of the product. These tests take approximately three years.
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Phase I clinical research usually involves 20 to 80 normal, healthy volunteers, andtakes about a year. The tests study the drug's safety, including safe dosage, the mannerin which it is absorbed, distributed in the body, and excreted, and the duration of itsaction.

Phase II clinical research involves controlled studies of approximately 100 to 300 illvolunteer patients to determine the drug's effectiveness. The trials take about twoyears.

Phase III clinical research takes about three years and involves 1,000 to 3,000patients with the disease in clinics and hospitals. Physicians monitor patients todetermine efficacy and to identify adverse reactions.

Preregistration involves the analysis of all information and compilation ofmultinational registration dossiers.

Registration to marketrefers to the actual submission of all documentation to theregistering authorities and subsequent marketing of the product.

The data indicate (Table 10) that the critical transition points for biological pharmaceuticals

are from the Preclinical to Phase I clinical trials, and less so from Phase II clinical humantrials to Phase III (widespread human testing).

Table 11 reports the "market entrance probability" defined as the probability that a projectwill progress to the marketplace from a given development stage. The chances of an averageproduct increase considerably as each phase in the approval process is completed. Again, thegreatest problem is getting through the preclinical phase and Phase I.The factors most likelyto impede clinical progress, from most to least frequently cited (the total exceeds 100 percent,as multiple responses were allowed) are:321

Inadequate financial resources (55%); Inadequate or insufficient capability of development partner (42%); Unclear FDA review standard guidelines (37%); Expected drug failure rate (37%);

Market/competition changes (35%);
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Understanding clinical test requirements that should have been addressed in earlierphases (33%);

Investor pressure (28%); Poor clinical design of clinical tests for determining dosage and effectiveness (25%); Inadequate clinical research expertise (25%); Inadequate communication with FDA (25%); and Lack of FDA familiarity with biotechnology (11%).

Additional problems include a tendency to "over-promise" on a product and to underestimatethe time frame in which it can be delivered; a lack of experience with the multidisciplinaryrequirements of drug development; and a mistaken belief that the FDA will omit certainrequirements due to a company's opinion that the drug holds great promise.322

Ernst and Young surveyed biotechnology company CEO opinions about how clinical trialresults could be improved. CEOs recommended various actions including:323

Target patient group more specifically (56%) Extend phase II testing (52%) Ignore Wall Street (50%) Communicate better with FDA (48%) Conduct more preclinical research (46%) Recognize the placebo effect better (33%) Enlarge trial populations (32%) Utilize partner's clinical skills (26%) Conduct more offshore trials (16%)

Some companies have responded to regulatory problems by moving product developmentoffshore. The California Health Care Institute, in a survey of 40 California biotechnologycompany CEOs, found that: "...70% of California health care technology companies conductinitial new product development outside the U.S."324This trend is being encouraged byventure capitalists. Shorter review times and a more predictable regulatory scheme allowscompanies to quickly enter the foreign market and make early sales.

Bioindustry Manufacturing

Scale-up from Basic Discovery to Production

Moving a promising biotechnology research discovery through the product testing andfederal approval process are only the first steps towards producing that product. Each step inthe scale-up from test tube to flask, to small fermentation vessel, to pilot plant, to large-scaleproduction facilities involves new scientific questions. The effects of temperature, sheerforces, and other factors on living material must be assessed and managed at each step.Solving these problems requires multi-disciplinary research and considerable funding.

In the bioindustry's infancy, conventional wisdom held that investing in manufacturingprocess development did not increase a company's value as much as basic research. However,as more and more products reach the market and compete with each other, rapid process

development may provide a key strategic advantage today. There are an increasing numbersof small bioresearch companies in California with products in clinical trials or that have
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recieved FDA product approval to suggest that there may be a sustainable need for pilotmanufacturing plants in California.325According to one industry observer, " By far thebiggest risk for a biotech company is that its management is unable to execute the businessstrategies" necessary to produce and market a product.326

Some companies have chosen to develop dedicated pilot manufacturing facilities to designand test large-scale product manufacturing options. This strategy has proven to beenormously expensive and may place large amounts of investment capital at risk. The cost ofsuch facilities can range from $15 to 25 million or more. For example, Synergen invested $65million in a Boulder, Colorado, facility but the newly developed product was not approved bythe FDA.327

Lack of investment capital makes it very difficult for many small companies to build theirown manufacturing facility. Some companies have chosen to have an independent companyassist them with their pilot manufacturing. More than 30 companies offer contractmanufacturing services to the industry world wide.328There are a very limited number of

contract facilities in the U.S. Many are being built by European manufacturers or are locatedon the East Coast. One may be built through a public/private effort in Chula Vista, California.

According to Patricia Seymour, manager of biotechnology services at CollaborativeLaboratories, a contract manufacturing company:

Most multi-user facilities are designed to handle, on average, three to four clients per quarter.Given the number of new products entering clinical trials, a new facility will absorb only afraction of the demand.329

Some of the pilot manufacturing need may be met by sharing idle existing bioindustrymanufacturing capacity in California.330Several large companies (such as Baxter in Glendale,California) have already begun this practice. Problems include conflicts of interest betweencompanies that are producing similar products, and lack of continuous plant availability.Conversely, large corporations that offer contract services may also help in developingworkable business and marketing strategies. In any case, expansion of the bioindustry clusterinto manufacturing may provide an opportunity for the public sector to facilitate developmentby supporting the development of pilot manufacturing plants. Such an effort could keep morethe fruits of the state's research at home.

Manufacturing Facility Construction

Bioindustry manufacturing facilities are highly specialized due to the following productrequirements:

Physical containment of the manufacturing process (such as fermentation or cellcultures) requires specialized equipment that protects the product, the environment,and the workers;

Air purification systems must restrict airborne particulate matter to designatedproduction and purification areas;

Abundant and highly purified water must reach standards above that applied to publicwater systems for manufacturing processes; and

Sterilization is required for equipment entering the containment area and certainprocessing areas.331
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Water

Water is a critical component in all of the stages of the manufacturing process. Bioindustrymanufacturing requires higher water usage than other high tech.332For example: "for everykilogram of recombinant microbial protein drug, a biopharmaceutical company might need

15-30,000 kilograms (liters) of water. . . . Thirty thousand liters is...the volume of a verymodest swimming pool . . . ."333The quality of the water is also important. According to theCity of Chula Vista's High-tech/Biotech Zone Issue Paper:

San Diego area biotech firms need an uninterrupted water supply for their future growth andparticularly in their move to manufacturing. According to William Rastetter, CEO for IDECPHARMACEUTICAL Corp., "The biopharmaceutical industry needs assurance that therewill be adequate water for manufacturing as our companies grow. The demand for ourproducts may increase 35% per year following product launch. If our water usage is frozen atthe previous year's level, we'd have to ration our products . . . ." [Italics and capitalization inoriginal]334

Hazardous Materials Disposal and Spill Cleanup

In addition to traditional waste streams such as garbage and sewage, bioindustry generatesthree additional types of waste: hazardous/toxic waste, radioactive waste, and biologicalwaste. Biotechnology companies are subject to existing California and federalhazardous/toxic waste regulations governing transport and disposal of hazardous wasteswhich require inactivating or degrading biologically active material.335County departments ofhealth services also regulate biological wastes, requiring a plan and permit. 336Somebiotechnology waste products may be recyclable or useful for other purposes, such asfertilizers.

Biological research uses radioactive materials to trace certain proteins, antibodies, and othersubstances. Radioactive waste includes research chemicals, glassware, research gowns,research animals, and various paraphernalia. Currently, biotech companies must store thiswaste on site or ship it to the Barnswell, South Carolina, radioactive disposal facility. Elevenstates plan to develop low-level waste disposal facilities.337However, this is a highlycontentious issue, making it difficult to predict what will happen. Meanwhile, onlyBarnswell, South Carolina, accepts radioactive wastes from outside its region. However,because of the small quantities of radioactive waste typically generated at each Californiabioindustry site, shipping is often not economically feasible.

Existing state and federal hazardous materials legislation addresses chemical and radioactivespills and illegal dumping. Exactly how these laws extend to large spills of biologically activesubstances or the illegal dumping of biologically active wastes is unclear, since thesesubstances are not specifically identified in the governing legislation. For example, while it isillegal to dispose of biological waste in a dumpster, it is not illegal for biological wastes to bein a dumpster.338

In the judgment of Office of Emergency Services, current reporting procedures are probablyadequate to detect the occurrence of a spill or illegal dumping of biologically activematerials.339However, existing OES state response and state training guidelines foremergency response workers do not specifically address biological spills or illegal dumping.

Standard government response references that assist fire service and other personnel withchemical spills do not cover these types of incidents, nor do they provide protocols for
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decontamination of equipment, protective gear, or exposed people. Bioindustry companiesare working closely with their local fire districts to address many of these problems.340

Air Pollution

Like other research and manufacturing firms, bioindustry is subject to air pollution regulationand has many of the same issues. Bioindustry activities do not usually involve combustion orincineration of materials. However, according to the City of Chula Vista, they may requirethe use of evaporative agents that have the potential to release volatile organic compoundsand other emissions that may require local air resource board permits. Depending on the localAir Pollution Control District, companies may be required to reduce the number ofautomobile trips to the facility to meet local air pollution requirements.341

Liability Issues and the Availability of Biomaterials

Product liability concerns may make it difficult to obtain the biomaterials necessary for

manufacturing: "Materials that are reasonably biocompatable with use in the human body (forexample, polyester for vascular grafts, polyurethanes for pacemaker leads, and siliconeelastomers for hydrocephalus shunts) are becoming increasingly difficult to obtain fromprimary producers."342

The reason is that chemical companies have determined that unpredictable and excessiveliability costs of doing business with manufacturers of implantable medical devices no longerallow unrestricted sale of standard polymers to these customers. Under current U.S. productliability laws, any remote supplier of commodity materials can be joined in lawsuitsinvolving medical products that are alleged to have failed unexpectedly, not lived up toexpectations, or caused complications. As the sales of such materials represent a tiny fractionof the business of chemical companies, but account for a major part of their liability or legalcosts, it is expedient for the companies to opt out of the medical device market.343

Medical device manufacturers claim that the shortage of raw materials has resulted in ashortage of medically implantable devices. Research involving such materials is beingincreasingly shifted to countries with less stringent liability standards.344

Next Chapter:Public Policy Options

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Bio Industry