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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 (IMPACT)

• Regulatory responsability (REGULATION)

• Legal and effective ownership of genetic material (PROPERTY RIGHTS)

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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 Erik Mathijs)

• Lecture 3: Prospects of Biotechnology in Developing Countries (by Eric Tollens)

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Lecture 1: Exploring the Economics of Biotechnology

• Part 1: The business of biotechnologyPisano, G., 2006, Can Science Be a Business? Harvard Business Review, 115-124.Ernst & Young, 2009. Beyond Borders. Global Biotechnology Report 2009.

• Part 2: Consumer issues and regulation• Part 3: Pharmacoeconomics

Part 1: The business of biotechnology

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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 pharma-ceutical 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: structure

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Profitless growth for biotech

Source: Pisano, 2006, Harvard Business Review, 114-125

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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

Future trends identified by E&Y

• Generics: Pharma’s revenues face a significant drop due to patent runout

• Healthcare reform in US

• Personalized medicine

• Globalization

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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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Source: Howard, P.H. (2010) Visualizing consolidation in the global seed industry: 1996-2008. Sustainability 1: 1266-1287.

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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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Can Science Be a Business?

• Can organizations motivated by the need to make profits and please shareholders succesfully conduct basic scientific research as a core activity?

• Pisano: The anatomy of the biotech sector is fundamentally flawed and therefore cannot serve the needs of both basic science and business

• Anatomy is borrowed from succesful models in ICT industry

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Anatomy of a sector

• Sector’s direct participants (start-ups, established companies, not-for-profit labs, universities, investors, customers)

• Institutional arrangements that connect these players (markets for capital, IP and products)

• Rules that govern and influence how these arrangements work (regulations, corporate governance, IPR)

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Challenges of the sector

• Manage risk and reward risk taking

• Integrate the skills and capacities that reside in a range of disciplines and functions

• Advance critical knowledge at the organizational and industry levels

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Why biotech R&D is different

• Profound and persistent uncertainty, rooted in the limited knowledge of human biological systems and processes, makes drug R&D highly risky

• The process of drug R&D cannot be broken neatly into pieces, meaning that the disciplines involved must work in an integrated fashion

• Much of the knowledge in the diverse disciplines that make up the biopharmaceutical sector is intuitive or tacit, rendering the task of harnessing collective learning especially daunting

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A more suitable anatomy

• More vertical integration• Fewer, closer, longer-term collaborations• Fewer indepedent biotech firms• Quasi-public corporations• A new priority for universities towards

maximizing their contributions to the scientific community

• More cross-disciplinary academic research• More translational reearch

Part 2: Consumer issues and regulation

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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

• Impact of incomplete institutions & information in global agbiotech 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)

• Differences 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

Part 3: Pharmacoeconomics

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Overview

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Cost-minimization analysis

• Comparison of two or more therapies with the same outcome

• Only based on costs

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Cost-effectiveness analysis

• Compare costs with outcomes or effectsyears of life, premature births averted, patients cured, etc.

• Incremental cost-effectiveness ratio = change in costs / change in effects

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Cost-utility analysis

• Cost-utility analysis: effect = quality-adjusted life years (QALY)

• QALY:– measure of disease burden, incl. both the

quality and the quantity of life lived– between 0 and 1, with weight attached

relative to ‘perfect health’

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Cost-utility analysis

• Threshold for adoption is somewhere between $ 20,000 and $ 100,000/QALY with thresholds of $50-60,000/QALY frequently proposed

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Cost-benefit analysis

• Basic strategy: to attach monetary values to the environmental impacts (desired and undesired), such that they can be considered along with ordinary inputs and outputs

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Private appraisal: NPV

• Compounding: Vt=PV(1+i)t

with i interest rate

• Discounting: PV=Vt/(1+i)t

• Idea: individual is indifferent between certain promise of the future sum and the offer of the present value now

Project A

Year Cost Benefit Net cash flow

0 100 0 -100

1 10 50 40

2 10 50 40

3 10 45 35

Total 130 145 15

Project B

Year Cost Benefit Net cash flow

0 100 0 -100

1 0 0 0

2 0 0 0

50 0 115 115

Total 100 115 15

Project A versus B

• Both have a total net cash flow of 15, so would a company be indifferent between the two?

• Decision rule: NPV0

with

T

tttt

i

CBNPV

0 )1(

Project A versus B

• Project A: – i=0.05, NPV=4.6; – i=0.075, NPV=0;– i=0.10, NPV=-4.3

• Project B:– i=0.05; NPV=-90

• Result is independent whether firm uses borrowed money or own cash

Private appraisal: IRR

• Internal rate of return = i for which NPV=0

• Multiple solutions for i may exist

• NPV recommended

• Example: project A has IRR=0.075

Dealing with risk

• What if we do not know cash flow for certain?

• Assign probabilities to alternatives• Expected NPV instead of NPV• Assumes a risk-neutral decision-maker:

indifferent between getting 2 € in cash and having a 0.5 probability of getting 4 €

• Practice: risk-aversion• Practice: sensitivity analysis on uncertain

factors

Project A

Year Net cash flow 1

Net cash flow 2

Expected cash flow

prob 0.6 0.4

0 -100 -100 -100

1 40 35 38

2 40 35 38

3 35 25 31

Social appraisal

• Utility-based appraisal using a social welfare function: but several problems and utilities are not observable

• Consumption-based appraisal: trace all consequences of project through final impact on consumption by individuals

• NPV test is a potential compensation test• NPV seeks allocative efficiency: NPV>0 only if

IRR>r (discount rate of consumption)• Critical: choice of discount rate

Choice of discount rate

• There is disagreement among economists about the principles according to which the discount rate to be used in CBA should be determined, as well as about the actual number to use at any particular time in any particular economy.

• NPV is very sensitive to choice of discount rate

PV of 100 at various discount rates

r 25 50 100 200

2% 60.95 37.15 13.80 1.91

4% 37.51 14.07 1.98 0.04

6% 23.30 5.43 0.29 0.0009

8% 14.60 2.13 0.05 0.00002

Time horizon - years

Choice of discount rate

• Core:– Market situation: no problem, market rate i=r– Market failure: which r?

• Practice: risk-free market interest rate = interest rate on government bonds (usually between 2 and 5%)

• Always use real rates (corrected for inflation, for example: 7-3=4%)