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 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)

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 (IMPACT)
Regulatory responsability (REGULATION)
Legal and effective ownership of genetic material (PROPERTY RIGHTS)

10. 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 Erik Mathijs)
Lecture 3: Prospects of Biotechnology in Developing Countries (by Eric Tollens)

14. Lecture 1: Exploring the Economics of Biotechnology
Part 1: The business of biotechnology
Pisano, G., 2006, Can Science Be a Business? Harvard Business Review,
Ernst & Young, Beyond Borders. Global Biotechnology Report 2009.
Part 2: Consumer issues and regulation
Part 3: Pharmacoeconomics

15. Part 1: The business of biotechnology

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

17. Life science companies
How does this sector look like?
How important is this sector?
What is the current status of this sector?

18. 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

19. Life science companies: structure

20. Profitless growth for biotech
Source: Pisano, 2006, Harvard Business Review,

21. 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

22. 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.

23. 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

24. 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.’

25. 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

26. 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

27. 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)

28. Source: Howard, P.H. (2010) Visualizing consolidation in the global seed industry: Sustainability 1:

29. 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

31. 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

32. 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)

33. 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

34. 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)

35. 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

36. 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

37. 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

38. Part 2: Consumer issues and regulation

39. Consumer issues Why do consumers care? Evidence of consumer concerns
What are consumer concerns?
The origins of consumer concerns
Regulatory responses

40. 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

41. Eurobarometer 2006
Support for GM foods (percent); EU Member States. The EU-wide average is 27 percent.

42. Support for GM foods among the "decided" participants from selected EU Member States : 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.

43. 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.

44. 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

45. 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

46. 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

47. 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

48. 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

49. 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

50. 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

51. 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

52. Part 3: Pharmacoeconomics

53. Overview

54. Cost-minimization analysis
Comparison of two or more therapies with the same outcome
Only based on costs

55. Cost-effectiveness analysis
Compare costs with outcomes or effects
years of life, premature births averted, patients cured, etc.
Incremental cost-effectiveness ratio = change in costs / change in effects

56. 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’

57. Cost-utility analysis
Threshold for adoption is somewhere between $ 20,000 and $ 100,000/QALY with thresholds of $50-60,000/QALY frequently proposed

58. 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

59. 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

60. Project A Year Cost Benefit Net cash flow 100 -100 1 10 50 40 2 3 45
100
-100 1 10 50 40 2 3 45 35
Total
130
145 15

61. Project B
Year
Cost
Benefit
Net cash flow
100
-100 1 2 50
115
Total 15

62. Project A versus B
Both have a total net cash flow of 15, so would a company be indifferent between the two?
Decision rule: NPV0
with

63. Project A versus B Project A: Project B:
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

64. 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

65. 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

66. Project A Year Net cash flow 1 Net cash flow 2 Expected cash flow prob
0.6
0.4
-100 1 40 35 38 2 3 25 31

67. 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

68. 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

69. PV of 100 at various discount rates
Time horizon - years 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

70. 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%)