Social & economic aspects of
biotechnology
Erik Mathijs
Division of agricultural
and food economics
K.U.Leuven
1
Introduction
•
•
•
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A reminder: the potential of biotech
Three sets of issues
Overview of the 3 lectures
Lecture 1
2
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
3
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)
4
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)
5
Agro-food
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•
•
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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)
6
Non-food uses of crops
• Complex molecules for the manufacturing,
energy and pharmaceutical industries
• Biodegradable plastics, biomass energy,
new polymers, etc.
7
Environment
• Bioremediation of pollluted air, soil, water
and waste
• Cleaner industrial products and processes
(e.g. enzymes or biocatalysis)
8
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)
9
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)
10
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?
11
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
12
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)
13
Lecture 1: Exploring the
Economics of Biotechnology
• Part 1: The business of biotechnology
Pisano, 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
14
Part 1: The business of
biotechnology
15
The stakeholders
• The Private Sector
– Life Science companies
– Other companies, farmers, etc.
• Public interest groups
– Consumer groups
– Environmental groups
• The Public Sector
– Government agencies
– Scientists and the scientific establishment
16
Life science companies
• How does this sector look like?
• How important is this sector?
• What is the current status of this sector?
17
Life science companies: structure
• Small number of very large pharmaceutical companies: GlaxoSmithKline,
Merck, Novartis, Pfizer, etc.
• Large number of biotech companies:
Amgen, Chiron, Genentech, etc.
• USA dominates
• Other countries are emerging
18
Life science companies: structure
19
Profitless growth for biotech
Source: Pisano, 2006, Harvard Business Review, 114-125
20
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
21
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.
22
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
23
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.’
24
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
25
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
26
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)
27
28
Source: Howard, P.H. (2010) Visualizing consolidation in the global seed industry: 1996-2008. Sustainability 1: 1266-1287.
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
29
30
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
31
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)
32
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
33
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)
34
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
35
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
36
A more suitable anatomy
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•
•
•
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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
37
Part 2: Consumer issues and
regulation
38
Consumer issues
• Why do consumers care?
– Evidence of consumer concerns
– What are consumer concerns?
– The origins of consumer concerns
– Regulatory responses
39
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
40
Eurobarometer 2006
Support for GM foods (percent);
EU Member States. The EU-wide
average is 27 percent.
41
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.
42
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.
43
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
44
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
45
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 consumerfocused in first wave of GM products
– Influence of interest groups and media
46
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
47
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
48
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
49
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
50
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
51
Part 3: Pharmacoeconomics
52
Overview
53
Cost-minimization analysis
• Comparison of two or more therapies with
the same outcome
• Only based on costs
54
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
55
Cost-utility analysis
• Cost-utility analysis: effect = qualityadjusted 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’
56
Cost-utility analysis
• Threshold for adoption is somewhere
between $ 20,000 and $ 100,000/QALY
with thresholds of $50-60,000/QALY
frequently proposed
57
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
58
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
130
145
15
Total
Project B
Year
Cost
Benefit
Net cash
flow
0
-100
0
100
1
0
0
0
2
0
0
0
50
0
115
115
100
115
15
Total
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
T
with NPV  Bt  Ct

t
t 0 (1  i )
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
prob
Net cash
Net cash
Expected
flow 1
flow 2
cash flow
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
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
0.00002
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%)