|Keywords:||United States of America; Private industry; Relation public-private sector; Monsanto Company; Calgene.|
|Correct citation:||Bijman, J. (1995), "Strategies of US Biotechnology Companies." Biotechnology and Development Monitor, No. 24, p. 1216.|
More than twenty years ago, the first private biotechnology industry emerged in the USA. The new companies were founded by scientist with strong ties with university biotechnology. For their survival, these new companies functioned as R&D contractors of established companies. However, from the mid 1980s onwards, the vertical division of labour between the different companies has been replaced by an ongoing vertical integration of the biotechnology sector in the USA.
In no country has the number of companies and the amount of capital
they have invested been so large as in the USA. The main US biotechnology
trade organization, Biotechnology Industry Organization (BIO), using
a broad definition of biotechnology, states that in 1994 there were a total
of 1,311 biotechnology firms in the US
The twenty years of US biotechnology industry can be seen as a twophased development. The first phase has been characterized by the establishment of new biotechnology firms (NBFs) and a strong division of labour between the new NBFs and established firms. During the second phase, starting in the mid 1980s, NBFs and established firms were involved in an integration process.
Emergence of new firms
The first phase occurred approximately between the mid 1970s and 1987, in which NBFs were established. The NBFs generally started as research organizations, selling scientific and technological knowledge but no products. They did not undertake R&D on the broad range on which established companies were active. Instead they focused on specific technologies and niche markets.
Two discoveries really triggered the development of biotechnology and NBFs. Firstly, the discovery of a technique to transfer specific genes from one organism to another by the US scientists Boyer and Cohen in 1973. Secondly, the invention of the cell fusion or 'hybridoma' technique by the British scientists Milstein and Kohler in 1975. Recognizing the commercial potential of these discoveries, many NBFs were founded by university scientists in collaboration with entrepreneurs and suppliers of venture capital.
A strong industryuniversity relationship is one of the remarkable aspects of the development of the US biotechnology industry. In the 1970s most of the expertise in genetic engineering was found at the universities. Many of the NBFs were started by university faculties interested in retaining simultaneously their professorship and participating in the development of a company. In the close vicinity of universities, special science parks were newly established, where hightech firms could build or rent facilities under beneficial conditions. Most of the biotechnology companies are now located in the states California and New England, near universities such as Harvard, MIT, Stanford and UC Davis.
In the beginning these companies had to fund the costs of infrastructural development, without the benefit of internally generating revenues. The NBFs, therefore, had to depend on venture capital, stock offerings, and relationship with established companies for their financing. Although venture capital and stock offerings were an important source of funds for the NBFs, contract research for established firms has always been the most important. Between 1977 and 1985 established enterprises, mostly in the pharmaceutical and chemical industry, provided 56 per cent of the total funds invested in NBFs.
Apart from the need for capital, NBFs benefited from their R&D supply/demand relationship with established firms to get access to downstream capabilities in manufacturing, clinical testing, regulatory processes, and distribution. A last reason was the scope economics in basic biotechnology R&D. Because different commercial products were based on similar basic technologies, the costs (and risks) of developing these technologies could be shared by clients with different commercial interests.
For established firms, buying biotechnology R&D from the outside and directing the main focus at commercialization had advantages. Control over manufacturing, testing and distribution facilities could be used to acquire access to the technology on attractive terms, without the large and risky investment in an inhouse biotechnology unit. In addition, collaboration allows established firms to tap the specialized expertise of the NBFs.
|Facts on US biotechnology industry
This vertical division of labour between NBFs and established companies as described above has not proved stable. During the second phase, from 1987 onwards, there has been a trend in the biotechnology production chain towards (a) a forward movement by NBFs into manufacturing, and (b) a backward movement into biotechnology R&D by established firms.
The main reason for forward or backward movements is the avoidance of (excessive) transaction costs. Transaction costs are costs that firms face in doing business with other firms in for example obtaining information about markets and about the (prospective) behaviour of the partner, in designing and enforcing a contract, or in preventing opportunistic behaviour by the partner.
In biotechnology, transaction costs in the market for manufacturing arise from the complexity of process development and scaleup, and the problems of protecting intellectual property rights. Close interaction between the scientists, who develop a microbial process for the production of a specific protein, and the bioengineers, who design industrialscale processing, generates significant advantages. Trialanderror and learningbydoing are still important activities in the scaleup process. Vertical integration allows the accumulation of firmspecific experience with scaleup in repeated projects. Such experience represents a valuable asset because it allows new projects to proceed from a base of shared knowledge and provides a common frame of reference for communication and problem solving.
The intensive collaboration between product developers and process engineers of different firms cannot be effectively protected by patents, although highly proprietary information is generated in this process. By the vertical integration of R&D and manufacturing the protection problem is solved, and boundaries which could impede the flow of sensitive information can be removed.
For the established firms that sponsor R&D contracts transaction costs increase as generic research projects result in concrete product development. With product development, much more of the knowhow generated is product and firm specific. Such idiosyncratic knowledge can be difficult to transfer to a new R&D supplier. Thus, the sponsor becomes more and more dependent on the R&D supplier, which can use the advantage of its accumulated knowledge continuously.
This dependence of established firms may even increase in second generation biotechnology projects: firms that buy R&D from a particular contractor today may be forced, for example, to buy additional R&D services from this same contractor in the future.
|Monsanto and Calgene
On June 28, 1995, the US private company Monsanto announced the
signing of a letter of intent to acquire 49.9 per cent of equity stakes
in Calgene, USA. Monsanto will provide to Calgene US$ 30 million,
certain research on fresh produce and oilseeds, and its current equity
interests and options in Gargiulo, one the major US firms in tomato
breeding, production and marketing. Monsanto will also provide long
term credit facilities for the general business needs of Calgene and Gargiulo.
Sources: Monsanto 1994 Annual Report; Monsanto Press Release, June 28, 1995; Personal communication with Monsanto employees.
Impact of vertical integration
Although mature NBFs have started downstream activities like manufacturing and distribution and established enterprises have started conducting biotechnology R&D on their own, it is unlikely that vertical integration will completely replace all alternative organization forms. There are two major reasons for this. Firstly, there are limits on the rate at which NBFs and established enterprises can expand their boundaries. These limits include financial restrictions, but also the risks inherent to mergers or acquisitions. Secondly, vertical integration is likely to predominate where the innovation chain is characterized by uncertain property rights, transactionspecific assets, and complex technologies. Where these conditions are absent, such as in research products, functionally specialized firms will deal with each other through contractual relations.
Given that the extent of transaction costs will differ across applications of biotechnology, firms are adopting hybrid organizational structures to get access to or to commercialize technology. Thus, a single NBF may use vertical integration, strategic alliances, and licensing to commercialize different technologies in different application segments.
In building a strategic technology alliance, both NBFs and established companies can choose between two broad categories of governing structures: joint ventures and contractual alliances. Joint ventures involve equity sharing and direct investment. Contractual partnerships involve joint development agreements, joint research pacts, cross licensing, second sourcing agreements, R&D contracts, etc.
Given the high uncertainty about both the outcome of the process of technological innovation and the structural consequences for the market as a result of the innovations, US firms operating in the biotechnology sector prefer contractual strategic technology alliances. These alliances are usually R&D or innovation driven, are onedimensional and their usual duration is relatively short.
The factors driving corporate alliances are the access to capital, access to technology or development skills of a partner, reduction of the time and/or costs to market entry, and validation of a technology. Not surprisingly, most of the alliances focus on technology in its concept or feasibility stage, when uncertainty is still very high on many levels, such as the validity of technology, development of time frames and regulatory approval.
Once a technology has successfully been converted into a new product or process, biotechnology companies look for access to manufacturing capacity and (global) markets. In return for this access, companies trade in exclusive intellectual property rights and marketing rights. Often NBFs give up technology rights for specified markets and applications, and international and/or US manufacturing and commercialization rights. But increasingly, biotechnology companies only give up exclusive rights to technologies in exchange for future revenue participation with their alliance partner.
Although the traditional model for strategic alliances involves a NBF and an established pharmaceutical or chemical company, increasingly biotechnology companies establish alliances among themselves. Ernst & Young noted the establishment of 196 strategic alliances in the US biotechnology industry in 1992/1993. 51 per cent of these alliances were within the pharmaceutical industry. Alliances in the agrochemical industry only accounted for 7 per cent of the total number. Twothirds of all alliances were with North American partners. Alliances with European partners accounted for 24 per cent, while USJapan alliances only covered 11 per cent of the total.
|New coalition of US religious groups appeals patenting
genes and animals
In the USA, a coalition of 175 Christian, Jewish, American Muslim, Hindu
and Buddhist groups has published an appeal to stop the patenting of animals,
human genes, cell lines, embryos, and body parts. The statement, which
received ample attention in the US press in May 1995, does not oppose genetic
engineering or the biotechnology industry as such, but the appropriation
of what they consider rightfully belongs to humanity. Their main concern
is the "commodification of life," or the reduction of life to its commercial
value and marketability. Patents on the techniques of genetic engineering
are not challenged in the statement.
Sources: Sally Lehrman (1995), "Coalition Plans Challenge to Genetic Patenting in the US." Nature, vol. 375, 25 May 1995, p. 268; Richard Stone (1995), "Religious Leaders Oppose Patenting Genes and Animals." Science, vol. 268, 26 May 1995. p.1126; "Mainstream Religions Oppose Human and Animal Patenting." The Gene Exchange, July 1995, p.1/12.
Given its strong basis in technology development, the US biotechnology industry uses international alliances to get access to foreign markets and additional capital. European and Japanese companies alliances with US biotechnology firms have the objective to get access to technology with the intention to renew and expand product ranges in the home market.
All major European pharmaceutical companies have alliances with one or more US biotechnology firms. These alliances can involve equity sharing or R&D collaboration. The bestknown example of equity sharing is the purchase by HoffmannLa Roche, Switzerland, of a 60 per cent share in Genentech (USA), covering the sharing of development costs, sales and marketing efforts and profits.
Also in the agrobiotechnology market US biotechnology companies have alliances with European and Japanese agrochemical companies. For example, Calgene has an alliance with Ferruzzi, Italy; Ecogen with Roussel Uclaf, France; and Mycogen with Shell, UK/the Netherlands, with Ciba Geigy, Switzerland, and Japan Tobacco. It is expected that international strategic alliances will increase in the near future.
LEIDLO, P.O. Box 29703, 2502 LS The Hague, the Netherlands. Phone (+31) 70 3308218; Fax (+31) 20 3615624; Email firstname.lastname@example.org
BIO (1995), The US Biotechnology Industry: Facts and figures. 1994/1995 Edition. Washington: Biotechnology Industry Organization.
Ernst & Young (1993), Biotech 94: Longterm value, shortterm hurdles. Eighth annual report on the biotechnology industry. San Francisco, CA: Ernst & Young.
Gary P. Pisano (1991), "The Governance of Innovation: Vertical integration and collaborative arrangements in the biotechnology industry". Research Policy, Vol. 20, pp. 237249.
D. Teece (1986), "Profiting from Technological Innovation: Implications for integration, collaboration, licensing, and public policy". Research Policy, Vol. 15, pp. 285305.
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