3
Technology Linkages_Scope, Significance, and Trends

THE ACTORS

To understand why technology linkages are being formed, it is important to consider the special characteristics of the major actors_small U.S. biotechnology firms, large established U.S. companies, the federal and state governments in the United States, U.S. universities and research institutions, large Japanese companies, and Japanese government agencies that provide funding for biotechnology R&D. The major impetus for the formation of technological linkages is the development and exploitation of biotechnology. Each of these actors brings different resources to bear in linkages that take many different forms.

Small U.S. biotechnology firms (sometimes called ''dedicated'' or "new" biotechnology companies) are those formed for the sole purpose of commercializing biotechnology. The formation of these small firms was spurred by the development of recombinant DNA and monoclonal antibody technologies in the 1970s. These technologies, which emerged from universities and national research institutes, were public and widely diffused, stimulating the formation of new biotechnology firms by venture capitalists in association with entrepreneurs and university research scientists. In 1981, a peak year for the formation of biotechnology firms, almost 70 new companies were established.18

18  

See OTA, New Developments in Biotechnology, op. cit., p. 79.



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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s 3 Technology Linkages_Scope, Significance, and Trends THE ACTORS To understand why technology linkages are being formed, it is important to consider the special characteristics of the major actors_small U.S. biotechnology firms, large established U.S. companies, the federal and state governments in the United States, U.S. universities and research institutions, large Japanese companies, and Japanese government agencies that provide funding for biotechnology R&D. The major impetus for the formation of technological linkages is the development and exploitation of biotechnology. Each of these actors brings different resources to bear in linkages that take many different forms. Small U.S. biotechnology firms (sometimes called ''dedicated'' or "new" biotechnology companies) are those formed for the sole purpose of commercializing biotechnology. The formation of these small firms was spurred by the development of recombinant DNA and monoclonal antibody technologies in the 1970s. These technologies, which emerged from universities and national research institutes, were public and widely diffused, stimulating the formation of new biotechnology firms by venture capitalists in association with entrepreneurs and university research scientists. In 1981, a peak year for the formation of biotechnology firms, almost 70 new companies were established.18 18   See OTA, New Developments in Biotechnology, op. cit., p. 79.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s Such small biotechnology firms continue to generate much of the most promising research in biotechnology. One recent study concluded that small biotechnology firms make unusual contributions to innovation, as measured in patent applications (both product and process). Although they no longer have the overwhelming innovative advantage vis _ vis established U.S. or Japanese companies seen in the early 1980s, the patents they spawn are still cited disproportionately.19 R&D is the lifeblood of biotechnology firms for many U.S. firms whose R&D expenditures well exceed revenues (see Table 1). In contrast to the small U.S. biotechnology firms that have consistently had a comparative advantage in biotechnology R&D, most large U.S. companies did not have their own in-house biotechnology R&D programs in the early 1980s.20 Instead, they relied on R&D contracted with the small biotechnology firms. Japanese and European companies also lacked in-house biotechnology R&D programs in the early 1980s. Today, some of the large pharmaceutical and other companies are beginning to pursue biotechnology-related R&D_as a complement, rather than a substitute, to their main areas of business activity. The special strengths of the large companies continue to be in traditional drug discovery, manufacturing, marketing and distribution of products, and their financial strength. In addition, large pharmaceutical firms have much experience with the process of regulatory approval, which can be time consuming and costly in the United States and elsewhere. Large pharmaceutical companies invest considerable resources in drug discovery and development as a prerequisite for manufacturing and marketing. The large U.S. firms such as Monsanto, Eli Lilly, Schering-Plough, and Merck, which were the first to begin their own in-house biotechnology R&D programs in the early 1980s, also established technology links with the small biotechnology firms. The major motivation for these linkages was to access technology developed in the small biotechnology firms in order to commercialize it and to bring the technology in-house over time.21 Universities and other research institutions continue to be critical actors in biotechnology research. As noted earlier, basic research in biochemistry and molecular biology at universities can lead directly to commercial applications. For example, Centocor pays royalties to universities for 15 products it has developed. Moreover, individual researchers trained at universi- 19   Joshua Lerner, "The Flow of Intellectual Property Between the U.S. and Japanese Biotechnology Industries," Harvard Business School Working Paper, 1991. Lerner's paper summarizes his detailed analysis of patent citations as a measurement of technological flows. His conclusions confirm the predominant flow of technology from the United States to Japan. 20   Office of Technology Assessment, Commercial Biotechnology (Washington, D.C.: U.S. Government Printing Office, 1984). 21   Mark D. Dibner, "Corporate Strategies for Involvement in Biotechnology," Bifutur (Paris), July-August, 1987, pp. 47–48.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s TABLE 1 Top 10 U.S. Biotechnology Firms in R&D Spending, 1990   FY 1990 (millions) Revenues (millions) Genentech $173 $447 Amgen 63 190 Genetics Institute 61 40 Cetus 56 39 Chiron 50 79 Centocor 46 65 Biogen 36 50 Xoma 28 20 Immunex 19 31 Genzyme 19 50 NOTE: R&D and revenue figures have been rounded to nearest million. SOURCE: PaineWebber, Inc., December 1991. ties become not only scientific leaders but also entrepreneurial leaders in the new biotechnology firms. In biotechnology more than in perhaps any other industry, companies see linkages to universities as a fast track to new ideas. There are hundreds of collaborative arrangements between biotechnology companies and U.S. universities (and nonprofit research institutions), many focused on human pharmaceutical applications. The U.S. government plays a powerful role in the development of biotechnology. Its two principal activities are in research and the regulation of new biotechnology products. The National Institutes of Health (NIH) represents one of the largest biomedical research complexes in the world. NIH and, to a lesser degree, the National Science Foundation (NSF) fund most of the basic biological research at universities and nonprofit research institutes in the United States. Regulatory functions are split among a number of agencies: the U.S. Food and Drug Administration (drugs, food); the U.S. Environmental Protection Agency (environmental regulations); the U.S. Department of Agriculture (plants, animals); and NIH (research guidelines). Although progress has been made toward development of a unified regulatory scheme, there has been considerable criticism of the slow approval process for new products, particularly in medical products. Such delays can only increase the financial burden for the companies involved. For large companies, drug pricing is a major issue.22 Unlike the Japanese government, 22   Alice Sapienza has argued that, while the federal government is encouraging "hi or biotech" advanced drugs in the health care arena, pressures on the pharmaceutical industry in the form of drug pricing (health care cost containment) are creating a situation where the products will not be paid for. See "Irreconcilable Differences? Strategic Innovations for a Publicly Insured Market" Technovation, forthcoming.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s the U.S. government has played a limited role in technology development and transfer. Creation of the BioProcessing Center at the Massachusetts Institute of Technology (MIT) and passage of the Technology Transfer and Orphan Drug acts represent infrequent examples of government action that may help speed up the commercialization of research. State governments have become increasingly involved in biotechnology even though their expenditures are minimal compared to those of the federal government. Their principal effort has been in the creation of state biotechnology centers, many of which carry out basic research in areas that might be relevant to the states' economies. Some states, such as Maryland, Massachusetts, Pennsylvania, and North Carolina, have begun to experiment with new approaches to commercialization, with fostering the creation of new biotechnology companies, and with the promotion of sales of biotechnology products overseas. In Japan there are virtually no U.S.-style small biotechnology companies. A variety of possible explanations for this can be offered, but the lack of a dynamic venture capital industry, a centralized R&D process in large traditional Japanese firms, and the comparative lack of movement of professionals from company to company are certainly important factors. Japanese companies active in biotechnology are mostly large, well-established pharmaceutical, fermentation, or chemical companies, such as Yamanouchi, Kirin, and Mitsubishi Kasei. In recent years other Japanese companies (even steel and tobacco companies) have entered the biotechnology industry in order to diversify into new businesses.23 In a recent survey of 1,600 CEOs, R&D directors, and business planners in Japan's largest companies, biotechnology was selected as the most important technology for the future.24 Fumio Kodama notes Japan's high expectations for biotechnology in the 5-to 10-year time period.25 The Japanese government is another important actor in the promotion of biotechnology, although Japanese government funding in all areas of R&D (biotechnology included) is dwarfed by the investments made by companies.26 The Japanese government, particularly the Ministry of International Trade and Industry (MITI), nevertheless played a significant role in 23   Toyota is beginning biotechnology research in its corporate laboratory, according to a December 20, 1990 report of the Nihon Keizai Shimbun (in Japanese), p. 11. See also report by Robert K. Fujimura for U.S. Department of Commerce, R&D in Biotechnology-Related Industries in Japan, 1989, NTIS PB 89-167936. 24   "Bio, Kankyo nado Juyo ni" (Importance of Bio, Environment, etc.), Nihon Keizai Shimbun, September 9, 1990, p. 6. 25   Fumio Kodama, comments at Workshop on U.S.-Japan Technology Linkages in Biotechnology, June 12, 1991. 26   See Robert T. Yuan and Mark D. Dibner, Japanese Biotechnology: A Comprehensive Study of Government Policy, R&D and Industry (London: MacMillan, 1990) and Mark D. Dibner and R. Steven White, Biotechnology Japan (New York: McGraw-Hill, 1989).

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s stimulating interest in biotechnology in the late 1970s and early 1980s, leading a variety of companies to establish internal goals in this field or to join R&D collaborations with other companies. As Table 2 shows, the overall amount of money spent on biotechnology through the general account (government of Japan budget) is less than one-fifth of that spent by the U.S. government, but it is important to look closer to get an accurate picture of Japanese government support.27 In contrast to the emphasis on support for basic research in the United States, the share of Japanese government funding for university research has declined as a part of the national R&D effort in recent years. Still, the Ministry of Education reports that 40 percent of the grants to university researchers under the kagaku kenkyu hi (scientific research fund) go to life sciences and that many of the priority areas selected for preferential treatment in the awards process are in biotechnology.28 At the same time, MITI, the Science and Technology Agency, and other ministries are increasing their funding of biotechnology-related R&D, including $27 million in 1991 for international collaboration in the Human Frontier Science Program. Table 3 shows that the share of Japanese contributions in life sciences in leading journals has remained steady in recent years. (Japan's overall contribution, however, remains about one-fifth that of the United States.29) Perhaps the most striking aspect of Japanese government support for biotechnology is its commercial orientation and the number of agencies involved. One example that illustrates both of these aspects of policy is support for research on the role of carbohydrates in cell function. Three Japanese agencies launched projects in this field in March 1991, bringing the total number of agencies involved to five. Three of these projects encompass participation by industry.30 Other institutes in protein engineering and marine sciences also have been formed over the past few years 27   The statistics here are taken from a Japanese trade journal, Baiosaiensu to Indasutori (Bioscience and Industry), January 1990 and February 1991. Estimating the Japanese government's biotechnology budget presents several problems. First, the definition of biotechnology used by the Japanese government appears to be broader than that used in the United States, which would introduce an upward bias in the figures. Second, the figures do not include loans made through the Japan Development Bank, loans through the Small and Medium Size Business Program, and sizable tax breaks on R&D and the purchase of laboratory equipment. 28   "Heisei 2 Nendo Kakushocho Baiteku Kanren Yosanan" (1990 Biotechnology-Related Budget Proposal by Agency), Baiosaiensu to lndasutori, January 1990, p. 97. 29   National Science Board, Science and Engineering Indicators, 1991, p. 388. Between 1981 and 1987, Japan's contributions increased from 6.2 percent to 7.1 percent of the world total of publications in biomedical research, while the U.S. share declined slightly from 39.5 percent to 38.2 percent. 30   "San Shocho de Shin Purojekuto" (Three Agencies Launch Projects), Nihon Keizai Shimbun, September 9, 1990, p. 17. Genzyme Japan will receive approximately $1.7 million over the next 5 years from the MITI to conduct carbohydrate research; foreign firms can participate.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s TABLE 2 Japanese Government's Biotechnology-Related Budget   1988 1989 1990 1991 1992 (requested) Ministry of International Trade and Industry (MITI) General Account (billion yen) 5.1 7.1 6.6 9.9 10.3 (million $) 37.8 52.6 48.6 73.4 76.4 (Investment Account million $) (20.7) (15.6) (NA) (NA) (NA) Science and Technology Agency (STA) General Account (billion yen) 13.8 18.2 17.6 20.3 22.6 (million $) 102.2 134.8 130.3 150.3 167.7 (Loan Account million $) (50.4) (65.9) (66.7) (44.7) (8.0) Ministry of Education (Mombusho) Program Funding (billion yen) 14.0 14.5 16.1 19.8 19.3 (million $) 103.7 107.4 119.3 146.7 143.0 40% of Research Subsidies (billion yen) 19.6 21.0 22.3 23.6 25.8 (million $) 145.2 155.6 165.3 174.8 191.4 Total General Account (billion yen) 33.6 35.5 38.4 43.4 45.1 (million $) 248.9 263.0 284.4 321.5 334.4 Ministry of Health and Welfare General Account (billion yen) 4.8 6.0 6.6 7.4 8.5* (million $) 35.6 44.4 48.9 55.0 63.1 (Investment Account million $) (19.3) (17.8) (17.0) (17.0) (17.0) Environment Agency General Account (billion yen) 0.34 0.34 0.3 0.34 0.45* (million $) 2.5 2.5 2.2 2.5 3.4 Ministry of Agriculture, Forestry, and Fisheries General Account (billion yen) 6.6 7.5 7.9 8.3 9.1 (million $) 48.9 55.6 58.5 61.7 67.7 Total General Account (billion yen) 64.2 74.6 77.4 89.6 96.0 (million $) 475.6 522.6 573.3 664.3 712.7 Change in General Account (NA) +16% +4% +16% +7% (Financing Accounts million $) (90.4) (99.3) (NA) (NA) (NA) NOTE: Conversions at 135 yen per dollar. Items that have an impact on biotechnology but that do not appear in the budget include private sector funding for university research administered by the Ministry of Education, extramural support for Ministry of Health and Welfare research institutes, loans extended through the Japan Development Bank and the Small-and Medium-Sized Business Program, biotechnology-oriented ERATO programs administered by STA, and R&D subsidies given as tax breaks. * In 1992, the Ministry of Health and Welfare and the Environment Agency changed their definitions of biotechnology, making them more inclusive. The figures here are based on the definition used in previous budgets. SOURCE: Compiled by OJA Staff from figures appearing in Baiosaiensu to lndasutori (Bioscience and Industry), January 1990, February 1991 and March 1992; and figures provided by the Ministry of International Trade and Industry.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s TABLE 3 Japanese Papers Published in Leading Journals   Japanese Papers Published as a Percentage of Total Papers   1980–1984 1985–1989 Biology Journal of Biological Chemistry 5.1 7.2 EMBO Journal 2.2 4.1 Biochemical Journal 2.9 3.5 Molecular and Cellular Biology 2.0 2.5 Cell 1.6 1.6 Average 3.9 5.2 Multidisciplinary Nature 1.6 1.8 Science 0.7 0.8 Average 1.3 14   SOURCE: Institute for Scientific Information, Science Citation Index, 1980–1989, as related in "Japanese Scientists Increase Their Presence in World-Class Journals," Science Watch, May 1990, p. 7. In the article, John Tooze, editor of EMBO Journal, noted that the Japanese are strongest in biochemistry and fields relevant to the pharmaceuticals industry. He also notes that the Japanese share of papers rose only modestly in Science, Nature, and Cell, "the top three journals in biology." under the Key Technology Center program, which features strong industry leadership. The U.S. government could actively participate with industry in the development and exploitation of commercial applications of biotechnology, as discussed in more detail in the conclusions chapter of this report. In the 1980s Japanese companies began to build competitive strategies featuring expanded participation in the U.S. research community and market. One indicator is the fact that they have filed many pharmaceutical patents in the United States. These patents are cited often, but they are less science intensive than the U.S.-origin patents filed at the same time.31 In terms of new nonbiotechnology drugs introduced into the market, the growing contributions of large Japanese firms are clear. In biotechnology, Japanese companies gradually built strength during the 1980s by perfecting manufacturing technology through automation and other means in areas such as bioprocessing, by commercializing technology and products licensed from U.S. companies, and by deepening their independent R&D capabilities. Suntory 31   Francis Narin and Dominic Olivastro, Identifying Areas of Leading Edge Japanese Science and Technology, CHI Research for NSF, April 15, 1988.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s is building a completely automated factory for the production of biotechnology-based drugs.32 Generalizations about the six major groups of actors must be qualified in light of changes now under way. There is evidence to support the thesis that a few U.S. biotechnology firms are today moving toward "forward integration," establishing their own manufacturing, marketing, and sales capabilities (rather than relying on the large farms to manufacture and sell the products they develop or joining them in joint ventures). Forward integration, however, may not be easy for even the most successful biotechnology firms. There is also some evidence that the large U.S. companies are moving to expand their in-house biotechnology R&D. Meanwhile, Japanese companies are expanding their ties to innovative U.S. firms and increasing R&D in more fundamental research areas. A distinguishing characteristic of large Japanese firms, particularly pharmaceutical firms, seems to be their interest in using biotechnology as the driving force in their attempt to become serious global players, rather than as a complement to established business activities. COMPANY-TO-COMPANY LINKAGES BETWEEN THE UNITED STATES AND JAPAN Few studies exist that focus explicitly on technology linkages between U.S. and Japanese firms or that document changes over time.33 Since the mid-1980s, however, it has been clear that linkages between U.S. biotechnology firms and foreign companies have been expanding and that linkages with Japanese firms have been significant. The NRC biotechnology working group assembled data on linkages from a number of sources, including the data base developed by the North Carolina Biotechnology Center, Bioscan, reports by Ernst & Young, JETRO, JEI, and other proprietary sources. Together, these sources provide an overview of the various linkage mechanisms. In many instances, however, information in specialized journals and data bases must be augmented with expert knowledge to draw conclusions about the direction of technology transfer and the significance for corporate strategy. There are many ways to classify technology linkages, but an important distinction can be made, at least in theory, between those that involve the commercialization of technology already in existence and those established 32   "Santori_Baio iyaku no Zenjido Kojo" (Suntory_A Completely Automated Factory to Produce Bio Drugs), Nihon Keizai Shimbun, September 26, 1991. 33   In addition to the works of Mark D. Dibner cited previously, see Lois S. Peters, Technical Network Between U.S. and Japanese Industry (Rochester, N.Y.: Center for Science and Technology Policy, Rensselaer Polytechnic Institute, 1987), p. 117 ff. See also Donald H. Dalton and Phyllis A. Genther, U.S. Department of Commerce, The Role of Corporate Linkages in U.S.-Japan Technology Transfer 1991, NTIS PB 91-165571, 1991.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s with the purpose of developing new technology. Licensing and marketing agreements, materials supply, and some types of joint ventures not oriented to new technology development are formed to exploit technology already brought through development and manufacturing. Research contracts (which usually include licensing agreements), joint development agreements to produce a new product or process, and equity investments oriented around the development of new technology are examples of linkages aimed at developing new technology. Generally speaking, the first type of technology linkage (designed to transfer established technology) requires less certainty and less tacit knowledge about a particular partner and its R&D process than do technology linkages for the development of new technology, where equity investments are also more common.34 Data collected by the NRC working group show that during the decade of 1981 to 1991 the most common form of technology linkage between U.S. and Japanese firms was of the first type_ a transfer of technology developed in the United States to a Japanese company through a licensing or marketing agreement. About half of the linkages included in the data base involved licensing of rights to manufacture a product (23.8 percent) or licensing of marketing rights (27.3 percent) to a Japanese company (see Table 4). Research contracts, direct acquisitions, and equity investments (for a minority stake in a U.S. company) have been much less prominent. It is important to emphasize, however, that most alliances are multifaceted. They frequently include a technology license, an R&D collaboration, some marketing, manufacturing and distribution rights, and in some cases an equity investment. Trade press and other published reports, the basis for data compilation, typically report on some new development and often do not include a complete review of all aspects of technology linkage, including those that are ended. The predominant pattern for U.S.-Japan linkages in biotechnology is a tie-up between a small U.S. biotechnology company and a large Japanese company (see Table 5). Overall, 200 of the 282 cases in the data base involved a linkage between a small U.S. biotechnology firm and a large Japanese company. The overwhelming majority of these linkages (160) were in the health care field; of the remaining 40 cases, more than half were in agriculture and food-related technologies. Table 5 provides a summary of the linkage patterns. Of the 51 linkages between large U.S. companies and large Japanese ones, it should be noted that more than half involve technology transfers in areas other than biotechnology precisely defined (such as traditional pharmaceuticals). While these data make it clear that 34   See Gary P. Pisano, "Using Equity Participation to Support Exchange: Evidence from the Biotechnology Industry," Journal of Law, Economics and Organization, vol. 5, no. 1, Spring 1989.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s TABLE 4 Alliances Between U.S. Biotechnology Firms and Large Japanese Companies, 1981–1991 Type of Alliance Comments % of Total Acquisition Outright purchase of a company 2.1 Equity purchase Purchase of a minority stake in a company 8.2 Joint deal Unspecified alliance, usually for product development 21.6 Research contract Biotech firm is paid for R&D on a specified product or product line 4.6 Joint venture New joint venture company formed 9.6 Licensing agreement License for rights to a product or technology, often for a limited geographic region 23.8 Marketing agreement License to market a product or technology 27.3 Purchase of material or service Provision of biological materials, products, or services for a fee 2.8 NOTE: The table was compiled from 282 cases that involve alliance formation. The data include 27 cases involving large U.S. companies active in biotechnology in which the focus of the alliance was not primarily biotechnology, and 12 alliances in biotechnology equipment. SOURCE: North Carolina Biotechnology Center, Institute of Biotechnology Information, Actions Database. technology linkages established to date have focused on the health care sector, it is important to remember that linkages in biotechnology applications in agriculture, the environment, and bioelectronics will probably increase in the future. Although the numbers are small, there is some evidence of an increase in equity investments in recent years. A trend toward increasing numbers of marketing agreements, a type of relationship in which there is often limited technology transfer, is quite clear. With regard to the direction of technology flow, there is no question that the predominant pattern of technology transfer has been and remains from the United States to Japan. In more than 90 percent of the linkages between small U.S. firms and large Japanese companies where the direction of technology flow could be established, it was from the United States to Japan. When the 231 cases involving small U.S. firms were reviewed, this pattern persisted. In only 11 cases was there clear evidence of technology

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s TABLE 5 U.S.-Japan Corporate Technology Links in Biotechnology, 1981–1991 Category Total Cases Where Technology Flow Is Identified % Flow to Japan Small U.S. firm Large Japanese firm Health care 160 154 90   There appears to be an increase in the importance of marketing agreements over time, but the proportion of linkages in which technology flows to Japan has remained constant. Small U.S. firm Large Japanese firm Nonhealth care 40 31 90   About half are targeted at the agriculture/food markets. There are no apparent trends in industries, mechanisms, or technology flow. The percentage of linkages in which technology flows to Japan is equivalent to that of health care. Small U.S. firm Small Japanese firm All markets 31 25 96   The first two cases of small Japanese companies purchasing equity in U.S. firms occurred in 1990. NOTE: Table includes 10 alliances in biotechnology equipment. Table does not include 24 cases involving large U.S. companies and large Japanese companies in biotechnology. Based on expert review of the 24 case sample, 10 involved technology transfer from the United States to Japan and 4 involved transfer from Japan to the United States; in 10 cases it was not possible to determine the direction of technology transfer. It should be noted that three of the four cases involving technology transfer to the United States were transactions making up the Upjohn-Chugai partnership in which the original technology was developed in the United States by Genetics Institute and licensed to Chugai. Considering the small number of cases involving large U.S. companies and the large weight that would be assigned to the Upjohn-Chugai partnership, the NRC working group decided that inclusion of these cases in the table would be misleading. SOURCE: North Carolina Biotechnology Center, Institute of Biotechnology Information, Actions Database. transfer from Japan to the United States. In only another eight cases was there clear evidence of a two-way flow of technology. A recent analysis by Weijan Shan and William Hamilton confirms these trends. Shan, using BioScan data and a very detailed disaggregation of linkage types, found that the majority of U.S.-Japan cases involved technology transfer rather than joint development of new biotechnology products. Shan takes this as evidence that U.S. firms avoid joint development and manufacturing relationships that may provide access to new technology but

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s according to the respondents, was the use of a university as a subcontractor for basic and pioneering R&D (39 percent), followed by joint partnership with a university for such projects (30 percent). The survey confirmed that Japanese companies, like their U.S. counterparts, are seeking to establish linkages with universities that will benefit their own businesses.51 The list of technology linkages between Japanese companies and U.S. universities in Appendix B confirms that the focus has been on new technology development. A prominent example, mentioned above, is the investment of $85 million by Shiseido to establish the world's first comprehensive cutaneous biology center at Massachusetts General Hospital, Harvard University's largest teaching hospital. In this case a sponsored research agreement was negotiated that outlines patent protection, salaries, direct and indirect costs, and relationships with other sources of funding. According to individuals at Massachusetts General Hospital, a sponsored research agreement provides more insurance for the U.S. organization than would be the case if a ''gift'' were made by a Japanese company to an individual professor. Gifts, often not covered by university policies, are sometimes made directly to an individual professor who is part of a publicly funded research program. Whether the funding comes from a U.S. or Japanese company, the company is always interested in gaining intellectual property rights. Often this is accomplished by filing a patent application prior to publication of research results, so that the corporate sponsor's intellectual property rights are protected. Technology linkages between Japanese companies and U.S. research institutions must be seen in a larger context_that of the relative comparative advantages of the two countries. In the past few years concerns have been raised about declining award rates by the NIH and NSF to U.S. researchers. Both agencies have concluded that there is much potentially valuable science represented in the applications that have gone unfunded. In addition to advocacy for continued support for basic research, a number of U.S. science policy leaders have begun to call for an increase in nondefense R&D, with an eye toward strengthening the competitiveness of U.S. industry. Steps have also been taken to improve technology transfer from the national laboratories to industry, and an effort has been made to provide a preference for transfers of technology to U.S. firms. In a period when research funds in the United States are constrained and priorities are under discussion, the number of foreign researchers in U.S. university and nonprofit research laboratories is growing. In 1988, according to statistics prepared by Japan's Ministry of Justice, 52,224 Japanese researchers went to the United States, while 4,468 U.S. Researchers 51   Ibid.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s visited Japan.52 A number of studies have explored the growing importance of foreign-born scientists and engineers to R&D in the United States. The excellent and open laboratories in the United States attract researchers from around the world.53 This is certainly true with respect to the exchange of Japanese and U.S. researchers in biotechnology. While only comparatively small numbers of U.S. researchers are going to work in Japanese laboratories, about 30 percent of the U.S. individual researchers who spent at least two months in Japanese government-supported programs in Japan identified themselves as working in the field of life sciences. Almost two-thirds of the Japanese researchers who spent more than 1 month at U.S. national research institutes in 1988 were reportedly carrying out research in biotechnology.54 It is estimated that there are 450 researchers from Japan at NIH, out of a total of 1,800 foreign researchers.55 While data are inadequate to provide an accurate estimate of the exchange of U.S. and Japanese researchers in biotechnology, it appears that biotechnology is a significant area of mutual interest.56 There is no easy way to calculate the gains or losses to the United States. Close interaction with a senior scientist represents access to years of funding and a network of researchers. Foreign researchers contribute to the work of the laboratories they visit. But the full costs of training are not covered by stipends or salary support. Japanese researchers, particularly those from private companies, usually return to their home country laboratories. In a few cases, however, talented young Japanese scientists have said that they would be unable to pursue creative research in Japan.57 Steps can be taken to expand the number of U.S.-born students, including women and minorities, who pursue careers in science. Programs of Japanese-language training for technical personnel and expanded fellowship opportunities may, over time, increase the number of U.S. researchers who 52   More than 113,000 Japanese researchers went to countries around the world, while Japan received 68,000 (59,000 from developing countries). 53   While U.S. university research remains comparatively strong, researchers are voicing complaints about inadequate funding, administrative constraints on multidisciplinary research, and other problems. 54   The total number of U.S. researchers covered in the survey conducted by NSF was 94. 55   Data provided by NIH. About two-thirds of all foreign researchers at NIH receive some support from NIH; it estimated that roughly the same percentage of Japanese researchers receive support. It should be noted that this support covers salaries, but not the true and full costs (or contributions) of using the facilities and interacting with permanent staff. 56   The 1988–1989 Annual Report of the Japan Society for the Promotion of Science indicates that only two of the 75 American postdoctoral researchers in Japan were working on topics related to biology. Of the 19 Japanese postdoctoral students in the United States in the same period, eight were engaged in biomedical research. See pp. 70–74. 57   Nobel prize winner Susumu Tonegawa is one example.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s study and work in Japanese laboratories. Until the quality of Japanese basic research in the life sciences improves, however, incentives for U.S. scientists to work in Japanese universities and national research laboratories will remain limited. For that reason, meaningful access to Japanese biotechnology R&D must include opportunities to interact with corporate laboratories and industry-led R&D consortia.58 The 1988 umbrella agreement between Japan and the United States for cooperation in science and technology states that increased cooperation is a goal. Cooperation in life sciences, including biotechnology, has been identified as a priority area. Experience over the past few years would lead one to question whether the umbrella agreement is a potent instrument for fostering research exchange in biotechnology.59 A team of U.S. experts traveled to Japan in 1991 to assess the status of Japanese bioprocessing; their visits focused primarily on R&D facilities.60 The major impetus for expanding collaborative R&D efforts has come rather from individual agencies, such as the agreement between NSF and the Ministry of Education to promote bilateral seminars in biotechnology and other fields.61 The Science and Technology Agency of Japan began a cooperative research project with the U.S. National Science Foundation in biotechnology.62 For universities and national laboratories supported with public funds, important questions have been raised concerning reciprocity. Recent public debates have focused on industrial liaison programs that include large numbers of foreign companies, research sponsored by foreign companies at U.S. universities, and the growing number of Japanese researchers in the nation's premier public sector biotechnology laboratories. These debates have drawn attention to the question of whether the end result will be to build a formidable competitor in Japan's biotechnology industry. It is not surprising that 58   Committee on Japan, National Research Council, Expanding Access to Precompetitive Research in the United States and Japan: Biotechnology and Optoelectronics (Washington, D.C.: National Academy Press, 1990). 59   The most significant exchanges are worked out independently by such agencies as NIH or take place through individual exchanges, rather than being fostered under the umbrella agreement. 60   Japan Technology Evaluation Center (JTEC), "Bioprocess Engineering in Japan," forthcoming. 61   Two such seminars have been sponsored in recent years, each involving about 10 researchers from each country. In addition, a significant number of NSF's cooperative science programs with Japan have focused on biotechnology-related topics. There were a total of 56 seminars in all fields in the 1989–1990 period. Only a small number of U.S. researchers on long-term stays in Japan, however, are working in biotechnology-related areas, according to NSF. 62   See "Baio de Bei to Kyodo Kenkyu" (Joint Research with the United States in Biotechnology), Nihon Keizai Shimbun (in Japanese), January 5, 1991, p. 13. The collaboration involves Michigan State University and will be focused on environmental applications of biotechnology.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s Japanese companies are building strategies to access basic research in U.S. universities, in view of the significant costs that would have to be incurred to establish comparable programs in-house and the relative weakness of Japan's own university labs. In an effort to learn more about the linkages between U.S. universities and Japanese corporations, the NRC working group conducted a pilot survey in the spring of 1991. The survey was sent to 23 of the largest university biotechnology centers. Responses from 18 of the centers indicated that the value of research contracts with Japanese companies is small and that little technology is licensed to Japanese companies but that the number of Japanese visitors and researchers is significant. Confuming previously mentioned trends, there is no case in which the number of researchers from the U.S. university biotechnology centers going to Japan approaches the number of visitors from Japan. It should be noted, however, that most respondents indicated that they did not have complete information about linkages developing across their university. The issue of Japanese participation in research at U.S. universities is complex. U.S. university officials say that participation by Japanese companies often comes after U.S. companies have declined to get involved. In view of the federal budget crisis and the exponential growth in R&D in the life sciences, it seems likely that Japanese involvement will increase in the years ahead. While some believe that restrictions are needed to protect U.S. competitiveness, a more viable approach may be for universities themselves to build more coherent strategies. In view of the growing public concern, it may be appropriate for U.S. institutions to develop guidelines that permit the continuation of foreign participation while ensuring academic freedom and timely dissemination of research results. Questions of reciprocity also arise in the context of participation in international conferences and dissemination of research results through professional journals and data bases. There is no satisfactory way to judge the numbers of Japanese researchers attending conferences in the United States or other locations or to draw firm conclusions about their contributions to professional organizations as paper presenters and program organizers (as contrasted to registrants who come to listen). Some large organizations, such as the Federation of American Societies for Experimental Biology (FASEB), whose annual meetings draw 15,000 to 20,000, would find it difficult to make statements about participation by individuals from Japan. FASEB collects data on the number of "registrants from abroad" (only about 50 from Japan in 1990), but there is no way to know how many of the Japanese researchers currently working in the United States might register using their current institutional affiliation.63 In the cases of the Association 63   Data provided by FASEB.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s of Biotechnology Companies (ABC), there were eight Japanese attendees at the 1989 annual meeting (out of a total of 475) and five Japanese attendees at the 1990 meeting (which was attended by 500 individuals).64 Some U.S. professional organizations have few conferences or events that involve foreign participation.65 On the other hand, there is good reason to believe that professional conferences and meetings with a more specialized focus in some subfields of biotechnology, particularly those held in the Pacific region by international unions, attract good participation from Japan. For example, the major interaction of the American Chemical Society (ACS) with Japan is not in its annual meeting but in the International Chemical Congress of Pacific Basin Societies, which the society cosponsors. Of the 6,000 registrants at the 1989 congress in Honolulu, Hawaii, more than 3,400 were Japanese chemists.66 Likewise, Japanese attendance at smaller biotechnology-related meetings organized by FASEB may well be much stronger than at the association's annual meeting. One can find evidence to support this perspective by observing the strong participation of Japanese chemical engineers in conferences that feature new research on safety-related areas.67 The best example of a U.S. professional organization involved in biotechnology where there is significant foreign participation is the American Society for Microbiology (ASM), which also collects the most relevant data.68 More than 25 percent of ASM's members come from abroad, and they are seen as making substantial contributions to the organization. Statistics from the ASM are especially relevant, since members must have at least a bachelor's degree in microbiology. Of its almost 35,000 full members, about 1,000 are Japanese. The areas of expertise most frequently cited by the Japanese members are molecular biology and fermentation. Nonmember subscriptions to journals are unusually high for the Asian region, and Japanese members' comparatively high subscription rates to the journal Clinical Microbiology reflect their strong interest in pharmaceutical-related applications. Foreign authors are significant contributors to ASM's more than 10 journals. ASM is a good example of an American professional association that is consciously charting an international course. Japanese scientists, from industry as well as academe, participate significantly not only in attending meetings but also in conference planning, authoring papers, and subscribing to publications (see Tables 7a, 7b, and 8). To better understand the internationalization of biotechnology, it would 64   Data provided by ABC. 65   One example may be the American Institute for Chemical Engineering. 66   Data provided by ACS. 67   Comments from the staff of the Biochemistry Union. 68   ASM generously cooperated with the NRC working group in providing the detailed statistics cited here.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s TABLE 7a ASM Full Membership by Region   1985 1986 1987 1988 1989 1990 U.S. full members 22,842 81.01% 23,510 80.47% 24,103 79.82% 25,100 78.95% 26,203 78.09% 26,725 77.29% Asia full members 1,288 4.57% 1,382 4.73% 1,458 4.83% 1,573 4.95% 1,748 5.21% 1,906 5.51% Total full members 28,184 29,216 30,197 31,792 33,556 34,578 ▪ Japanese full members constitute approximately 50% of the Asia region. (Currently, there are 1,000 Japanese full members out of a total of 35,000.) ▪ Full members hold at least a B.S. in a microbiology or a related science. SOURCE: ASM, Washington, D.C. TABLE 7b 1990 ASM Full Members by Self-Identified Divisions   No. in U.S. No. in Asia Total No. in Division from Entire Membership Molecular biology 3,218 79.54% 243 6.01% 4,046 11.70% Fermentation 810 76.13% 83 7.80% 1,064 3.08% Clinical microbiology 4,626 78.83% 241 4.11% 5,868 16.97% Medical microbiology 1,032 74.46% 88 6.35% 1,386 4.01% ▪ Percentages are based on total number of members in each division. ▪ Divisions here are those in which the greatest number of Japanese members identified themselves. SOURCE: ASM, Washington, D.C.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s TABLE 8 ASM Journal Subscriptions and Publication Acceptances for 1990   U.S. Full-Member Subscription Asia Full-Member Subscription U.S. Nonmember Subscription Asia Nonmember Subscription U.S. % Accepted in Journal Asia % Accepted in Journal Medical Microbiology 3,947 342 945 351 56.43 7.68 Applied & Environ. Microbiology 4,331 388 1,056 710 55.34 9.32 Molecular & Cell Biology 3,724 289 818 268 78.41 4.15 Clinical Microbiology (review) 5,479 452 249 90 80.95 0.00 Infection and Immunity 3,549 374 771 414 61.81 9.05 Systematic Bacteriology 494 213 311 178 39.54 19.77 Journal of Bacteriology 3,390 489 1,354 751 62.18 8.61 Clinical Microbiology (diagnostic) 8,354 621 1,138 405 55.54 8.99 Journal of Virology 2,677 248 808 374 67.71 5.28 General Microbiology (review) 6,778 618 1,313 503 66.67 8.33 ▪ Number of Japanese authors contributing from the Asia category is high. ▪ Percentage of foreign contributions to ASM journals during 1986–1990 was steady (38%) but increased in Applied and Environmental Microbiology, Systematic Bacteriology, and Journal of Clinical Microbiology. ▪ Most subscriptions in the Asia category are from Japan. Interest of Japanese scientists in identifying new microorganisms is very high. This is reflected in the high subscription rate for Systematic Bacteriology, which focuses on nomenclature. ▪ ASM is increasing the number of foreign scientists on its editorial and advisory boards. SOURCE: ASM, Washington, D.C.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s be useful to gather more comprehensive statistics on participation by foreign1 scientists and engineers in conferences, as organizers and panelists as well as attendees, and in specialized journals. Comparisons to conferences held in Japan and to Japanese-language publications would provide a basis for drawing conclusions about reciprocity. Unless universities and professional associations carry out such studies and cooperatively analyze data gathered by different institutions, the policy debate will be influenced by anecdoctal evidence and inadequate statistics. EXAMPLES OF TECHNOLOGY LINKAGES_MULTIPLE PURPOSES AND MECHANISMS To better understand the multiple mechanisms that typically make up U.S.-Japan linkages in biotechnology, it is important to look beyond aggregate data to specific examples. Four examples of U.S.-Japan technology linkages have been examined for this report, and full case studies are included in Appendix A. The cases are Kirin's operating joint venture with Calgene in seed potatoes, Monotech's licensing and marketing relationship with Showa-Toyo Diagnostics (STD) in cancer diagnostics,69 Kirin and Amgen's joint venture to develop and market EPO and granulocyte colony-stimulating factor (G-CSF), and the lease-swap agreement that allowed Hitachi Chemical's U.S. subsidiary to build an R&D lab on the campus of the University of California at Irvine in return for use of space in the building by the University's Department of Biological Chemistry. These examples illustrate much of the range of technologies, linkage mechanisms, partners, and markets that currently make up U.S.-Japan biotechnology linkages. The studies reinforce the inference drawn from aggregate statistics and anecdotal evidence that the objectives for Japanese partners are largely technological and that the U.S. partners are typically motivated by financial considerations. In addition to illustrating the motivations of the partners, the cases also detail the process of forming and managing biotechnology linkages. Each case is unique, but some common themes come into focus, including the gradual process of building relationships over time and the use of multiple channels to establish linkages. Some emerging questions are also discernable. For example, under what circumstances do linkages_even those that have benefited both sides_have a continuing rationale beyond the success of the first products in the market? U.S. biotechnology firms experiencing success may have greater bargaining power than in the past relative to larger corporate partners_ 69   Not the real names of the companies.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s Japanese and otherwise. The question is whether the structure of linkages can be modified to reflect changes in the circumstances and interests of the partners. Another important question concerns the long-term significance for U.S. academic research and for U.S. competitiveness of new efforts on the part of large Japanese companies to establish closer relationships with the U.S. biomedical research community in universities and other academic settings. What conclusions can be drawn about the impacts on the partners, both short and long term? Of the four cases presented here, two were launched fairly recently, which makes it difficult to assess even short-term impacts. In the other two cases the positive short-term impacts on both sides have been obvious and substantial. The short-term benefits to Japanese partners have centered on products. Japanese companies have been able to gain a foothold in commercial biotechnology by licensing products and technology developed in the United States. It is important to remember that, because of the time required for approval of pharmaceutical products, "short-term" benefits may take a number of years to materialize. In several of the cases the Japanese partner also focuses on expected longer-term benefits, such as diversification or a migration to more innovation-intensive strategies in existing businesses, in some instances by building research capability in biotechnology. In some cases the stated aim of many of the Japanese companies locating R&D facilities in the United States is to eventually conduct independent advanced biotechnology R&D in the United States. In a general sense, Japanese partners are motivated by the desire to establish a stronger global presence, although the cases studied here are unlikely to result directly in increased sales of products developed in Japan. As the two cases involving Kirin Brewery show, the pursuit of shorter-and longer-term benefits is by no means mutually exclusive, and perhaps linkages that bring both sorts of benefits are ideal from the standpoint of Japanese companies. But the greater product focus of Monotech-STD and the greater capability-building emphasis of the Hitachi Chemical/UC Irvine relationship may illustrate general differences between alliances forged with U.S. firms and with American research institutions. Clearly, Japanese companies have been able to use linkages with U.S. institutions to build technological and marketing capabilities in commercial biotechnology_regardless of whether particular linkages are maintained or dissolved. However, the eventual payoff of these capabilities and the extent of long-term benefits to the Japanese partners remain to be seen. From a U.S. perspective, a common thread in the calculations of companies_particularly small biotechnology firms_as well as universities is the need for capital to support a world-class R&D effort. In an environment

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s of constrained federal R&D budgets and impatient investors in large U.S. corporations, the prospect of investment from Japan and Europe presents an opportunity that U.S. institutions will consider seriously. The case studies show that under certain circumstances U.S. partners have been able to utilize linkages with Japan as part of an overall strategy for growth. Linkages have contributed critical financial resources to some U.S. firms. It appears that the quality of the American partner's technology is crucial in determining the potential of linkages to bring substantial benefits in the short term and that superior technology must be combined with clear strategic vision on both sides to realize its commercial potential. U.S. partners have also realized technological benefits from linkages with Japanese companies, though these are seldom consciously pursued. Market access also is an issue for American partners. For the stronger biotechnology firms, the development of linkages with Japanese companies has opened opportunities in the Japanese market for expanded sales, mostly licensed sales. Over the longer term, and parallel to the expectations of Japanese firms setting up R&D facilities in the United States, there is also a prospect that the linkages will serve to improve access to biotechnology developed in Japan. A handful of U.S. biotechnology companies are now monitoring Japanese technology, funding research, and conducting clinical trials in Japan. It is important to note that Japanese companies are strongly oriented toward technology development rather than fundamental science. This asymmetry in the biotechnology R&D systems of the two countries will make it necessary for the U.S. partners to consciously develop strategies to access the applied technology, particularly production technology, developed in Japan. Building the capability to enhance the long-term benefits of linkages with Japan has been vigorously pursued by some U.S. partners but doing so is often difficult. This is understandable given the financial and human resource constraints that have characterized most U.S. biotechnology companies. Yet devoting resources and attention to leveraging linkages with Japan to obtain technology and a foothold in the Japanese market may be an important focus for long-term growth and survival. Readers should keep in mind that detailed studies often touch on sensitive issues that parties connected with linkages are reluctant to discuss, particularly when real names are used. It is difficult to elicit information about cases that are clearly unsuccessful, or where there are hard feelings, under any circumstances. Further, although the cases contain examples of U.S.-Japan linkages in biotechnology aimed at human therapeutics, diagnostics, and agricultural biotechnology as well as a range of institutions as partners, none involve one of the major Japanese or American pharmaceutical companies. There have been few acquisitions of U.S. biotechnology

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s firms by Japanese companies, and it was not possible for the NRC working group to prepare a study on that particular technology transfer mechanism. Thus, these cases are not ideally representative, nor do they comprehensively illustrate the factors that can lead to asymmetrical benefits or outright failure. Still, care has been taken to explore cases in which a range of business and technical issues arise.