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Technology Linkages_Definitions and Approaches to Analysis

Biotechnology is a research-and capital-intensive industry for which intellectual property rights protection and government regulation are critically important. The industry is growing rapidly, both domestically and internationally, and the context is rapidly changing.6 Linkages between U.S. and foreign-based biotechnology companies also are expanding, but there is no consensus about the long-term impacts. Will Chugai's acquisition of a majority interest in Gen-Probe or Roche's acquisition of Genentech lead to the creation of potent competing firms, or will these linkages bring new strength to U.S. industry and the U.S. economy? Will Hitachi's investment in an R&D laboratory on a University of California campus bring benefits to both sides? Put another way, will biotechnology go the way of the semiconductor industry to face severe competition from Japanese companies that focus their efforts on commercialization of technology that originated here?

This report was compiled to assess the nature, scope, and impacts of technology linkages between the United States and Japan in biotechnology and to outline policy issues for government, industry, and universities. The major focus is on commercial biotechnology_the use of biotechnological tools to develop and manufacture products for the market. The line be-

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See, for reference, Burrill and Lee, Biotech '92, op. cit.; G. Steven Burrill and Kenneth B. Lee, Jr., Biotech 91: A Changing Environment (San Francisco, Ca.: Ernst & Young, 1990); and Biotechnology Information Division, North Carolina Biotechnology Center, Biotechnology in the U.S. Pharmaceutical Industry (Research Triangle Park, N.C.: NCBC, 1990).



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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s 2 Technology Linkages_Definitions and Approaches to Analysis Biotechnology is a research-and capital-intensive industry for which intellectual property rights protection and government regulation are critically important. The industry is growing rapidly, both domestically and internationally, and the context is rapidly changing.6 Linkages between U.S. and foreign-based biotechnology companies also are expanding, but there is no consensus about the long-term impacts. Will Chugai's acquisition of a majority interest in Gen-Probe or Roche's acquisition of Genentech lead to the creation of potent competing firms, or will these linkages bring new strength to U.S. industry and the U.S. economy? Will Hitachi's investment in an R&D laboratory on a University of California campus bring benefits to both sides? Put another way, will biotechnology go the way of the semiconductor industry to face severe competition from Japanese companies that focus their efforts on commercialization of technology that originated here? This report was compiled to assess the nature, scope, and impacts of technology linkages between the United States and Japan in biotechnology and to outline policy issues for government, industry, and universities. The major focus is on commercial biotechnology_the use of biotechnological tools to develop and manufacture products for the market. The line be- 6   See, for reference, Burrill and Lee, Biotech '92, op. cit.; G. Steven Burrill and Kenneth B. Lee, Jr., Biotech 91: A Changing Environment (San Francisco, Ca.: Ernst & Young, 1990); and Biotechnology Information Division, North Carolina Biotechnology Center, Biotechnology in the U.S. Pharmaceutical Industry (Research Triangle Park, N.C.: NCBC, 1990).

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s tween basic research and commercial biotechnology is not hard and fast, however. Companies focusing their efforts on the commercialization of biotechnology are research intensive, carefully watching the work going on in basic research laboratories because new developments in science can become the basis for new products seemingly overnight. But bringing these products to market can take a number of years, particularly in the health care field. Erythropoietin (EPO), for example, generated $200 million in revenues for Amgen in its first full year of sales in 1990. Amgen carried out research to bring this product to the clinical trial stage for approximately 3 years, and it took another 3 years to complete clinical trials and obtain regulatory approval before going to market.7 Because of the importance of fundamental research to firms seeking to commercialize biotechnology, the working group decided to include in its analysis linkages formed between Japanese firms and research laboratories at U.S. universities, national laboratories, and biotechnology centers that are likely to have an impact on market competition. Biotechnology is a diverse activity comprised of many scientific disciplines. Indeed, some prefer not to call it an industry because developments in biotechnology research span many fields of science and affect a wide range of industries (see Figure 1). For the purposes of this report, the working group has defined biotechnology as any activity, product, or process that involves recombinant DNA and/or cell fusion technology. These technologies are currently applied to develop products for human health care, specialty chemicals and biosensors, and human and agricultural applications and to improve the generation of energy and protection of the environment. More than 100 large chemical, pharmaceutical, and agricultural companies use biological processes. Large pharmaceutical and agricultural firms are using biotechnological techniques to complement their established in-house research efforts. These large companies should be distinguished from the dedicated biotechnology firms (many of them small firms formed by some of our nation's premier researchers and entrepreneurs) that focus almost exclusively on the use of biotechnology to develop new products through biological processes. In terms of market segments, health care (including human diagnostics, vaccines, and therapeutics) is by far the largest.8 7   See Gary P. Pisano, "Joint Ventures and Collaboration in the Biotechnology Industry," David C. Mowery, ed., International Collaborative Ventures in U.S. Manufacturing (Washington, D.C.: American Enterprise Institute, 1988), p. 199 for an estimate that the development of a pharmaceutical product takes 5 to 10 years from the initiation of basic research to marketing of the product. 8   There are more than 1,000 biotechnology companies in the United States, about 76 percent of them small companies with 1 to 50 employees. (See Burrill and Lee, Biotech 91, op. cit., pp. 15–16.) The Biotechnology in Japan Yearbook 1990/91 states that there are more than 800 Japanese companies involved in biotechnology commercialization and estimates the 1990

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s FIGURE 1 Matrix definition of biotechnology.     market in Japan for biotechnology-related products as more than 100 billion yen. Note that the Japanese count includes companies that are involved in biotechnology in some way; a large number of these companies have their primary business in some other area. See Mark D. Dibner and R.S. White, Biotechnology Guide USA (London: MacMillan, 1991), for a list of 742 biotechnology firms and 142 corporations involved in biotechnology in the United States.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s Defining the term "technology linkages" is equally complex. Linkages include company-to-company activities such as marketing, sales, distribution and/or manufacturing, inward and outward licensing of technology, and various types of equity investments and R&D collaborations. As will be discussed in more detail in the following section, technology linkages between companies are the most prominent and most studied types_both domestically and internationally_but the degree of actual technology transfer involved varies greatly and must be evaluated on a case-by-case basis. Other types of linkages relevant to a study of commercial biotechnology include relationships between companies and universities, national research laboratories, and biotechnology centers. In many instances these research laboratories are supported in part by taxpayer dollars. Companies establish ties with these organizations not only by endowing chairs and providing grants for facilities and research programs, but also by establishing links with individual professors through contract research and other mechanisms such as laboratory visits and training of employees. Conferences and specialized journals also offer mechanisms for learning about new developments in biotechnology R&D, as do patent registrations, cell line deposits, and related documents. While the primary focus of attention has been on company-to-company linkages in biotechnology, consider the following hypothetical case as an example of how universities can be important mechanisms. A researcher from a U.S. university is invited to give a research seminar at another U.S. institution, unaware that the biotechnology program at the host institution is generously funded by a company based in Japan. Details from the presentation are quickly faxed to the firm's Tokyo headquarters, where they are used as the basis for filing patent applications by the Japanese company. In Japan, where the principle for patent rights is first to file rather than first to invent, the Japanese company stands a good chance of securing patent rights. Consider another example that illustrates the importance of scientific publication in one country to research around the globe. A young Japanese researcher, Masashi Yanagisawa, read about the work of Highsmith and his colleagues on cell membrane receptors for a family of peptides called endothelins. The young researcher persuaded his professor that this was a worthy topic for a Ph.D. dissertation, and a group of researchers at Tsukuba University began work that led to a breakthrough published in Nature in March 1988. Two independent groups in Japan continue path-breaking work in this area, while Japanese pharmaceutical companies race to find potential therapeutic agents.9 9   See John Vane, "Endothelins Come Home to Roost," Nature, vol. 348, December 20–27, 1990, p. 673.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s Linkages provide opportunities not only for a transfer of technology and products but also for access to capital, market, and distribution channels; improved manufacturing capability; regulatory expertise; and research strengths. The creation or transfer of technology, whether consciously intended or an indirect result, is a prerequisite for a "technology linkage." One can study technology linkages by combing the trade press and other specialized publications for reports of specific interactions or deals between individual companies. This will provide a representative but not a complete accounting of either relationships among companies or the biotechnologyrelated in-house efforts of large pharmaceutical and other companies.10 In many cases linkages between U.S. and Japanese organizations are complex and encompass a variety of mechanisms that evolve over time. It is also important to underscore the ambiguity that arises in defining a "U.S." or a "foreign" firm. For years the standard approach has been to use equity ownership as the criterion for making the distinction. In practice, U.S. policy has been "national treatment" for foreign investors in the United States and the reduction of foreign barriers to investment overseas. Foreign investment has played a critical role in U.S. economic development, and U.S. multinational companies have grown through investments overseas, particularly in Europe where restrictions have been less extensive than those of Japan before the 1980s. For the purposes of this study, the critical elements in distinguishing between foreign and domestic firms are the location of a firm's headquarters (or where most of its employees are working) and majority ownership by citizens of a country. This definition is practical but not entirely satisfactory from an analytical perspective. About one-fourth of U.S. biotechnology firms are publicly owned, but companies based in Japan and other countries are often privately owned, and the details of ownership and control are less accessible. Nor should U.S. ownership be equated with U.S. interests.11 A "foreign" firm that operates manufacturing and R&D facilities in the United States may, under certain conditions, contribute more significantly to the U.S. economic and technology base than a "U.S." firm that moves its manufacturing and R&D overseas. Realities such as these complicate analysis of technology linkages and must be kept in mind. To assess technology linkages between the United States and Japan in biotechnology, the working group developed a multidimensional matrix (see Figure 2). Linkage mechanisms, organizations involved, and industries make 10   Readers should note that the focus of this report is on the linkages among firms rather than the internal biotechnology-related efforts of larger firms. Readers interested in the internal activities of larger firms can consult other studies, such as OTA, Biotechnology in a Global Economy, op. cit. 11   Robert Reich, "Who is Us?" Harvard Business Review, January-February, 1990, pp. 53–64.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s FIGURE 2 Matrix of U.S.-Japan private sector biotechnology linkages. up the three axes of the matrix. As will be discussed in more detail later, the predominant pattern during the past decade has been linkages involving emerging U.S. firms in the health care field in technology licensing and product marketing agreements with large Japanese firms. The analysis necessarily focuses on this area where U.S.-Japan linkages in biotechnology have been formed, but also includes treatment of potential future linkages in Chapter 4. Finally, a few preliminary words about underlying assumptions and goals are in order. Many studies have focused on international competition in biotechnology. This study focuses on technology linkages and long-term impacts, for the following reasons. First, Japan is now a technological superpower, and the United States and Japan must develop new modes of interacting that involve reciprocal transfers of Japanese technology and manufacturing expertise and/or commensurate contributions to basic research, the source of much of the technology. While the standard assumption is that Japan lags behind the United States in biotechnology, a study by the U.S. Department of Commerce identified biotechnology as an emerging

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s technology where the United States may fall behind Japan in the years ahead.12 At the very least, Japan has technological strengths in certain areas, such as bioprocessing and biosensors, worthy of attention. In addition, Japanese industry reports increasing investments in basic research,13 and the Japanese government is acting to catalyze new efforts in generic technology development. Nor should Japan's strengths in manufacturing and global marketing be underestimated.14 For all these reasons, a basic assumption is that Japan represents a major competitive challenge in biotechnology. Second, technology linkages present opportunities for two-way flows of technology. Press accounts provide clues to the direction of technology transfer and the terms of the arrangements, but more detailed knowledge often is required to evaluate the impact. As the competitive challenge to U.S. industry has grown in recent years, increased attention has been paid to past patterns of technology licensing to Japanese firms and training of Japanese scientists and engineers in fields such as electronics. An examination of technology linkages should contribute to an understanding of the expectations and results, and how linkage mechanisms can be structured so that both sides benefit. A basic assumption underlying this study is that these linkages are a fact of life, and it is important for U.S. companies and the United States as a nation to develop more effective strategies to ensure that benefits flow to both sides. A good deal of attention has been paid to structural differences in industrial organization and markets in Japan and the United States. Japan's biotechnology industry contrasts with the U.S. biotechnology industry in several ways. In Japan the primary players are large integrated pharmaceutical firms joined by large firms seeking to diversify into new businesses. There are also differences in the regulatory environments, drug pricing, and medical practices that relate to cultural differences between the two countries. One such difference lies in the fact that Japanese physicians prescribe and dispense drugs and profit directly from sales. Only a small number of the Japanese companies active in the U.S. market are biotechnology based, and many new drugs reflect joint development with a U.S. partner, but large Japanese companies are playing an increasingly important role in the U.S. market. Japanese pharmaceutical 12   U.S. Department of Commerce, Emerging Technologies: A Survey of Technical and Economic Opportunities (Washington, D.C.: Department of Commerce, 1990). 13   The "basic research" under way in Japanese corporations is mokuteki kiso kenkyu (translated goal-oriented basic research) and would not be recognized as such by many people in the United States. 14   Dibner and White, op. cit.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s firms are developing new drugs, marketing them in the United States, and in some cases licensing them to U.S. companies.15 In the face of such striking differences in industry organization, patent systems, regulation, and medical practices in the two countries, observers point to a "playing field" that is not level.16 The National Research Council's (NRC) working group discussed this issue at some length and concluded that the purpose of this assessment is not to develop recommendations that will create a "level playing field." In view of the significant differences and asymmetries in funding and access to research, technology, and markets, it seems correct to assume that the differences will not be eliminated quickly. Instead of trying to create a level playing field, the more important question is how to compete and win in this context. Increasing U.S.-Japan technology linkages are part of a global phenomenon. Linkages are affected by capital markets, the macroeconomic environment, scientific prowess, patent systems, and other factors that vary across countries and regions. One interesting question is whether the U.S.Japan linkages are different or generally similar to linkages between U.S. and European firms. Fortunately, the research carried out by members of the NRC working group and others on U.S.-European linkages can be drawn on to set the context and form contrasts and comparisons.17 There is no guarantee that the future will repeat recent experience_that the United States will maintain a competitive edge. New factors that may influence the future development of biotechnology as a global enterprise must be taken into account if the United States is to maintain its position. 15   Cardizem and Cefobid are among the biggest-selling drugs in the U.S. market. Cardizem, sold by Marion Merrell Dow, was licensed from Tanabe of Japan. Cefobid is marketed by Pfizer under license from Toyama Chemical Company of Japan. 16   Mark D. Dibner, "Drug Regulation in Japan: Can We Compete on Their Playing Field?" Biopharm, vol. 2, no. 9, 1989, pp. 34–42. 17   Lois Peters, in a study that focused on relationships between Japanese and European pharmaceutical industries, found evidence of technology transfer from Japan to Europe, particularly through the establishment of laboratories in Japan by European companies. See Lois Peters, "Emerging Private Sector Alliances," in Herbert I. Fusfeld, ed., Changing Global Patterns of Research and Development (Rochester, N.Y.: Center for Science and Technology Policy, Rensselaer Polytechnic Institute, 1990). Note that the data were not disaggregated with an analysis of interactions in biotechnology.