5
Conclusions

Various studies, scholars, economists, and politicians have argued, and the NRC working group agrees, that America's ultimate comparative advantage lies in its ability to develop and use technology, because this ability is a major driving force for continued economic growth. Venture-capitaldriven investments have played a major role in the development of new technologies and are uniquely American.

The Council on Competitiveness, in a recent report entitled Gaining New Ground,73 describes priorities for America's future and makes specific recommendations that are consistent with this report. According to the council's report, the U.S. position in biotechnology is strong, and the United States is not in danger of losing this leadership in the next 5 years. The NRC working group agrees but notes that there are a number of areas, such as fermentation, scale-up technologies, biosensors, and agricultural applications, where Japanese capabilities approach those of the United States. We are also concerned about the 5-to 10-year window. The present report deals primarily with U.S.-Japan technology linkages and their long-term significance to the United States, a subject not covered in the council's report. This analysis leads us to conclude that the U.S. biotechnology industry will lose its strong leadership position in several industry segments at the end of the decade unless concrete steps are taken by government, industry, and universities.

73  

Council on Competitiveness, Gaining New Ground: Technology Priorities for America's Future, 1991.



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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s 5 Conclusions Various studies, scholars, economists, and politicians have argued, and the NRC working group agrees, that America's ultimate comparative advantage lies in its ability to develop and use technology, because this ability is a major driving force for continued economic growth. Venture-capitaldriven investments have played a major role in the development of new technologies and are uniquely American. The Council on Competitiveness, in a recent report entitled Gaining New Ground,73 describes priorities for America's future and makes specific recommendations that are consistent with this report. According to the council's report, the U.S. position in biotechnology is strong, and the United States is not in danger of losing this leadership in the next 5 years. The NRC working group agrees but notes that there are a number of areas, such as fermentation, scale-up technologies, biosensors, and agricultural applications, where Japanese capabilities approach those of the United States. We are also concerned about the 5-to 10-year window. The present report deals primarily with U.S.-Japan technology linkages and their long-term significance to the United States, a subject not covered in the council's report. This analysis leads us to conclude that the U.S. biotechnology industry will lose its strong leadership position in several industry segments at the end of the decade unless concrete steps are taken by government, industry, and universities. 73   Council on Competitiveness, Gaining New Ground: Technology Priorities for America's Future, 1991.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s The U.S. biotechnology industry is growing very rapidly. In 1990 it had sales of $2 billion. For the year 2000 sales estimates of the U.S. industry vary from $30 billion to more than $70 billion. Biotechnology will be a major factor in the health care industry, even though sales of biotechnology products will represent less than 10 percent of the total. By the year 2010, the role of biotechnology in health care will increase substantially. During the 1990s, many more biotechnology companies will be created than the number that go out of business. The total number of companies will continue to increase, particularly in the health care area. Consolidation of the health care industry will be very slow. This dynamic industry has emerged from the world's premier science and technology base in the United States and America's venture capital/ public market system. In order for the U.S. biotechnology industry to remain strong, however, it is not enough to do good R&D and create research companies. A new generation of scientists and engineers must be trained. Heavy capital investments in manufacturing technology, product improvements, and global marketing of products also are essential. The new ideas created in the laboratory must be taken to the market, and the market is more and more a global one. A primary conclusion of the NRC working group is that cooperation between the United States and Japan in biotechnology is inevitable and desirable as we move toward a global market, but policy must be developed. The United States and Japan have different resources to bring to bear in developing biotechnology, as a result of striking differences in the two countries' research systems, industrial structures, regulatory regimes, patterns of disease and food products, drivers of capital market systems, and customer access and delivery. To achieve the potential gains from these differences, however, U.S. firms will need to develop careful strategies that focus linkages with Japanese firms on areas where technology transfer is feasible, such as bioprocessing. U.S. firms that want to do business in the Japanese market and tap into Japanese technology will need to develop effective ways of operating in Japan. Increased cooperation among U.S. companies also is desirable. There are good reasons to suggest that special efforts will be needed by U.S. government, industry, and academe if the benefits of cooperation with Japan are to be maximized. The danger is that, if conscious strategies are not developed by the U.S. participants to increase inflows of technology from Japan and to expand marketing and sales in Japan, the net result of increasing technology linkages in biotechnology will be to create significant competition from Japan without strengthening the ability of U.S. firms to compete and commercialize technologies. There are powerful forces driving small innovative U.S. biotechnology firms toward relationships with large capital-rich Japanese firms. These forces include the need for infu-

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s sions of capital to ensure survival today; they are unlikely to weaken in the decade ahead. The strength of the venture capital industry and the ability of U.S. biotechnology companies to gain access to venture capital are important factors that make it more likely that linkages will work to strengthen the U.S. competitive position. The price run-up of biotechnology stocks and the large amount of new equity capital raised by the industry during 1991 have alleviated the immediate financial needs of some top-tier companies. However, the financing issue will not recede in importance as a result of the boom in initial public offerings (IPOs) and secondary offerings. Several factors should be kept in mind. First, the benefits of access to public markets have accrued to a relatively small number of firms in the top tiers. Second, public markets cannot substitute for seed capital _ the amount available for venture capital investment in biotechnology has declined in recent years along with the overall pool of venture capital. Third, even for the companies with access to public markets today, the favorable climate will not continue indefinitely, and the resources required to bring products through the regulatory process to market remain considerable. In short, financing remains an immediate concern for the vast majority of the U.S. biotechnology industry, and remains an underlying issue for even the top companies. To assess the impacts of U.S.-Japan technology linkages, it is important to evaluate the effects of various types of linkages by considering a range of possible impacts. The possible effects include capital generation, expanded market access, profits, number of jobs, creation of new technology, expanded R&D, and effects on the broader national scientific manpower base. Detailed analysis of particular cases also is required. From a U.S. perspective, linkages that result in a weakening of downstream activities (manufacturing, marketing, sales) in the United States raise significant concerns. On the other hand, U.S.-Japan linkages that strengthen the U.S. research base and accelerate commercialization can bring real benefits. The reality is that the short-and long-term impacts may differ significantly and that technology linkages normally involve multiple mechanisms. Research conducted by the NRC working group indicates that U.S.-Japan linkages established to date have overall had positive effects in infusing new capital and expanding the R&D efforts of U.S. firms. Technology transfers to Japan have not resulted in an erosion of the capabilities of U.S. firms in biotechnology product sales. However, during the past decade, Japanese industry, which views biotechnology as the most promising technology for future growth, has positioned itself well to compete, particularly in markets outside the health care area and particularly in Asia. The NRC working group's concern is with the future rather than the past. The technology linkages that have already been formed, particularly those involving licensing of technology, may have significant market im-

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s pacts in the decade ahead. If the pattern in the future continues to be a one-way technology transfer to Japan without the development of strong global commercialization capabilities in the United States, the results could be significant and negative by the end of the decade. Japan is well positioned to fuse biotechnology with other technologies since most of the biotechnology products are being developed by large companies in the food, chemical, and health care industries. A key question is whether U.S. organizations involved in biotechnology_including universities and nonprofit research organizations_can make the technology linkages with Japan work to their long-term benefit. To do so, a strategy must be developed to ensure that R&D capabilities in the United States are maintained and strengthened; that technology continues to be transferred out of U.S. universities; that the intellectual property rights of innovators are protected; that technology transfer from Japan in areas such as microbial cell lines, bioprocessing and automated screening assay techniques, and biosensor technology takes place; and that U.S. organizations find expanded opportunities to participate in the Japanese regulatory process and in the Japanese market and are able to enforce patent rights. To assess the long-term significance of technology linkages, it is important to step back and see the trends and the potential significance for the United States as a country as well as for the organizations directly participating. Despite the strengths of the U.S. biotechnology industry today, the NRC working group is not sanguine about the future and the ability of the U.S. biotechnology industry to compete in the twenty-first century. Significant potential problems were identified that cannot be adequately addressed on an ad hoc basis because active collaboration of government, industry, and universities will be needed_perhaps through an industrial and technology policy for biotechnology. The President's Council on Competitiveness recently released a report that is a good starting point. Its major recommendations are consistent with the present report, which focuses more specifically on U.S.Japan linkages, technology transfer, and the importance of emerging firms. The NRC working group believes that expanded cooperation among industry, academe, and government is needed, particularly outside the health care arena where serious competition will emerge first. The subsequent sections of this chapter identify specific issues that each sector must address, but in most cases effective response will depend on joint efforts. ISSUES FOR INDUSTRY The U.S. biotechnology industry must focus more resources on product development, production technology, and marketing of new products globally while at the same time maintaining excellence in research. To do this, it will be necessary for U.S. companies to focus investments on second-generation products and improvements (vs. generating breakthroughs) _an area of strength

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s for Japanese companies. A new partnership between industry and government to establish technologically oriented institutes may be essential. Fusion of biotechnology with other technologies such as electronics, purification of chemicals, applications in agriculture, and food must be pursued through technology linkages. Continuous improvement and refinement of products and technology are a prerequisite for staying on the front edge of the competitiveness curve. This strategy has major implications in the regulatory field and in the funding of new technology. (See Issues for Government below.) The U.S. biotechnology industry must seek expanded participation in commercialization and direct marketing of its products around the world, particularly in Europe and Asia. An exclusive reliance by U.S. firms on licensing out first-generation products, marketing, and sales rights ultimately creates increased competition. U.S. companies, particularly small biotechnology firms, must participate in the global commercialization of products. Comarketing and joint sales by U.S. and Japanese companies should be preferred over exclusive licensing out of products in return for short-term infusions of capital. The U.S. biotechnology industry must develop a global strategy, and Japan, as the world's second-largest pharmaceuticals market, and the European Community must be key elements of that strategy. This means building the expertise to play in the Japanese market_to carry out clinical tests, to market products, and ultimately to tap into Japanese R&D. Unfortunately, the cost of establishing a business in Japan is prohibitive for many small U.S. biotechnology firms. U.S. biotechnology firms will need to develop new approaches to structuring linkages to become more global. One example would be a sequential approach in technical licensing that ensures, over time, comarketing and market access opportunities in Japan for products from emerging companies. Another possibility would be to develop linkages that combine capital and technology inflows from Japan. Still another possibility would be to develop improved collaboration within U.S. industry, perhaps through joint efforts to keep track of the policy and market contexts in Japan by industry associations or more creative agreements among small U.S. companies and larger U.S. companies that allow the smaller companies to begin product manufacturing within 5 to 10 years. In other words, small U.S. companies could rent capabilities in the larger U.S. companies versus selling all future rights abroad. If such approaches are to work, the large U.S. companies must play a more significant and aggressive role in building strategy and in focusing on biotechnology-related applications.74 74   One example of a linkage between a large U.S. pharmaceuticals company and a small biotechnology firm is the acquisition by American Home Products of 60 percent of Genetics Institute in the fall of 1991.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s Thus, for industry, the key issues are (1) the need for greater investments in product and technology improvements, (2) the importance of global commercialization of products, and (3) the need for increased financial staying power for the emerging companies. These require financial strength, and government can help. (See Issues for Government below.) In other words, efforts to improve capital formation are a prerequisite to addressing these issues. The American university/venture capital industry relationship is essential for long-term competitiveness in the years ahead. ISSUES FOR GOVERNMENT In view of the critical importance of investment to the health and viability of the U.S. biotechnology industry and other R&D-intensive industries, the U.S. government could increase financial incentives to encourage innovation, more venture and patient capital, and long-term strategy building. Technology development is an area of current U.S. strength but is also an area where renewed efforts will be important to ensuring future competitive strength. New approaches should be considered that feature government and industry working together to develop generic technologies (precompetitive) important to future applications. This is an area where the United States can learn from studying Japanese approaches. The NRC working group considers investment-related measures that lead to easier capital market access and greater financial strength for emerging companies to be top priorities. Possible approaches that require further study and debate include making the R&D tax credit permanent, introducing a graduated capital gains tax for technology investments, and establishing a pool of patient capital to provide seed investments for promising innovators. U.S. government policy in the regulatory and international trade spheres also has a direct impact on the financial strength of innovating firms, particularly biotechnology firms. The provision of resources to speed the review process for new biotechnology products while maintaining the highest safety and efficacy standards is one possible focus. In the trade area, the possiblity of initiatives by the Agency for International Development (AID) and the International Trade Administration to promote exports of U.S. biotechnology products is worth exploring. The U.S. government could consider developing, in cooperation with industry, a technology strategy for biotechnology as a scientific enterprise and technology, giving special attention to the unique contributions made by small entrepreneurial firms and U.S. research universities. A government-industry forum could be established to enhance discussion and debate. Agencies funding research could place a special priority on non-medical applications, perhaps working with state biotechnology centers. The U.S. government should continue to evaluate the creation of centers of excellence that act as bridges between universities and industry.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s These centers need long-term funding from government and industry. They could contribute to the U.S. biotechnology industry by carrying out research programs that focus on enabling technologies and technology fusions that benefit many companies and industries. Since biotechnology is a new set of tools that could be used by a variety of industries, there is a rationale for developing a plan of broad-based support for research, development, and training. Participation in such programs should be permitted for foreign companies that are manufacturing and performing R&D in the United States and whose home governments provide similar opportunities to U.S. firms. The U.S. government could also encourage the appropriate agencies to define programs that have as their purpose increasing information about new developments in Japanese biotechnology R&D to U.S. industry. For example, a program of cooperation with a Japan industry-based biotechnology R&D consortium could feature on-line access for U.S. researchers to Japanese biotechnology data bases, patent registrations, and electronic mail reports on new Japanese research projects in biotechnology with information about themes, participants, and laboratories. In order for such efforts to be meaningful, however, a Japanese-speaking U.S. researcher should be present in Japan to participate in identifying useful information and to communicate with users in the U.S. biotechnology research community on a regular basis.75 Joint projects involving companies and universities from both countries could also be developed that have as their goal incremental technology development. In addition to programs aimed at gathering and disseminating technical information, careful assessments by U.S. government and industry of differences in accounting practices, regulatory environments, and government support to biotechnology R&D in the United States and Japan could form the basis for informed discussions with Japanese counterparts.76 These efforts would also support the strategy-building by U.S. government and industry mentioned above. The U.S. government could give serious consideration to a move to the first-to-file system of intellectual property rights protection. The current system gives strong incentives to innovators, thereby supporting the work of small firms. At the same time, however, serious differences exist between approaches to intellectual property in the United States and Japan.77 75   See 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). 76   The U.S.-Japan Business Council established a working group on biotechnology that has recommended regulatory changes in both countries. The patents offices of the two countries also are working together to promote the expeditious publication of patent data in English as well as Japanese. 77   See Committee on Japan, National Research Council, Intellectual Property Rights and U.S.-Japan Competition in Biotechnology: Report of a Workshop (Washington, D.C.: 1991).

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s Harmonization around a first-to-file principle would bring U.S. practices in line with those of other major competitors and would enhance the ability of entrepreneurs in U.S. industry, national laboratories, and academe to profit from their innovations in Japan and around the world. Domestic policy giving strong protection to biotechnology processes as well as product patents and international harmonization around similar principles will also benefit U.S. industry. ISSUES FOR UNIVERSITIES AND NONPROFIT RESEARCH INSTITUTIONS Cooperation with industry must be deepened, and technology transfer should be supported as an important activity. To make the most of collaboration with industry while ensuring academic freedom and proper protection of intellectual property rights, universities should develop standard policies for licensing technology to industry that permit faculty participation in the formation of new companies. Because funding of research and participation by Japanese companies are growing, universities could develop guidelines for good practice for contract research, standards for the conduct of foreign researchers in U.S. laboratories, and other measures to ensure reciprocal access for researchers to the laboratories and know-how of the foreign sponsoring organizations. Such measures may include laboratory access in Japan, cross-licensing rights, and access to improvements in technology originally developed in the U.S. university setting. Dedicated centers of excellence that are industry driven should be considered as a means to provide longer-term orientation to the development of new technologies. U.S. universities must maintain their excellent research base, but work to develop global thinkers and entrepreneurial managers in all disciplines. Programs of Japanese-language training and professional experience in Japan for scientists and engineers should be expanded. Part of the science curriculum should include the fundamentals of international business. In addition, cross-fertilization should be promoted among technical researchers, business strategists, and area specialists through professional associations and university courses. Professional associations may find it necessary to develop strategies for international participation. In this regard, cooperative efforts to collect and analyze data on foreign participation in U.S. university research could make a significant contribution to better public understanding of reciprocity issues. Professional associations can also encourage Japanese-language study for members through fellowship programs and information dissemination. U.S. universities and regional biotechnology centers may also contribute to public education about biotechnology. Biotechnology centers are

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s training high school biology teachers and developing curricula that feature hands-on laboratory experiences. There is a stronger emphasis on public education in Japan, and the companies, through their advertising campaigns, reinforce a positive image for biotechnology-based products. This is the right time to look ahead to the year 2000 and the future of U.S. biotechnology_as a research and market enterprise. The technology linkages that are being formed with Japan present opportunities as well as risks for the U.S. partners_companies, universities, and national research institutes. For a variety of reasons examined in this report, there is little question that these linkages will expand and deepen. The question that must be asked is whether in the year 2000 it will be clear that they have produced concrete benefits to both the United States and Japan. The answer depends, to a great extent, on whether U.S. organizations can individually and cooperatively develop new ways of interacting with each other and Japan and whether the American innovation machine will continue to be a leader in the development of new technologies and products.

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