Appendix A
Case Studies of U.S.-Japan Technology Linkages in Biotechnology

CASE I: CALGENE-KIRIN78

An agreement was reached in March 1990 between Calgene and Kirin to jointly develop and market potato seedlings. Although the partnership is still relatively young, which makes it difficult to assess its impacts on the two companies, the joint venture illustrates some of the business issues that are relevant to agricultural biotechnology. In addition, the alliance contains several novel structural features that may shed light on possible future directions for U.S.-Japan biotechnology linkages.

The Partners

It might be useful to begin with a description of the partners and where agricultural biotechnology fits into their businesses.

Kirin is the fourth-largest brewer in the world, with unconsolidated sales of about $10 billion. The nonbeer businesses that contribute significant amounts to sales include engineering services (centering on bottling factories), food, and soft drinks.

78  

Subsequent to the preparation of this case study, Calgene announced that it was restructuring as a result of ''significant breakthroughs in...core crop areas.'' As a part of this restructuring, the joint venture with Kirin was to be downsized. See "Calgene Restructures Operating Businesses to Focus on Three Core Crops," Biotech Patent News, September 1991, p. 5.



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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s Appendix A Case Studies of U.S.-Japan Technology Linkages in Biotechnology CASE I: CALGENE-KIRIN78 An agreement was reached in March 1990 between Calgene and Kirin to jointly develop and market potato seedlings. Although the partnership is still relatively young, which makes it difficult to assess its impacts on the two companies, the joint venture illustrates some of the business issues that are relevant to agricultural biotechnology. In addition, the alliance contains several novel structural features that may shed light on possible future directions for U.S.-Japan biotechnology linkages. The Partners It might be useful to begin with a description of the partners and where agricultural biotechnology fits into their businesses. Kirin is the fourth-largest brewer in the world, with unconsolidated sales of about $10 billion. The nonbeer businesses that contribute significant amounts to sales include engineering services (centering on bottling factories), food, and soft drinks. 78   Subsequent to the preparation of this case study, Calgene announced that it was restructuring as a result of ''significant breakthroughs in...core crop areas.'' As a part of this restructuring, the joint venture with Kirin was to be downsized. See "Calgene Restructures Operating Businesses to Focus on Three Core Crops," Biotech Patent News, September 1991, p. 5.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s As a result of the long-term vision adopted in 1980, which put forth the goal of becoming a company that "contributes to life and health around the world," Kirin began to diversify into services (restaurants); engineering; information services; food products (dairy, tomatoes, coffee); and life sciences (pharmaceuticals, agricultural biotechnology). Corporate R&D spending is $110 million per year. The firm's principal subsidiaries are the Kirin-Seagrams joint venture, Coca-Cola bottling franchises in western Japan and New England, and the Kirin-Amgen joint venture to manufacture and market EPO and G-CSF (see Case III below). Kirin has more than 30 domestic and overseas subsidiaries. The focus of Kirin's Agribio Division is the plant laboratory. Kirin is seeking to utilize biotechnology to develop new varieties for mass propagation. To compete with established seed companies, a new strategy was adopted that incorporates the use of cell fusion and artificial seed technology for breeding and propagation, an emphasis on "seedlings" rather than seeds, leveraging the strong brand consciousness of Kirin products, and formation of a global network of subsidiaries and joint ventures. Globalization makes it possible to exploit market opportunities quickly. Joint ventures with companies possessing complementary technologies are particularly attractive because they allow Kirin to maximize the return on technology developed internally. Kirin's other partnerships in agricultural biotechnology include Tokita Seed (vegetables), Flower Gate, and Twyford (in vitro plants). Calgene, founded in 1980, is a publicly traded company that focuses exclusively on agricultural biotechnology. The firm's projected revenues for 1991 were $35 million; it has spent a total of $70 million on R&D; and it has raised $120 million to $130 million in capital since its founding. It was the first company to apply for Food and Drug Administration (FDA) approval of genes to be introduced into plants. The firm's core products are genetically engineered tomatoes, cotton, and rapeseed. Calgene has 300 employees, including 100 scientists, in five operating groups. Half the employees are located at its headquarters in Davis, California. Calgene is actively pursuing vertical integration, seeking direct access to markets in all of its core businesses. Origins of the Linkage Long-established business and personal relationships as well as a "strategic fit" were crucial in putting the partnership together. In 1984 Kirin bought an equity stake in Plant Genetics, Inc. (PGI), the agricultural biotechnology company that later merged with Calgene. PGI also performed contract research for Kirin in the area of synthetic seeds. Zachary Wochok, a founder of PGI, worked with Yoshihiro Imaeda and Kirin's legal repre-

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s sentative, Joel Marcus, to set up the alliance. Both companies were doing research on potatoes but did not cooperate in this area from the beginning. Several factors make the potato market an attractive target for the application of agricultural biotechnology. First, potatoes are a multibillion dollar crop worldwide. Consumption in the United States is growing at a rate of 7 percent per year, mainly due to sales of french fries and other fast foods. Second, potatoes are relatively easy to manipulate through genetic engineering. Finally, although governments around the world are involved in trying to improve potato yields and quality, there is very little private sector involvement or market discipline. One key technical issue is reduction of the "bulk-up" period required for seed potatoes. Potatoes are grown from "seed pieces," and it takes 7 years, using conventional techniques, to produce enough seeds to sell to farmers, a process known as bulk-up. Reduction of the bulk-up period to 3 to 4 years would result in a significant efficiency gain. If the period could be reduced to 1 to 2 years, the resulting proprietary product would drive the potato market. Kirin first approached PGI about extending its collaboration to seed potatoes after the latter's initial public offering in 1987. PGI was investigating the introduction of genes into potato varieties to promote pest and disease resistance. For its part, Kirin had developed a technique, called the "microtuber," that allows generation of a seedling from a single cell rather than through seed pieces. If it performs up to its potential, the technology will allow a reduction in the bulk-up cycle to 1 to 2 years. Wochok and others at PGI were skeptical at first, but Kirin continued to update them on their progress. Negotiation Process and Issues In 1989 PGI and Calgene, located next door, merged. Kirin's PGI stock became Calgene stock, and Kirin again raised the question of collaboration in potatoes. Discussion continued through 1989. That year Calgene researchers went to Hokkaido for a Kirin presentation on its microtuber field experiments. Calgene became more confident, although questions remained about scaling up the technique and how effective it would be in the United States. Calgene had already achieved a reduction of the bulk-up period to the 3-to 4-year time frame through its own ongoing research program and was selling pest-resistant seed potatoes to farmers. The main issues were the valuations of Calgene's seed potato business and Kirin's microtuber technology. The former issue was the main stumbling block. The valuations of Calgene's potato receivables, inventory, and other assets made by the two sides at the start of discussions were disparate by a factor of 10. The two sides resolved their differences on this point

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s during a day-long meeting in December 1989, which was a "make-or-break" session for realizing the partnership. Kirin used stock price valuation and projected profit/price earnings ratio figures submitted by Calgene. Kirin also calculated new figures based on its own assumptions about growth prospects and factored in what it would contribute to the venture. At the end of 1989 the companies shook hands on the basic agreement. The formal negotiations were completed less than 3 months later without the involvement of investment bankers. The basic outline was for Kirin to provide financing to the venture and for Calgene to contribute the personnel and core technology. Kirin already had a high opinion of PGI (now Calgene) personnel, quality control practices, and the systematic collection of germ plasm. In addition, Kirin determined that a partnership with Calgene was the most effective way to commercialize its microtuber technique. Calgene's experience with recombinant DNA and cell fusion in many species and its collection of genes isolated for possible introduction into potatoes were additional benefits that a premerger partnership with PGI would not have provided. Ideally, the venture will be able to introduce genetic improvements into popular types of potatoes and provide a new, more efficient production method. Structure of the Linkage The Kirin-Calgene partnership contains a number of elements, including equity, licensing, and contract research. Kirin made an initial asset purchase of 30 percent of Calgene's seed potato business for $2.5 million. The companies formed an operating joint venture, called Plant Genetics-Kirin (PGK), in which Calgene held a 70 percent share and Kirin 30 percent. Kirin has since increased its stake to 35 percent. Kirin licensed its production technology_the microtuber technique_to PGK and will be paid in a series of "equity kickers." If the microtuber reaches "agreed performance milestones," Kirin's stake in the joint venture will rise to a maximum of 50 percent. Calgene now appoints two members and Kirin one to PGK's management committee. When its equity reaches 40 percent, Kirin will add a financial representative to the committee. In evaluating Kirin's technology, the idea of "equity kickers" was suggested at an early stage. The basic concept is that, to the extent that Kirin's technology works, the value of PGK will increase and so should Kirin's stake. The performance milestones are qualitative rather than quantitative, and both sides are confident that they will be able to agree on whether they have been met. This structure protects Calgene and rewards Kirin if its confidence in the microtuber technique is justified. The phased growth in equity stakes also addresses Calgene's reluctance to go into a 50–50 joint venture at the outset.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s In another set of contracts, Calgene licensed its own core technology to the venture. This consists of genes that are introduced into potato varieties to make them more resistant to pests, particularly the Colorado potato beetle. Outside of the PGK framework, Kirin is paying Calgene $1.5 million over 2 years for contract research on potato genes that promote pest and disease resistance. Kirin is the Asian licensee for Calgene's core pest-resistance technology, and the joint venture is the licensee for the rest of the world. The agreement also contains termination mechanisms. Corporate strategic objectives may change over time, but the joint venture has explicit goals built into the business plan. The companies hope that the management systems put in place will ensure that the objectives_both annual and over the 5-year horizon_will remain explicit and are incorporated into the strategic planning of each side. Budgets and other operational matters will remain manageable if both companies remain focused on clear strategic goals. Strategic Goals, Management, and Technology Transfer Calgene faced a basic dilemma of how to pursue new opportunities, in areas like potatoes and alfalfa, while pushing for vertical integration in its tomato, cotton, and rapeseed products. The distribution system for potato seedlings is fairly complicated. At this point, PGK sells seedlings to farmers, but the key to future profitability will be the degree of vertical integration that can be achieved. With the combination of better yields as a result of the pest-resistance features and a shortened bulk-up period, the venture's superior product may allow it to move downstream. Ideally, rather than selling a "turnkey" product to farmers, PGK would contract with them, process the crop, and then negotiate directly with major consumers like McDonald's. Besides the contribution of complementary technology, Kirin's participation also ensures that the resources for a worldwide push, particularly into the critical European market, will be available as products come on line. Although Calgene has a joint venture in Scotland, it would be very difficult for the firm to move quickly into foreign markets by itself. Kirin's clear commitment to potato development was another factor that made it an attractive partner for Calgene. PGK itself has a marketing and sales emphasis_intellectual property rights to technologies are retained by the parties and licensed to the partnership. At this point, Calgene charges the venture for facilities and personnel, but PGK itself was expected to begin hiring its own employees in late 1991. Technical exchange goes on between the two partners through reciprocal research exchange visits and placements of up to 3 months. As in most biotechnology linkages that involve researcher exchange, the mechanisms

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s are written into the agreement. So are the monitoring and control systems. These center on quarterly meetings of scientific counterparts, business counterparts, and a joint science-business session. Kirin is responsible for producing a quality microtuber efficiently and PGK will be responsible for field testing in the United States. Calgene sent researchers to Hokkaido during 1990 to get the benefit of Kirin's experience in running field tests of microtuber potatoes. Even though the American personnel are responsible for meeting the performance milestones, Kirin can visit at any time to evaluate the field tests. Whose technology is more critical to the venture's success_Calgene's or Kirin's? The answer is still uncertain. Clearly, Calgene's pest-resistance genes are the basis of the current commercial effort, but the performance of the microtuber technique will directly impact the degree to which PGK can vertically integrate. Ultimately, this will determine PGK's profit margins. Even though the initial dollar amounts of the partnership's various elements are small, the potential importance of the product and the belief that "informality does not bind" led both sides to conclude that a structured joint venture would be more efficient in the long run than an informal collaborative arrangement. What are PGK's weaknesses? One vulnerability that often arises in U.S.-Japan biotechnology linkages is overdependence on the contributions of particular individuals in making the alliance a success. It is often the case that long-standing relationships facilitate the formation of a venture, but this also means that partnerships rely heavily on the key players to keep the business on track and to resolve disagreements. Since personnel rotation and lifetime employment are still standard human resource management practices in large Japanese companies, the problem of vulnerability is more likely to arise on the U.S. side. In the case of PGK, Zachary Wochok played a key role in building the alliance. As deeper relationships are developed between the scientific and business sides of the partners and PGK develops its own momentum, PGK will be less dependent on the contributions of key individuals. Those involved in putting PGK together cite several key elements that allowed the two sides to come to an agreement. One was the strategic fit of complementary technologies and capabilities. Previous relationships also were important. Wochok and Joel Marcus played key roles. Though the latter serves as Kirin's legal representative, Calgene had confidence in him because of a previous association. Another important element that contributed to forming the venture was the equity enhancement mechanism. Finally, patience, determination, and regular face-to-face communication during the negotiating process also were critical.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s CASE II: MONOTECH, INC. AND SHOWA-TOYO DIAGNOSTICS79 The distribution and licensing agreement between Monotech, Inc. and Showa-Toyo Diagnostics (STD) covering Monotech's in vitro cancer diagnostic products and technology was concluded in 1982, and the first products were on the market in Japan in 1985. Monotech is a rapidly growing U.S. biotechnology firm, and STD is a joint venture between a large Japanese textile and chemical manufacturer and a medium-sized health care company. The arrangement currently covers five products, and the venture has annual sales of 2.1 billion yen ($15.5 million at 135 yen per dollar). Because the relationship has a substantial track record, it is possible to look back and assess the effects on the firms. Other emerging U.S. biotechnology companies may be able to learn from Monotech's experience. Looking to the future, it is also possible to ask whether changes can be made in the structure of the linkage to ensure that it serves the strategic interests of the partners in the 1990s as well as it did during the 1980s. The Partners To fully understand the role of the linkage in the strategies of the partners, it is necessary to begin with a brief overview of the companies and the role of biotechnology and diagnostic products in their businesses. Monotech is one of the leading U.S. biotechnology companies. Its research and market focus is on the field of monoclonal antibodies. The in vitro diagnostic products that are the basis of the linkage to STD were Monotech's first commercial products, and income from them has played a major role in bridging the gap to the revenue stream expected from the company's first therapeutic product, Mabex. Mabex is a treatment for gramnegative sepsis. In 1990 Monotech registered sales of over $30 million and comparable income from R&D limited partnerships. The company registered a net loss of about $130 million as a result of exercising options to buy back shares in several of the limited partnerships it had set up to fund product development. Monotech spent about $45 million on R&D in 1990 and had almost 900 employees as of March 1991. Showa Materials is one of Japan's leading textile firms, specializing in synthetic fibers. It has diversified aggressively into engineering plastics, carbon fibers, and health care, and about 10 percent of its sales are in "new operations." In the health care area, in addition to its cancer diagnostics 79   The names of the companies, products, and individuals that appear in Case II have been changed.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s activities through STD, Showa has developed antiulcer and cardiovascular therapeutics. In biotechnology Showa has several marketing agreements with U.S. companies for diagnostic products, and in therapeutics the company has put its emphasis on beta interferon, where it has collaborated with both American and Japanese companies. Showa earned a net profit of 40 billion yen ($296 million at 135 yen per dollar) on consolidated sales of 844 billion yen ($6.2 billion) in the fiscal year ending March 1990. Showa Materials has over 10,000 employees and owns about 6.1 percent of Toyo Health. Toyo Health is a health care company specializing in clinical reagents. In 1989 it earned a net 1.6 billion yen ($12 million) on consolidated sales of about 60 billion yen ($440 million). Besides the cancer diagnostics based on Monotech's analytes, Toyo distributes and manufactures other human diagnostic products under license. Toyo has over 800 employees, a figure that does not include subsidiaries. The Products Monotech's In Vitro Diagnostics Division, headed by Joseph Atkins, is the most established of its business divisions. Its main line of products are cancer blood tests. Monotech sells complete test kits that utilize radioimmunoassay (RIA) methods through distributors as well as analyte (monoclonal antibodies), which is fabricated into kits by several licensed partners. Monotech analytes account for 25 percent of the world end product market for cancer immunodiagnostic tests. Over three-quarters of the Diagnostics Division's sales_which have represented the bulk of Monotech's total sales to date_are international, and one-third of the international sales are in Japan. A monoclonal antibody clings to a single antigen and is produced by a single B lymphocyte. In the mid-1970s biochemists developed a method to capture individual antibodies and the cells that produce them. Among the applications of monoclonal antibodies to health care is in immunoassays to detect tumor antigens secreted into the blood. A blood sample is combined with the analyte and its chemical tag. The antibody binds up with the antigen, and the amount of antigen is then measured by comparing the sample profile to a reference curve. Monotech's five main products in the in vitro diagnostics field are: MI-1 is used to detect ovarian cancer. It is approved for use in Japan (1986), Europe, and the United States (1987). MI-2 detects and monitors gastrointestinal and pancreatic cancers. It is approved for use in Japan (1985) and in Europe. It is available for experimental use in the United States. MI-3, which is used to detect breast cancer, is approved for use in Japan (1987) and Europe, and is available in the United States for research.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s MI-4, which detects gastric cancer, is approved for use in Europe and Japan (1987) and is available for research in the United States. MI-5 monitors the resistance of cancer cells to drugs during multidrug chemotherapy. It has been approved for use in Japan and Europe (1989) and is available for investigational use in the United States. Launching the Partnership Showa-Toyo Diagnostics is a 50–50 joint venture between Showa Materials and Toyo Health. It was formed for the purpose of marketing Monotech's in vitro products in Japan. During the "biotechnology boom" of the early 1980s in Japan, monoclonal antibodies were one technical area that received a great deal of attention. Showa was already taking steps to diversify into health care and biotechnology and was interested in this field. During 1982, Monotech's cofounder and current chairman, William Nelson, made extensive efforts to find partners to market the firm's diagnostic products in each of the major markets_the United States, Europe, and Japan. Since Japan has very high rates of gastrointestinal cancer and MI-2 would be the first product to emerge from the pipeline, gaining access to that market received particular emphasis. Nelson visited Japan as part of this effort, and Showa was one of the interested parties. Showa enlisted Toyo for its diagnostics marketing experience. To narrow the field of possible partners to a manageable size Nelson set up a "lottery" for the products. He told interested parties that for a nonrefundable fee of $10,000 they would be considered. A number of companies came forward, and Monotech's management evaluated the business proposals. Through a process that was part intuition and part analytical, the Showa-Toyo joint venture was chosen. In particular, Monotech liked the idea of a separate venture built around the products. The motivations of the partners were fairly straightforward. Monotech wanted aggressive marketing of its products in Japan. In this field, as in many others, the Japanese distribution system contains layers of wholesalers, and it would be unthinkable for a U.S. company, particularly a start-up company, to contemplate an independent sales effort. Showa wanted experience in the management and marketing of biotechnology products and an opportunity to integrate into manufacturing and development. Toyo wanted Monotech's cancer tests as an addition to its line of diagnostic products. Structure of the Relationship, Technology Transfer, and Marketing Issues The linkage between Monotech and STD is fundamentally a licensing and marketing partnership. The contract provides for a transfer of products

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s and assistance in development. Management of the approval process in Japan is the responsibility of STD. Since reactive effects in patients are not an issue for in vitro diagnostics, clinical trials and the approval process in general are not as expensive or time consuming as they are for human therapeutics or in vivo diagnostics. The main issue for establishing a product's effectiveness as a diagnostic tool is an assessment of the level of risk associated with a given blood level of antigen in specified clinical situations. The products have been very successful in the Japanese market. The gastric cancer rate is high in Japan, and MI-2 is the best way to detect the disease. Monotech manufactures complete kits utilizing radioactive tags that the venture distributes. The venture can also incorporate the analyte into nonradioactive delivery systems. Monotech gets a royalty of approximately 20 percent of end-product sales. About 60 percent of sales are the complete kits that Monotech ships, and 40 percent are royalties on kits manufactured by STD and independently by Toyo. STD itself has over 100 employees, who provide technical support, manage the product approval process, ship the product, and_increasingly_manufacture and market it. Monotech has two technical meetings each year with STD, one in the United States and one in Japan. Business meetings are held semiannually as well. The fundamental knowledge that STD requires to support sales of the tests concerns the reactive properties of the analyte. Technology transfer is relatively simple and is accomplished by visits of three or four STD researchers to Monotech for several weeks prior to the technical meetings. In the licensed development of delivery systems by STD and other Monotech partners, Monotech provides more analyte for experimental purposes, and the partners specify generic methods of non-RIA tagging to the particular analyte. Partners that fabricate kits under license also do some purification of the antibody. Monotech does not have its own non-RIA delivery system development program. In contrast to Mabex and other Monotech therapeutic products, for which large amounts of antibody are required, the manufacturing process for the analyte does not present major problems. Large-scale bioprocessing is not necessary. One gram of antibody will last for a million or so tests, and sufficient amounts can be manufactured easily in mice. Technology and Strategic Issues The technology and strategic issues in the field of in vitro diagnostics are somewhat different than those that arise in pharmaceuticals_both their apeutics and pharmaceutical diagnostics. For its therapeutic and injectable diagnostic imaging products, Monotech is trying to build an independent global marketing capability and integrate downstream. For in vitro diagnostics,

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s the company distributes the product initially with a standard radioactive delivery system. Extending the life cycle of the product and reaching a wider market have two interrelated elements. The first depends on clinical work with the analyte that Monotech undertakes with its research partners all over the world. For example, MI-1 is already used along with other diagnostic methods in detecting ovarian cancer and in ''managing'' postoperative treatment. Clinicians have more recently found that MI-1 may be cost effective as a screening test for postmenopausal women, since false-positive values of the antigen are less common in older women. In supporting and participating in clinical work on new areas in which the test can be used, Monotech expands the market for the test. The second element is the delivery system. Monotech depends on its partners to drive the delivery system technology. The MI-2 analyte will likely have a long product life, but the test will be performed differently as delivery systems are improved. One well-known example is the glucose test for diabetes. Chemically, it is the same test that it was 20 years ago, but since then the delivery system has advanced to the point where patients can perform it at home. So Monotech, which licenses kit manufacturing and supplies analyte to several companies on a nonexclusive basis, gets wider breadth from the variety of partners and from competition among those partners. In addition to STD and Toyo, Monotech also licenses delivery system development to a major U.S. pharmaceuticals company and a French health care firm. These licensees sell kits in Japan through different distributors. To a large extent, the radioactive tag is the classical way of performing immunoassay tests. On a new undefined analyte, it is best to start out with an RIA delivery system. When the performance characteristics are understood and the test is peer reviewed, nonradioactive systems utilizing enzymes (enzyme immunoassay or EIA) and chemiluminescence can be developed. This has many benefits. For example, in Japan radioactive isotopes can be used only in the large reference labs and in hospitals that have special facilities. Many Japanese hospitals cannot perform RIA tests. In addition to the safety issues, an emotional aversion to radioactivity in Japan plays a part. Therefore, access to a large part of the Japanese hospital market requires the development of non-RIA kits and instruments. In addition to safety and the psychological edge, non-RIA also allows development of kits with a longer shelf life_6 weeks for RIA versus as long as a year for non-RIA. Other "user-friendly" characteristics can be chemically engineered as well. In particular, EIA and chemiluminescence allow a proper reaction to occur even when reagents are added non-sequentially. This means that the test can be automated. The technician, rather than pipetting in various chemicals in a prescribed order, can insert a test

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s would not contribute toward good long-term relations with the university. When recruiting researchers, Jacobs can raise the possibility that working at HCR may facilitate an adjunct faculty appointment subject to UCI's requirements and approval. The three UCI research groups on the first floor do basic biochemical research representative of what is being done in many research universities. One group is working on mapping human chromosomes, which may have implications for pinpointing and curing genetic disorders. The other groups are working in more basic areas_RNA processing in yeast and the organization and biosynthesis of ribosomes. The work is presently funded by a variety of NIH, NSF, and private foundation grants. Interaction between the UCI faculty members housed in the building and HCR personnel has not been extensive thus far. Indeed, the first research contract, invention, and licensing agreement between UCI and HCR resulted from a project that Hitachi sponsored for UCI's Department of Pharmacology, which is not housed in the HCR building, and the University of Oregon. UCI and HCR have also established a standard request form letter that UCI researchers can complete in order to use advanced equipment located on the HCR floors. For the university, the positive impacts are fairly straightforward. A number have already been realized. The university has the use of high-quality space more quickly and at a lower cost than if a lab had been built through state support. Quality facilities of this type allow faculty members to be more productive and improve the quality of graduate education. Also, to the extent that HCR gives assistance or research positions to graduate students, this will allow the graduate school to train more students. Direct sponsorship of research by HCR that arises from the physical proximity is an expected benefit, though the extent is not yet clear. There are also spin-off benefits from sponsored research. When HCR agrees to license technology, it pays for the patent applications and the issue fee for the patent as well as the royalty on sales of the commercial product. The university has not encountered negative impacts from the agreement and does not anticipate any, though it should be pointed out that research at the facility had been going on for about a year and a half as of this writing. There are no concrete plans to make closer interaction between UCI and Hitachi's Japanese biotechnology lab or other Japanese research institutions a formal part of the relationship. Professor Nomura has strong ties to the research community in his native country, and it is expected that personal relationships may lead to closer UCI-Japan interactions over time. UCI sees this relationship as an innovation in the structuring of university-industry research interaction that benefits itself, HCR, and U.S. biotechnology as a whole. The campus hopes that new relationships with industry will further cement its position as a leading-edge research institu-

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s tion. New modes of cooperation with industry that are likely to arise in coming years will require universities to consider issues beyond licensing, and UCI is pleased with the results of its coordinated approach. For HCR and its Japanese parent, the impacts are perhaps less clear at this point. From the point of view of the company, this linkage represents a leap into uncharted territory in a number of respects. For example, biotechnology is a relatively new technological field for Hitachi Chemical and pharmaceuticals are a new business. In addition, the decision to launch into biopharmaceuticals by building a basic research capability represents a departure from the approach taken by Kirin and other large Japanese companies, in which a gradual shift of research focus was accompanied by linkages with U.S. biotechnology firms to obtain product rights and technology closer to the commercialization stage. Finally, focusing a basic research thrust on a laboratory in the United States and a novel relationship with a U.S. university will present Hitachi Chemical and the HCR subsidiary with an additional layer of organizational and business challenges. It might be expected that a combination of "trial and error" and "learning and listening" will prevail at HCR for the time being. At this point, the facility is mostly staffed by U.S. researchers with academic and corporate backgrounds. The lab does have the potential to play a key role in building the parent company's biotechnology capability by serving as a training ground for Japanese researchers, who could familiarize themselves with methodology and developments in U.S. biotechnology through short-and long-term visits. In addition, the fact that a technology with commercial potential has already been developed through this relationship points to the possibility of a substantial payoff in the long run from an investment that very few U.S. companies in the pharmaceuticals industry would be willing to make.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s APPENDIX B Examples of Linkages Between Japanese Companies and U.S. Academic Research Institutions Year Japanese Partner U.S. Partner Type of Linkage Technologies Product Comments 1982 Green Cross University of California Collaborative research Hybridoma Monoclonal antibodies (MABs) therapeutics (RX) for cancer Agreement for development of MABs for cancer   Toyo Jozo Johns Hopkins University Licensing agreement Recombinant DNA (rDNA) Interferon (IF) Toyo has licensed IF technology from Johns Hopkins 1983 Asahi Chemical Industry City of Hope Medical Center Collaborative research rDNA Interferon-G (IF-G) Asahi will build a large production tank for its IF-G developed through collaboration with City of Hope   Chugai Pharmaceutical University of South Carolina Collaborative research Hybridoma MABs USC gets $500K over 3 years for MABs and cancer diagnostics (DX) development; lymphokines   Sumitomo Chemical U.S. Cancer Research Center Collaborative research rDNA Macrophage activating factor (MAF) Sumitomo will get use of MAF developed in the United States

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s   Suntory New York State University Collaborative research rDNA Plasmids NYSU will supply Suntory with plasmids for rDNA studies 1984 Suntory Rockefeller University Collaborative research rDNA RX for dementia Joint development of an RX for senile dementia   Toyo Jozo New York State University Collaborative research rDNA Oncogene Two-year joint research agreement to study carcinogenic gene 1985 Ajinomoto MIT Collaborative research   Cell biology and immunology Ajinomoto provides $750K annually for 5 years   Mitsui Toatsu Chemicals Beckman Research Institute Collaborative research rDNA Tissue plasminogen activator (TPA) Mitsui Toatsu is working with Beckman Research to produce TPA in animal host cells 1986 Otsuka Pharmaceutical Fred Hutchinson Cancer Research Center Licensing agreement MABs for cancer DX    

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s Year Japanese Partner U.S. Partner Type of Linkage Technologies Product Comments 1986 Takeda Harvard University Collaborative research   Renewal factors Takeda funds $3 million over 3 years to Harvard University Childrens' Hospital to study blood vessel renewal factors and inhibitors affecting cancer metastasis and bone formation 1987 Konishiroku Photo Stanford University Collaborative research   Tumor marker Joint venture that has discovered tumor marker believed to be common to most cancerous cells; isolated and purified a glycosyltransferase   Lyphomed Michigan State University Collaborative research rDNA Antifungal antibiotic Further development of an antifungal antibiotic

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s   Otsuka Pharmaceutical University of Maryland Collaborative research   Interleukin-1 (IL-1) Joint project for protein engineering of IL-1; will be used as RX in various infectious diseases and to reduce side effects in radiation therapy 1988 Hitachi Chemical University of California, Irvine New research facility     Hitachi built lab on UCI campus; in return, UCI receives use of one floor of lab space   Kirin Brewery University of California, Santa Barbara Collaborative research rDNA Megakaryocyte colony stimulating factor (MEG-CSF) Collaboration to develop MEG-CSF for treatment of thrombocytopenia   Nagoya Sogo Bank Columbia University Gift     $50K to life sciences fund 1989 Asahi Chemical Industry SIBIA Collaborative research   rDNA seeds Asahi signed agreement with Salk Institute Biotechnology Industrial Associates to develop new fruits and vegetables via rDNA

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s Year Japanese Partner U.S. Partner Type of Linkage Technologies Product Comments 1989 Daiichi Pharmaceutical Vanderbilt University Endowed chair     $1.2 million; also provides for exchange of research staff   Mitsubishi Chemical Industries McLean Hospital Collaborative research   RX for Alzheimer's disease Mitsubishi will fund 200 million yen over 3 years to jointly develop RX for Alzheimer's disease   Shiseido Massachusetts General Hospital New research facility   Dermatology research Shiseido will provide $85 million to establish world's first comprehensive dermatology center at MGH called the Harvard Cutaneous Biology Research Center   Sumitomo Chemical SIBIA Collaborative research   Disease/pest-resistant plants Sumitomo provides $900K in a 2-year cooperative plant

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s             research agreement with SIBIA; SIBIA will develop disease/pest-resistant plants 1990 Fujisawa University of Pittsburgh Collaborative research   Immuno-suppressants Joint development and clinical testing of immuno-suppressants   Japan Research and Development Corporation Michigan State University Collaborative research   Environmental biotechnology Five years and $15 million toward evolution of microbes for environmental biotechnology 1991 Daiichi Pharmaceutical National Cancer Institute Supply drug for testing     Daiichi will supply SP-PG, a treatment for Kaposi's sarcoma to NCI for testing and clinical trails   Kanebo University of Pittsburgh Collaborative research   Anticancer agent Five-year study of anticancer and immune system technologies   Takeda Harvard University Collaborative research   Anticancer drug Fumagillin set to enter U.S. clinical trails

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s Year Japanese Partner U.S. Partner Type of Linkage Technologies Product Comments 1991 Yamanouchi Pharmaceutical Mt. Sinai Medical Center Collaborative research Transgenic mouse   Collaboration to develop transgenic mouse model exhibiting Alzheimer's disease ? Green Cross University of California, San Francisco Licensing agreement   MABs for cancer DX MABs for cancer DX ? Green Cross University of California, Los Angeles Collaborative research   Atrial peptide Joint development agreement for atrial peptides ? Sankyo Washington University SOURCE: North Carolina Biotechnology Center Actions Database, BioScan, Japan Economic Institute Report, and other sources.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s Appendix C Workshop on U.S.-Japan Technology Linkages in Biotechnology: Agenda and Participants Wednesday, June 12, 1991-NAS Green Building Room 104 2001 Wisconsin Avenue, NW, Washington, D.C. National Research Council's Committee on Japan Introductory Comments by Chairman HUBERT SCHOEMAKER, Centocor, Inc. Future Global Technology and Industry Trends STEVE BURRILL, Ernst & Young (discussion leader) Comments by: Robert Easton, The Wilkerson Group Isao Karube, Tokyo University David MacCallum, Hambrecht & Quist Break Trends in Technology Linkages MARK DIBNER, North Carolina Biotechnology Center (discussion leader) Comments by: Fumio Kodama, Harvard University Roger Longman, Windhover Information, Inc. Joel Marcus, Brobeck, Phleger & Harrison Senior Management Perspectives (Working Lunch) HUBERT SCHOEMAKER, Centocor, Inc. (discussion leader) Comments by: Yasuo Iriye, Otsuka America, Inc.

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U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s Roles for Universities and Government JAMES WYNGAARDEN, National Research Council, and ROBERT YUAN, University of Maryland (discussion leaders) Comments by: Marvin Cassman, National Institutes of Health Marvin Guthrie, Massachusetts General Hospital Susanne Huttner, University of California System Hideaki Yukawa, Mitsubishi Petrochemical Co. Investment Issues STELIOS PAPADOPOULOS, PaineWebber (discussion leader) Comments by: Joseph Lacob, Kleiner Perkins Caufield & Byers Robert Riley, Bristol-Myers Squibb Co. Alan Walton, Oxford Partners Concluding Discussion of ''Big Picture Questions'' Closing Remarks by Chairman Adjourn Other Participants/Discussants Susan Clymer, NichiBei Bio, Inc. Michael Goldberg, American Society for Microbiology Joshua Lerner, Harvard University Rachel Levinson, Office of Science and Technology Policy Kathryn Lindquist, State of Maryland, Department of Economic and Employment Development Lesley Russell, U.S. House of Representatives Committee on Energy and Commerce Weijian Shan, University of Pennsylvania     Note: BOLD denotes members of the NRC biotechnology working group.