2.01 Structure refers to the organizational characteristics of an industry or market, e.g., the number and nature of buyers and sellers. Structure is affected by the basic conditions of supply and demand in the industry. As noted by Phillips and Khachatourians (2001) about development of genetically modified canola in Canadian agricultural biotech, there has been significant structural evolution of the sector over a relatively short period of time. In general, the biotechnology sector, on the production or supply-side, is currently dominated by five distinct yet interactive agents: universities (including teaching hospitals), innovators (or “stars”), newly founded small- to medium-sized biotechnology firms (NBFs), large well-established firms (especially agro-chemical, seed and pharmaceutical companies) and the public sector (government). Collectively they function like a network with each agent specializing in a particular phase of biotech research, development and marketing (Auroa and Gambardella 1990). In addition there are trade associations and other professional societies that are active, e.g., Biotechnology Industrial Organization (a U.S.-based advocacy group) http://www.bio.org/.

a) Universities

2.02 The original work leading to modern biotechnology took place within universities (e.g., Watson and Crick’s identification of the DNA helix at Cambridge University and Paul Berg’s development of recombinant DNA technology at Stanford University). The university provides a setting for ‘pure research’ or the search for ‘knowledge-for-knowledge’s-sake. It has extensive infrastructure including laboratory facilities, equipment and cadre to support research as well as teaching the next generation of researchers. This infrastructure is built up over decades and relies heavily on public funding. Beyond tangible assets the university by housing the full spectrum of human knowledge (NES, HSS and the Arts) in both codified form (e.g. libraries) as well as tacit form (e.g., scientists, lawyers, medical doctors, humanists, social scientists and artists) provides the opportunity for cross-fertilization, e.g., social scientists and humanists learning from the experience and practice of the physical sciences and the arts. Put another way, the university provides agglomeration economies (formally and informally) with respect to knowledge.

b) Innovators Index

2.03 Within the university there are leading researchers or ‘stars’ who play a significant role as innovators within the biotechnology sector of the economy. Of some 207 biotech ‘stars’ identified by Zucker et al, 158 (76%) were resident in universities, 44 (21%) in research institutes and only 5 (3%) in commercial firms (Zucker et al 1998: 293). Like Watson, Crick and Berg such ‘stars’ have the talent, knowledge and experience that leads them to new insights and breakthroughs. Their high profile tends to attract the best students who, in turn, become the ‘stars’ of the next generation. They also tend to attract the attention of the large well established firms.

2.04 It has been argued, using a life-cycle model, that most scientists invest in developing a reputation early in their careers usually through publication in journals that signal the value of their knowledge to the scientific community. With maturity they seek ways to appropriate the economic value of their knowledge, e.g. through consultancy, work (full- or part-time) with established enterprise outside of the university or by joining or establishing a new firm (Audretsch and Stephan 1999). This appears to be especially true in biotechnology.

c) New Biotech Firms Index

2.05 In the case of ‘scientific founders’ of new firms in pharmaceutical biotechnology some 50% followed the academic trajectory; 28% established their careers with large pharmaceutical companies; 13% followed a mix of the two while 6% established firms immediately following their academic training (Audretsch and Stephan 1998). It has also been argued that many new biotech firms are founded with the specific intent of selling them to large established firms (Arora and Gambardella 1990, p. 362).

2.06 According to Zucker et al (1998) the number of American companies actively engaged in biotechnology grew from virtually none in 1967 to 751 by 1990. Of these 511 or 68% were new entrants, 150 incumbents (20%), and 90 (12%) including 18 joint ventures that could not be formally classified. Furthermore, by 1990, 52 (7%) of the 751 had died or merged with other firms (Zucker et al 1998: 292). Zucker et al do not provide evidence regarding the size or concentration ratios for biotech firms.

2.07 Using a different data set, Biotechnology Industrial Organization (a U.S.-based advocacy group) reports there were 1,311 biotech firms in 1995 increasing 5% to 1,379 in 2001 (Table 1). More significantly market capitalization of biotechnology firms increased 700% from $US 41 billion in 1995 to $US 339 billion in 2001. With respect to firm size, the average biotech firm increased from a capitalization of about $US 31 million in 1995 to $240 million in 2001.

Table 1

United States Biotechnology Industry

1993-2001

Year 2001 2000 1999 1998 1997 1996 1995

Sales* 18.1 16.1 14.5 13 10.8 9.3 7.7

Revenues* 25.0 22.3 20.2 17.4 14.6 12.7 11.2

R&D Expense* 13.8 10.7 10.6 9 7.9 7.7 7

Net Loss* 5.8 5.6 4.4 4.1 4.5 4.6 4.1

Market Capitalization* 330.8 353.5 137.9 93 83 52 41

Number of Public Companies 339 300 316 317 294 260 265

Number of Companies 1,379 1,273 1,311 1,274 1,287 1,308 1,311

Employees (‘000) 174 162 155 141 118 108 103

* $US billions

Source: Biotechnology Industrial Organization, 2002, http://www.bio.org/er/statistics.asp

2.08 At this time it is not possible to estimate the impact of the late 2001 stock market meltdown (collapse of the dot.com economy) on market capitalization of biotech firms. However, the National Venture Capital Association reported that biotech start-ups raised about $4.3-billion through the first three quarters of 2001, compared with about $5.2-billion in the first three quarters of 2000. While this represented a 17-per-cent drop year-over-year, biotech financing compared favourably to overall venture funding of privately held companies which fell 63 per cent between the first three quarters of 2000 and the first three quarters of 2001 (Reuters, January 16, 2002).

2.09 In Canada the biotech sector is dominated by small and medium sized firms (Table 2). In 1997, of some 282 reporting firms, 72% had 50 employees or less; 15% had between 51 and 150 employees; and only 13% had 151 or more employees (Research & Analysis 2000). Nonetheless, according to the federal government’s The 1998 Canadian Biotechnology Strategy: An Ongoing Renewal Process

Canada ranks third after the United States and the United Kingdom in the global biotechnology market. With more than 500 firms, mostly small companies, Canada now has more biotechnology companies per capita than any other country. (Industry Canada 1998, p. 5)

Table 2

Canadian Key Industry Data by Company Size, 1997

($Cdn Millions)

	Small (1-50)	Medium (51-150)	Large (151+)	Total
No. of Firms	204	43	35	282
Biotech Sales	$183	$137	$698	$1,017
Other Revenue	$49	$47	$23	$119
Biotech Revenue	$231	$183	$721	$1,135
R&D	$192	$153	$240	$585
Exports	$95	$43	$275	$413
Employees	3,125	2,397	4,302	9,823
Unfilled Positions	1,031	281	587	1,899
Total Positions	4,155	2,678	4,890	11,723

Source: BIOTECanada, Canadian Biotechnology’98, Success from Excellence, 1999.

2.10 By sector, 46% of reporting Canadian biotech firms were engaged in health care; 22% in agriculture; 11% in environment; 7% in food processing; 4% in aquaculture; 3% in bio-informatics; and 7% could not be classified (Table 3).

Table 3

Canadian Key Industry Data by Sector, 1997

(Per Cent)

	Companies %	Biotech Sales %	R&D %	Exports %
Health Care	46	50	87	58
Agriculture	22	23	5	21
Environment	11	3	1	1
Food Processing	7	21	2	18
Aquaculture	4	1	0	1
Bio- Informatics	3	0	2	0
Other	7	2	3	1
Total	100	100	100	100

Source: BlOTECanada, Canadian Biotechnology ‘98, Success from Excellence, 1999

d) Large Firms Index

2.11 Reliable data about large biotech firms is available only for agro-biotechnology, specifically plant biotech (Table 4). Drawing on work by Brennan et al (2000), Fulton and Giannakas (2001) indicate that the 4 largest firms accounted for 100% of plant biotech activity with one company, Pharmacia, accounting for 88% of all activity in 1998. No estimates were provided regarding the value of plant biotech activity by the 4 dominant firms.

2.12 The trend towards increased concentration is also indicated by merger and acquisition activity of the major firms (Table 5). The ten largest firms in 1998 were involved in 205 consolidations of one form or another of which 68% (140) were acquisitions; 5% (11) were mergers, 6% (13) were joint ventures, and 21% (41) were other forms of industrial consolidation.

2.13 While data is not available for the pharmaceutical industry, the other major player in biotechnology, the overlap with agro-biotechnology is suggestive that a similar level of concentration and consolidation is probably taking place in that sub-sector of biotechnology. Thus Pharmacia (Monsanto), DuPont, Bayer, Dow and others, listed in Tables 4 and 5, are also active in pharmaceuticals.

Table 4

World Sales of Top Ten Pesticide and Seed Companies

1997-1999

(Fulton and Giannakas, 2001)

Company 1997 1997 1999 1998

Pesticides Seed Seed Plant

Biotech

Millions $US

DuPont (Pioneer) USA 2,518 1,800 1,850 —

Pharmacia (Monsanto) USA 3,126 1,800 1,700 88%

Syngenta (Novartis) Switzerland 4,199 928 947 4%

Groupe Limagrain (France) — 686 700 —

Grupo Pulsar (Seminis) Mexico — 375 531 —

Advanta (AstraZeneca and Cosun) 2,674 437 416 —

UK and Netherlands

Sakata (Japan) — 349 396 —

KWS AG (Germany) — 329 355 —

Dow USA 2,200 — 350 —

Delta & Pine Land (USA) — — 301 —

Adventis Group (Hoechst/Rhone-Poulenc) 4,554 — — 8%

Bayer 2,254 — — —

American Home Products 2,119 — — —

BASF 1,855 — — —

Sumitomo 717 — — —

Agribiotech — 425 — —

KWS — 329 — —

Takii — 300 — —

Total World Sales 30,900 23,000 24,700 —

CR4 47% 23% 21% 100%

CR10 85% 32% 31% 100%

Note. From "Impact of Industry Concentration on Innovation in the US Plant Biotech Industry," by M.F. Brennan, C.E. Pray, and A. Courtmanche, 2000, In Transitions in Agbiotech: Economics of Strategy and Policy, W.H. Lesser (Ed.). Storrs, CT: University of Connecticut. Dashes indicate data not applicable.

Table 5

Consolidation Activity for the Ten Most Active Biotechnology Firms, 1998

(Fulton and Giannakas, 2001)

Company Mergers Acquisitions Joint Other Total

Ventures

Monsanto 1 15 4 17 37

AgriBiotech 1 30 0 5 36

Novartis 3 21 1 0 25

AgrEvo/Aventis 2 15 3 2 22

AstraZeneca 0 14 1 1 16

Limagrain 0 15 0 1 16

Empressa La Moderna 1 10 0 5 16

Rhone-Poulenc Agro 3 6 2 2 13

DuPont 0 3 2 8 13

DeKalb Genetics 0 11 0 0 11

Total [added by author] 11 140 13 41 205

Note. From "Impact of Industry Concentration on Innovation in the US Plant Biotech Industry," by M.F. Brennan, C.E. Pray, and A. Courtmanche, 2000, In Transitions in Agbiotech: Economics of Strategy and Policy, W.H. Lesser (Ed.). Storrs, CT: University of Connecticut.

e) Public Sector Index

2.14 The final actor in the biotech sector is government, or more properly the public sector at all levels and in many different forms. These varying forms include: national and regional research councils as well as specialized research institutes; departments and agencies of government (national and regional) including their regulatory activities and direct grants to industry, development of intellectual property laws and regulations protecting new biotech knowledge; publicly funded universities and colleges; and, national systems of innovation (OECD 1997)

2.15 To put the public sector contribution in perspective, in 1997 total Canadian biotech R&D spending amounted to $Cdn 770 million of which the federal government accounted for $314 million (41%) not including R&D in support of regulations while private industry contributed $341 million (44%), and, not-for-profit institutes contributed $115 million (15%) (Industry Canada 1998, p.4).

2.16 Biotech research represented about 10% of the entire federal government research budget in 1997. Of a total of $Cdn 314 million spent on biotech R&D: the Medical Research Council accounted for $104 million (33%); the National Research Council $90 million (29%); the federal department of Agriculture and Agri-Food $40 million (13%); and, other federal departments and agencies $80 million (25%) (Research & Analysis 2000, p. 14).

2.17 Thus publicly funded research councils and specialized research institutes are very active in supporting ‘pure’ and ‘applied’ biotechnology research. As noted by Phillips and Khachatourians (2001) about development of genetically modified canola in Canadian agricultural biotech, the National Research Council of Canada played a leadership role in the 1950 to 1985 period. In February 2000 the Government of Canada announced $160 million in funding to Genome Canada http://www.genomecanada.ca/. It is a not-for-profit corporation dedicated to developing and implementing a national strategy in genomics research. The Funding Agreement with the Government of Canada extends to 2004. At that time, the Government is to decide whether or not to renew the Agreement. Under its terms, Genome Canada will receive a total of $300 million and is required to obtain an additional $320 million from other sources. Similarly in the United States, the Nanobiotechnology Center was created in June 2000 with the support of the U.S. National Science Foundation and led by Cornell University on behalf of a consortium of American universities and health institutions http://www.nbtc.cornell.edu/. The creation of these two institutions is indicative of the rapid growth and dynamic change in public support to biotechnology.

2.18 In addition to support to research councils, government departments and agencies make industrial R&D and other grants to individual biotech companies. Furthermore, the public sector spends on regulatory activities to ensure, among other things, bio-engineered food and drug safety. At present data is not available about the total amount of public grants to the private sector nor the cost of biotech regulatory activities in Canada or the U.S.

2.19 Intellectual property rights, especially patents, serve as the legal foundation for the industrial organization of the biotech sector. Such rights are established by national governments and are subject to certain restraints through international treaties and conventions. The development of biotech patents and related intellectual property rights has been crucial to the development of the biotech sector and is the result of public sector decision-making. More will be said about the role of intellectual properties under Conduct (below).

2.20 The final strand in public support to the biotech sector is the national system of innovation (NSI). Phillips and Khachatourians (2001), quoting Metcalfe, define a NSI as “that set of distinct institutions which jointly and individually contribute to the development and diffusion of new technology and which provides the framework within which governments form and implement policies to influence the innovation process. As such it is a system of interconnected institutions to create, store and transfer the knowledge, skills and artifacts which define new technologies.” Subsequently, the OECD formalized the concept of NIS’s and produced a blue print for its member States (OECD 1997).

2.21 Governments around the world are now consciously designing NSI’s in an effort to enhance their competitiveness (Pagan 1999). The biotech sector is one of the chief objects of such NSI’s. However, the role of multinational corporations is generating stresses and strains on the successful operation of NIS’s (Patel and Pavitt 1998).

Index

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