Chapter 1: The New Bio MarketspaceThe dominant science of the twenty-first century will be biology.
Freeman DysonNew York, April 2020
At 8 A.M. on a sunny spring day, the Fuller household is in full morning rush mode. John is about to head off for his law office, his wife Cynthia for her pre-workday jog, and eight-year-old Marion for school. At the breakfast table of their Westchester home, Marion has just received her latest inoculation. Shots are a thing of the past; she just ate a banana. Using his wristwatch transmitter, John does his monthly checkup by sending his internist the data collected in his t-shirt's biosensors and in a capsule he swallowed. His health is fine, thanks to diet and exercise, but also to new drugs customized to his genotype. Always on the go, he tended to forget his pills, but he now has a microchip implant that works as a slow-release micropharmacy. In the bathroom, Cynthia is admiring her new makeup, which has just cleared a case of rosacea. She is back on her regular morning jog schedule, since the knee she injured skiing last winter has been partly reengineered. Meanwhile, John completes a bank transfer and decides to sell a stock that, in his view, has just peaked; thanks to iris scans and other biometric screens, online security is no longer an issue.
Outside, the air is crisp, and the Hudson River looks amazingly clean -- biofuels and waste-eating bacteria have worked wonders on the challenging New York ecology in the past decades. Overhead, planes bound for Canada and the West Coast are carrying their passengers with an added degree of safety -- their wings and fuselage are now made of biomaterials sensing and self-repairing any stresses or impending cracks, and their avionics include neural networks that can rapidly react to critical events such as hydraulic failures. Two things, however, have not improved; legroom is scarce and airports are still clogged to the gills.
Utopia? Biotech's detractors think so and paint a grim counterpart of Frankenfoods, mutant crops run amok, and the specter of eugenics creating a gene-enhanced "super class." This doomsday vision is unlikely to occur due to regulation, and resisting biotechnology progress amounts to battling the inevitable. Every innovation in our 2020 scenario is already in development or at the pilot market stage:
- Research on edible vaccines has yielded plants that produce hepatitis B surface antigen for oral immunization. A single banana chip would inoculate a child for one-fifteenth of the price of an injection and would not require the "cold chain" that is problematic in many developing economies.
- The distinction between food, cosmetics, and medicine is fading; Unilever is marketing medical foods such as a cholesterol-reducing margarine. Cosmetics such as Johnson & Johnson's Retinol have medical claims. Shiseido funds biopharma research and was first to develop a non-allergenic variety of rice. A strain of "golden rice" yielding provitamin A has been engineered and can open pathways for the production of other vitamins and plants.
- Vivometrics received clearance by the Food and Drug Administration (FDA) for its Life Shirt System that monitors more than 30 vital signs. Its initial focus is on three markets: clinical trials for drugs and devices, home sleep diagnostics, and cardiopulmonary medical research.
- Applied Digital Solutions developed a tracking device using mobile telephone chips in a wristwatch-sized locator and plans a medical version to relay data ranging from pulse rate to blood chemistry. Siemens and Agilent also created prototype medical monitors, and Medtronic's Chronicle links its pacemakers to physicians via the Internet.
- Samsung's vision of a home diagnostic tool is its "Family Doctor," a swallowed capsule that examines internal organs and relays data to a physician.
- MicroCHIPS, an MIT-affiliated startup, plans to launch within five years a chip implant with 400 wells holding drug dosages and a microprocessor releasing them at different intervals. By 2010, a second generation may interact with embedded sensors, allowing the body's own signals to trigger drug release.
- Regenerative medicine ranges from Organogenesis' Apligraf (first engineered skin, FDA-approved for leg ulcers) to the clinical testing of a bioartificial liver. Another tissue engineering company, Gentis, combines scaffolds, molecules, and dermal cells to build new cartilage (a global market of $1 to $3 billion).
- A "carbohydrate economy" is emerging with biofuels, plant-based polymers, and high-efficiency enzymes. Ethanol production is led by Archer Daniels Midland, and Cargill Dow received approval for polylactic acid, a biopolymer that is the first new fiber class since the 1950s.
- Environmental biotech accounts for more than $1 billion in a $17 billion U.S. market. This includes companies such as Regenesis, which markets products to help degrade groundwater contaminants.
For biotechnology to fulfill its potential, companies need to focus on three bases of competition: innovation, branding, and global reach. Innovation is shifting from pharmacos to biotechs, while branding largely remains the forte of Big Pharma. An emerging scenario links a few megamarketers such as Pfizer to a web of biotech satellites. These networks include equity investments as well as virtual links. In addition to their marketing muscle, pharmacos also contribute global reach, which biotechs need to recover their research costs. This chapter covers biotechnology's cross-industry scope, timeline, and global reach; and Chapter 2 discusses transforming trends in the industry. The following chapters focus on bionetworking and biobranding.
Economic Impact of Biotechnology
Broadly defined, the biosector is already estimated to account for more than a third of world gross domestic product (GDP). In the United States alone, the size of affected industries ranges from $400 billion for chemicals to $800 billion for the food sector and more than $1 trillion for biomaterials. Powerful macro forces will drive further expansion -- chief among them the need to feed, clothe, and shelter some 9 billion people worldwide by 2050.
Biotechnology will extend well beyond healthcare, which is already the largest industry sector in the world, reaching 12 percent of GDP in Germany and 14 percent in the United States or almost twice the spending on information technology. Population aging will entail the spread of chronic diseases and the need for gene therapies; by 2030, the number of Americans over 65 will more than double from today's 33 million to 75 million. In a decade, the United States could well spend 17 percent of GDP on healthcare.
Biotech innovation has clear results. In its thirty years of existence, the industry has produced more than 100 drugs and has nearly 400 products in clinical trials. Its value to society is also well established.
While innovation is the lifeblood of biotech firms, they face a set of unique challenges because of their medical focus. These range from ethical concerns to regulation and patenting issues. The evolution of bioscience cannot be extrapolated from that of its twentieth-century digital counterpart. Unlike information technology, bioscience is in a time paradox: Postgenomic research accelerates innovation across industries, but legal and ethical concerns have acted throughout biotech's history as "social brakes" -- a trend that is intensifying as we confront issues such as stem cell therapy and human cloning.Innovation Timeline
A central issue concerns the biotech timeline. It may be as little as 5 to 10 years before some of the components of our 2020 scenario are realized, while others may never come to pass. Biotech progress since DNA was first identified in 1944 as the "transforming factor" in bacteria (or, further back, since Gregor Mendel discovered plant genetics in 1863) shows that, like information technology, it evolved in discrete innovation clusters spurred by specific inflection points. In 1972, Eldridge and Gould proposed the theory of Punctuated Equilibrium
, suggesting that rapid evolutionary change takes place in relatively short bursts. Biopharma's first inflection point occurred in the nineteenth century, when scientists synthesized compounds from plants and dyes, leading to innovations such as aspirin, introduced in 1897. The second point -- and the beginning of bioscience -- came in the 1950s with Watson and Crick's discovery of the structure of DNA. The third inflection point was marked by the drafting of the human genome in 2000, which is leading to the emergence of molecular medicine, with therapies targeting specific patient genotypes.
Biotechnology, from the start, coevolved with other sciences; Watson and Crick's 1953 discovery of the double-helix structure of the DNA could not have happened without Franklin and Wilkins' development of x-ray crystallography. Later, bioscience merged with computing when Michael Hunkapiller developed in 1986 the first automated gene sequencer at Applied Biosystems, used by Craig Venter at NIH; a second impetus came in 1998 with the ABI sequencer that allowed Venter, then at Celera, to beat the genome sequencing schedule.
Computing and bioscience continue to merge, creating new fields such as bioinformatics. IBM is leading this area with initiatives such as its Blue Gene supercomputer, whose functions will include the study of protein dynamics.
Because it integrates several fields and deals with complex living systems, bioscience faces R&D costs and time frames much larger than those of information technology. Of 5 to 10,000 compounds screened, only one typically makes it to market, pushing the development cost of a new drug to more than $800 million. Timelines are equally daunting: It took 29 years after the discovery of DNA structure to market the first recombinant DNA therapy (Genentech and Lilly's insulin). Similarly, monoclonal antibodies (Mabs) were first developed in 1975, but companies such as Hybritech tried in vain to commercialize them in the 1980s. The first therapeutic Mab would not reach market until 1998, when IDEC's Rituxan was approved for non-Hodgkin's lymphoma. The main obstacle for the early Mabs was their origin in a mouse hybridoma (fusion of an antibody-producing cell with a myeloma B cell, leading to an immortal cell line generating the same antibody). These triggered immune system rejections, and success came only with a second generation of partly or fully humanized Mabs.
Given these historical delays, forecasts of biotech innovation vary widely and are likely to be revised often in the coming years.Impact of Investment Community
Timeline issues were exacerbated by an investor mindset that often expected short-term returns from a science whose progress should be measured in decades, not quarters. While the industry has attracted more than $200 billion in investment to date, it has also suffered from extreme stock volatility. Major slumps occurred in 1984, 1988, 1994, 1997, and 2001 following boom periods. After the 1982 approval of Genentech/Lilly's Humulin, the boom years of 1982 to 1983 saw nine initial public offerings (IPOs), including those of Amgen, Biogen, and Chiron. Another wave of seven IPOs occurred in 1986 alone, including OSI, Xoma, and Genzyme, but these dropped to zero after the 1987 stock crash. Similarly, the 1991 to 1992 boom collapsed by 1993 with the failure of the sepsis drugs and the Clinton plan for healthcare reform. In March 2000, at the peak of the tech bubble and shortly before the announcement of the draft of the human genome, a presidential declaration implying that genetic information should not be patented sent biotech shares into free fall. Gyrations continued in late 2001, as terrorism was followed by the birth of the biodefense sector.Social Barriers
Throughout its history, bioscience has also been affected by "social brakes" such as ethical fears and patent controversies. Early on, the development of recombinant DNA in the 1970s prompted a self-imposed moratorium by molecular biologists on gene-splicing research. Since then, most significant discoveries have triggered assorted warnings and limitations. The United States first led the world in stem cell research, when embryonic stem cells were first isolated at the University of Wisconsin in 1998. After a 2001 presidential decision limited U.S. federal funding to cell lines already in existence, the National Institutes of Health (NIH) announced that 48 of the 64 eligible cell lines were in non-U.S. labs. A shift of talent and funding may occur as a result, because Britain, Scandinavia, and the Netherlands have more liberal regulation; most importantly, the U.S. restriction, which affects a huge NIH yearly biomedical budget of almost $20 billion, may further delay the development of stem cell therapy for Parkinson's disease, stroke, or diabetes -- already estimated to be at least a decade away. Similarly, the November 2001 announcement by Advanced Cell Technologies (ACT) that it had cloned the first human embryo met with harsh criticism from the public and some legislators. Xenotransplantation was another thorny issue; European parliamentarians called for a moratorium on it because of concerns about animal-to-human viral transmission.
Another potent brake on bioscience research is the controversy surrounding patenting issues. Following the landmark 1980 Diamond v. Chakrabarty
case, the U.S. Supreme Court approved the principle of patenting genetically engineered life forms (awarded to Exxon for oil-eating microorganisms). The U.S. Patent & Trademark Office (PTO) awarded more than 10,000 patents in the past decade to companies including Incyte, Genentech, and Novartis, but also to academia and the government. New guidelines require medical utility, that is, a "specific, substantial and credible use" for a DNA sequence. A dispute between ACT, Infigen, and Geron (who bought Roslin Bio-Med in 1999) led to a PTO investigation of their patents on cloning technologies. Resolution of this dispute may take up to two years; in the meantime, this episode may drive some investment away from companies in the cloning field.
Ethical and legal barriers are compounded by privacy issues -- specifically, consumer concerns about insurance and employment discrimination based on genetic testing.
Biotech firms can draw several lessons from their innovation history:
Global Reach of BiotechnologyBiotech/Pharma Fusion
- Macrotrends are conflictual -- positive demographics are countered by pricing and access issues; companies need to stress bioscience's economic value to society.
- Bioinnovation cannot be extrapolated from the digital sector. The biosector is increasingly profitable and productive, but this is partly offset by persistent "social brakes."
- The industry as a whole and individual firms need to be more proactive in addressing ethical and legal concerns.
- Companies should also strive to manage investor expectations to attenuate the boom/bust cycles that have affected the biosector for the past three decades.
Biotechnology has now reached a stage where its top-tier firms are full-fledged biopharmaceuticals. Amgen's $16 billion acquisition of Immunex reached Big Pharma scale and was to give it a combined market capitalization of nearly $62 billion by yearend 2002, higher than that of AstraZeneca. Big Pharma global sales still dwarf biotech sales, but the new sector is increasingly profitable and has higher valuations and growth prospects.
Biotech's market cap peaked in early 2000 at nearly $500 billion. By yearend 2002, despite a sharp continuing decline in the technology sector, the top 10 biotechs still accounted for nearly $125 billion in market value -- roughly equivalent to Merck's market capitalization.
Despite the gloom in public markets, the biosector raised $12 billion in 2001 (down from more than $32 billion in 2000), still double the levels raised in the late 1990s, and investment rose again in 2002. Annual biotech growth is projected at 15 to 20 percent in the next three to five years, accelerating to 30 percent by the end of the decade.
The biotech/pharma symbiosis is easily summed up: Pharma needs biotech's innovation, and biotech needs pharma's scale. To maintain its sales at the double-digit annual growth rate expected by investors, major pharmacos need to launch an average of four new molecular entities (NMEs) per year, assuming annual sales of $350 million for each. From 1995 to 2000, there was less than one NME launch per year per company, with only 10 percent reaching annual sales of more than $350 million despite multibillion dollar R&D expenditures for major pharmacos.
In the coming decades, product portfolios will also come closer together. While Big Pharma sales are still dominated by primary-care blockbusters such as Pfizer's Lipitor (atorvastatin) for cholesterol reduction and Viagra (sildenafil) for erectile dysfunction, pipelines are filling up with biologics (nearly 400 are in late-stage clinical trials). Some of the top biologics are marketed by Big Pharma, such as Lilly's recombinant insulin line and Schering-Plough's interferon-alpha franchise. Conversely, Big Biotech is adding primary care to its traditional niche products, some of which are blockbusters in their own right, such as Amgen's $2 billion erythropoietin Epogen for anemia; in arthritis, the new compounds are biologics, from Immunex's Enbrel (etanercept) to Centocor's Remicade (infliximab) and the new Kineret (anakinra) from Amgen.
The biotech/pharma synergy now includes a focus on biomanufacturing, which is facing a major capacity crunch; shortages cost Immunex and Wyeth more than $200 million for Enbrel in 2001, and Wyeth invested in two new plants in the United States and Ireland. Fewer than a dozen biopharma firms have the development, manufacturing, quality, and clinical expertise to commercialize biologics. Major companies plan to invest more than $8 billion in biomanufacturing in the next five years, to obtain a total industry capacity of more than 1 million liters.Global Spread of Biotechnology
In 2000, thanks in part to a massive capital influx, the biosector became truly borderless, with a wave of cross-border deals, global financing, and dual listings in the United States and Europe. By 2001, there were nearly 5,000 biotech firms worldwide (of which more than 600 were publicly traded) generating $35 billion in revenue and spending $16 billion on R&D. Spurred by public and private investment, European biotechs multiplied to nearly 1,900 firms (versus almost 1,500 in the United States), but remained less mature, generating 22 percent of the world total (against 73 percent in the United States). Asia was still a small fraction of the world sector, but showed high growth in biohubs such as Singapore.Europe's Biotech Strategy
While national initiatives have kick-started markets such as Germany,
Europe-wide policy is still at the "all talk, little action" level. The German government triggered fast growth in the past decade with aggressive investment. By 2001, the public budget reached 435 million Euros, which was crucial in attracting a similar level of private investment. Germany spent more than four times as much as France, and the market reflected it. Germany now accounts for about one-fifth of European biotechs, with a national market cap over five times that of French companies. The region is led by the United Kingdom, whose biosector accounts for more than half of the total European market value.
France is the second largest pharma market, accounting for almost 20 percent of the European market; it has a strong medical research base, but its biosector lags because of underinvestment and a culture gap between academia and industry. There are signs of change: A 1999 law allowed public researchers to take equity stakes in their own ventures and offered a tax credit on R&D costs for startups. The Institut Pasteur has taken equity stakes in Hybrigenics and several spinoffs, and the University of Lille also has equity in Genfit.
At the regional level, the European Commission published in January 2002 an action plan to deliver effective policies, attract human and financial resources, and address global challenges. The corporate world was underwhelmed. Novartis announced that it was moving its global research hub to the Boston area, and European biotechs continued their transatlantic investments with two goals: Move downstream toward drug discovery but also gain a foothold in the North American market. Germany's Lion Bioscience bought Trega and NetGenics in the United States for $53 million to strengthen its drug discovery tools and combine its genomics expertise with informatics. Another German firm, MediGene, bought NeuroVir in the United States for $46 million. In 2001, Britain's Shire made a much larger acquisition with Canadian company BioChem for $4 billion. DeCode Genetics of Iceland purchased MediChem in the United States to move from population genetics to drug development.
Big Biotech is now mature enough to develop its own global marketing capabilities. In 2002, Amgen paid nearly $140 million to acquire from Roche the assets and operations related to Neupogen (filgrastim) in the European Union (EU), Switzerland, and Norway. Neupogen, targeting infection in patients on chemotherapy, reached sales of $1.3 billion in 2001. The much smaller U.S. biotech Cephalon bought French pharmaceutical firm Lafon, the licensee for its lead product (modafinil) to recover the 20 percent royalties it had been paying Lafon, but also to gain European production and sales capacity. The deal was notable for its size ($450 million in cash, or five times sales) and for the trend-setting potential of a biotech buying a pharmaco.Asian Biotech: Priority Sector
While Japan and the rest of Asia share region-specific policy goals and cultural perspectives, their biotech sectors are at very different levels of development. The Japanese pharmaceutical market, second worldwide, is valued at about $60 billion and accounts for more than 15 percent of global R&D spend. It will grow in parallel with its population of 130 million, which, by 2015, will have the largest proportion of over-65-year-olds in the world.
Japan has four distinct types of biotech players -- pharmacos, brewers and food makers with fermentation expertise, electronics firms, and local biotechs:
- Japanese pharmacos are actively acquiring technology via alliances such as those of Takeda/Affymetrix, Eisai/Incyte, and Taisho/Vertex/Neurocrine/IDEC.
- Brewers pioneered biotech investments with Kirin's early funding of Amgen; Takara (leader in distilled spirits) produces biochips for gene testing, and Kyowa Hakko (largest maker of fermented chemicals) also supplies reagents for DNA research.
- Like IBM, major electronics firms have set up internal life sciences groups and entered into alliances with local pharmacos and brewers; Hitachi collaborates with Takara and Yamanouchi, as well as with U.S. biotechs.
- Japanese biotechs multiplied in the late 1990s and include bioinformatics players Pharmadesign and Intec Web, tissue engineering firm J-Tec, drug delivery company NanoCarrier, and genomic firm GenCom; the government has boosted funds for biotech and nanotech research, aiming for a national biosector of at least 1,000 companies by 2010.
Beyond Japan, the Asia/Pacific region shows a wide variance, from
the first-world development level of Singapore to the embryonic biosector in China.
Asia's two giants, China and India, present very different pictures in biotechnology. China's biosector is embryonic but high-potential, whereas India has major pharmacos -- but these are facing a sharp transition from generic manufacturing to drug discovery. The Chinese pharmaceutical market is valued at only $4 billion but expected to grow annually at a 15 percent rate. While a large part of the market consists of traditional medicines, the government encourages foreign investment and technology transfer for high-tech therapies. The market's potential is shown in the fact that the population of 1.3 billion spends only $7 per capita on healthcare, compared with $200 per capita in the United States; even assuming only about 300 million people in the market for Western medicines, the upside is significant.
China's revenues from the biosector passed the $2 billion mark in 2000, and the country counts more than 50 biotech firms; the largest, Sinogen, has captured more than 60 percent of China's market of 20 million hepatitis sufferers with its recombinant interferon product. The government has designated biotech as a priority sector and backs areas such as the biochip industry, led by Beijing-based Capital Biochip. Serious barriers remain, ranging from weak intellectual property to suboptimal quality standards. These issues may improve in the wake of China's admission to the World Trade Organization (WTO).
While India has a major pharma industry led by multinationals such as Ranbaxy, Dr. Reddy, and Wockhardt, its biotech market is undeveloped, accounting for about $1.5 billion by 2005. It includes human health as well as agricultural and industrial products (genetically modified seeds, enzymes, and organic acids).
A major historical barrier has been India's lack of intellectual property protection. It will not begin to recognize patents until 2005, in accordance with the WTO. The government unveiled its "Biotechnology -- A Vision" Report in 2001, calling for a sustainable Indian biotech industry within
10 years; major goals include strengthening the bioinformatics network and conducting a field assessment of large-scale production of transgenic seeds by 2005.
India has several competitive advantages: a low cost innovation and manufacturing base (operational costs are one-seventh to one-tenth of those in developed markets), a research infrastructure (universities, biotech parks, and the National Institute of Biologicals, with a project outlay of $40 million), and an educated workforce.
India's major challenge will be the transition of its pharmacos from generics to original research. This will be helped by investments and cross-border alliances. Wockhardt plans to invest more than $40 million in biotech over two years, and Shantha Biotechnics partnered with Pfizer to commercialize the first indigenous hepatitis B vaccine and to expand markets for its other products.
In summary, the global environment yields several lessons for biopharma companies:
- In Europe, government support varies and EU-wide policy is still lacking; the most favorable markets are the United Kingdom and Germany.
- The EU biosector is growing fast but is still immature; consolidation will continue.
- U.S. biotechs are globalizing and investing in EU firms to gain a local production and sales infrastructure.
- Japanese biotech players are diverse, and potential partners can range from brewers to electronics firms.
- Asia/Pacific varies widely; Singapore, Taiwan, and Korea are biomedical hubs that offer attractive investment conditions; the China and India markets are embryonic, legally risky, and best approached with alliances.
Cross-Industry Scope of Biotechnology
In parallel with biotechnology's global reach, it has a unique multisector impact. In the same way that computing, media, and telecoms evolved around a binary language, innovation in a much broader array of industries now shares a common genetic code.
This is occurring at two levels: market and technology. Companies previously operating in one market, such as food processing, are branching out with hybrid products such as medical foods. At the same time, companies with a technology platform developed in one industry are leveraging it across sectors -- as Japanese brewers did with their fermentation techniques and as chemical manufacturers are doing with combinatorial chemistry and high-throughput screening.
Biopharma is emerging as the innovation driver for sectors ranging from energy to cosmetics, but these have fundamentally different roles in the new biotech ecosystem. Coinnovators
are academia and the government; enablers
include computing, telecoms, and media, forming new fields such as bioinformatics and telemedicine. Hybrids
are emerging as boundaries blur between medicine, food, and cosmetics. Counterparts
to the biopharma sector range from energy to agrotechnology, which share research areas such as biofuels and molecular farming.
This multisector web of research synergies should not be confused with industry convergence
. The "life sciences" concept was embraced in the late 1990s by firms such as Aventis and Pharmacia, envisioning that drugs, nutrition, and agbio would be housed under the same corporate umbrella. This quickly unraveled under internal and external pressures. European opposition to genetically modified organisms (GMOs) combined with low commodity prices to erode the profitability of agritech operations. In addition to vastly different margins, agbio and human health had different markets, regulators, and distribution channels. As a result, Novartis, Pharmacia, and AstraZeneca all spun off their agritech units, and Aventis followed suit. However, research synergies remain significant across sectors.
The need for scale in postgenomic R&D is acute, given its risks and costs. Many new technologies have a multisector impact: Transgenic plants yield human therapies as well as medical foods and cosmeceuticals. Instead of supporting vertically integrated conglomerates, bioscience is emerging as a matrix of research, supply chain, and marketing relationships, which link previously unrelated industries -- and spur new ones, from bioinformatics to the biodefense field.
Before the September 2001 terrorist attacks in the United States, biopharma companies had disengaged from vaccines and anti-infectives. Vaccines were not a repeat business like drugs for chronic diseases, prices were low because governments were often the buyers, and liability was significant until legislation passed in 1986 alleviated it somewhat. Vaccine producers had dwindled to four (Merck, Wyeth, Aventis Pasteur, and Glaxo-SmithKline). Similarly, anti-infective drugs had been neglected in favor of oncology or cardiovascular therapies, but the rise of antibiotic-resistant bacterial strains had partly rejuvenated the area -- the global infectious disease market was worth more than $37 billion, and vaccines and antivirals had double-digit growth. September 2001 radically changed the dynamics of this market.Biomaterials: From Polymers to Nanomedicine
The merging of biotechnology and materials science will have an unparalleled scope of applications and impact an enormous market of more than $1 trillion. Biomaterials are made in nature or by biotransformation and include drugs, enzymes, industrial chemicals, and crop protection/production compounds. In medicine alone, biomaterial products range from $200 vascular grafts to the $50,000 Left Ventricle Assist Device. Major players include Johnson & Johnson, Guidant, and Medtronic.
Further afield, biomaterials are revolutionizing energy, mining, and environmental cleanup. The biofuels initiative announced by the U.S. government in 2000 aims to generate biofuels equivalent to 348 million barrels of oil a year and to lower greenhouse gas emissions by 100 million tons (equivalent to the amount from 70 million cars).
Major corporate initiatives are underway. DuPont intends to generate 25 percent of 2010 revenues from biomaterials. By then, the second generation of its high-performance polymer, Sorona, will be produced directly from cellulosic biomass. It also leads in biosilks and is researching with Cornell University ways to engineer spiders to produce nonsticky web silk -- a polymer 5 to 10 times stronger than steel. Applications range from artificial ligaments to parachute strings. Similarly, Cargill and Dow Chemical have formed a joint venture, Cargill Dow Polymers, and are investing more than $300 million to manufacture plastics from corn.
In engineering, the central innovation will come from nanotechnology, producing composites tailored at the molecular or atomic level. Smart materials will emulate biological systems and use adaptive learning to self-repair. End products will range from automotive panels "remembering" their shape after dents, to lightweight airplane composites that sense and self-repair impending stress cracks.
The "killer application" is expected to be a DNA-type process to create integrated circuits. Traditional silicon technology may reach its limits in 2010 to 2015, when circuit lines may shrink to 0.01 micron and be vulnerable to quantum physics effects. To address this, DARPA intends to fund molecular electronics, in which molecules are designed to have electrical as well as chemical properties. The National Science Foundation estimates that nanotech as a whole will be a $1 trillion market by 2015.
Another high-potential area is nanomedicine, in which materials combine with drugs to create novel delivery systems. Startup C-Sixty was founded in Toronto to develop a fullerene-based therapy for AIDS. Because buckyballs (or buckminster fullerenes, carbon molecules discovered in 1985) can be shaped to fit into cell surface receptors, they can be coated with drugs that disrupt the cell's reproductive cycle; these are in development in oncology, AIDS, and other areas.Biohybrids: Cosmeceuticals and Medical Foods
For decades, the boundaries between cosmetics and drugs have been blurring, with incentives in both sectors: For cosmetics manufacturers, pharmaceutical margins are highly attractive; for drugmakers, new delivery systems (from creams to transdermal patches) are well-suited to some therapeutic areas. Johnson & Johnson's Ortho division pioneered this convergence with tretinoin, initially indicated for acne. The drug was later rebranded as Renova as an antiwrinkle agent.
The market is growing, especially in Germany, France, and Japan. To reduce its dependence on cosmetics and move into preventive health, Shiseido made massive biopharma investments and developed a portfolio of dermatology products. Beyond this area, it gained approval seven years ago to market a chemically treated form of rice as a medicine for children who are allergic to rice -- an unfortunate affliction in Japan. This made Japan the first country to approve a medical use for food.
Nutraceuticals, which include supplements, organic foods, and medical foods, reached global sales of $140 billion by 2000. Growth rates peaked around 10 percent in the late 1990s and are projected to continue at the 6 percent level in the coming years. About 65 percent to 85 percent of U.S. consumers claim to use food to help manage their health, and the Japanese have favored functional foods throughout their history.
The appeal of higher growth rates and margins prompted deals such as PepsiCo's purchase of Gatorade in 2000, Kellogg's acquisition of Worthington Foods for $307 million, and Kraft's purchase of Boca Burger in 1999/2000. The latter two firms focus on soy products.
For several reasons, the business reality of medical foods has not met expectations. Consumers are fad-sensitive and many products had fuzzy positioning and inadequate scientific support for their medical claims. After investing $50 million on its Intelligent Cuisine frozen line, Campbell discontinued it in 1998. Procter & Gamble's fat substitute Olestra was a disappointment, and the newer cholesterol-reducing phytosterols marketed by Unilever and McNeil have not had a stellar performance. Novartis chose to exit this sector, which may be better suited to consumer goods companies. In 2001, Archer Daniels Midland and Kao formed a joint venture to produce and sell diacylglycerol oil in major markets. It is approved in Japan for the management of serum triglycerides, and ADM Kao will conduct further clinicals in the United States and abroad.Agbio: The Next Generation
Following the collapse of the "life sciences" concept, spinoffs led to the creation of "pure play" agbio giants. Novartis and AstraZeneca merged and floated their agrochemical businesses under the name of Syngenta in November 2000; Aventis later announced the sale of its Crop-Science operation to Bayer for $6.6 billion, and Pharmacia spun off the agbio part of its Monsanto acquisition. On the other hand, DuPont increased its exposure to agribusiness with its $7.7 billion purchase of Pioneer Hi-Bred in 1999, and BASF bought American Cyanamid the following year. By 2001, after a consolidation wave, the top seven agbio companies had revenues of $23 billion.
While research synergies are clear, the downstream businesses are too different in terms of regulation, economics, customers, and distribution channels to warrant mergers. Collaborative potential is high in several areas, including transgenic animals for drug production, edible vaccines, and nutraceuticals, but its realization depends on a radical rethinking of the consumer strategies of agbio companies.
Historically, agrichemical companies focused on their direct customers, that is, farmers. While nutraceuticals changed this business model by introducing consumers as a critical component of the food chain, agbio companies largely continued to ignore them.
GMOs benefited farmers through input traits
(better crop productivity) but had no output traits
(advantage to the end user). This was compounded by external disasters, including British mad cow disease and the dioxin scare in Belgium. More media coverage followed when Aventis' StarLink corn, approved for animal feed but not human consumption, was found in U.S. fast food. The cost to Aventis was more than $1 billion for the recall and compensation to growers. Farmers also questioned Monsanto's bioengineering that prevented its "terminator" seeds from being reproduced, thereby condemning them to eternal dependence on the company. This was an acute issue in emerging markets such as India, where farmers could not afford to pay for the high-priced seeds. Monsanto eventually capitulated in India, but the public relations damage was done. The result was disastrous: Gerber led food processors in rejecting use of bioengineered ingredients, Archer Daniels Midland asked farmers to segregate crops, and the EU imposed a 1998 moratorium on the approval of new genetically engineered seeds.
The only way to turn the debate around is to produce a second generation of GMOs with clear and tangible consumer benefits, such as an increased nutrition value. The new strain of "golden rice," first developed at the Swiss Federal Institute of Technology, contains enough beta-carotene to meet daily Vitamin A requirements and boost iron levels. Vitamin A deficiency affects 400 million people worldwide and can lead to learning disabilities and blindness, and iron deficiency is found in 3.7 billion.
For these reasons, India and other emerging markets including Brazil, China, and South Africa are actively expanding genetically modified (GM) crops. Some 125 million acres of transgenic crops were grown in 2001, and China was reported to have the second largest investment in plant biotechnology after the United States -- with spending to quadruple by 2005. Argentina has the second-largest acreage of GM crops after the United States, and India and Brazil are expected to adopt transgenics in the near future.
The biggest challenge remains public opinion in developed countries. An EU report summarizing 81 research projects conducted over 15 years at a cost of $64 million concluded that there were no new risks to human health or the environment -- but the EU still passed legislation to mandate the labeling of GM foods, which requires producers to track the products from seeds to grocery stores.Summary Points
- Biotechnology has reached an inflection point where it is increasingly profitable and productive, but also vulnerable to negative forces ranging from pricing and access issues to public concerns about privacy.
- The biosector's evolution is unique, and the industry must be more proactive in minimizing the "social brakes" that have negatively impacted its progress.
- Big Biotech and Big Pharma are now indistinguishable, and an emerging scenario links pharmaceutical megamarketers to a web of satellite biotechs; accordingly, the next chapters deal with the biopharma sector as a single unit.
- The top-tier biotechs are developing their own global capabilities and need region-specific strategies in Europe and Asia.
- Cross-border deals are linking the United States and Europe, but high-potential, high-risk markets such as China and India are best approached with alliances.
- Biotechnology is the innovation driver for many sectors, but these vary widely in their business appeal; while biomaterials and nanomedicine hold high promise, hybrid fields such as medical foods may be better suited to consumer goods players than to biopharma companies.
Copyright ? 2003 by Francoise Simon and Philip Kotler