Chapter 2 The History of the Biotechnology Industry

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Chapter 2 T h e History of the B i o t e c h n o l o g y I n d u s t r y Biotechnology is comparable to the Chinese kitchen. It is a variehj of meat dishes, numerous vegetables and spices that are combined into to a diversity of dishes. Professor Keld Dan~, The Finsen Laboratory, University of Copenhagen

2.0. INTRODUCTION This chapter examines the biotechnology industry from the perspective of the history of technology. It illustrates that biotechnology contains a set of both new and old research disciplines and techniques rooted in molecular biology and biochemistry. In effect certain of the old industrial processing skills and techniques have been revitalized and refined. Furthermore, being interconnected with related and different technologies has also been of vital importance for the developments of the biotechnology industry, especially improvements in new materials and in computer sciences have been important. I focus especially on analyzing the industrial applications of new biotechnology research disciplines and their future prospects in major industrial segments, such as the pharmaceutical industry, the production of new types of food and environmental protection. This descriptive analysis leads to the discussion of the improvement and refinement of industrial skills and competencies. The ability to handle both the new disciplines and the old processing skills has proven to be one of the key problems for the small entrepreneurs in becoming vertical integrated firms. Finally, I attempt to explain why the biotechnology industry has been labeled "the networking industry". This will be the platform for the following chapter that will identify the main actors in the biotechnology industry and their roles. 2.1. THE CONCEPTUAL STRUGGLE The Boyer & Cohen discovery of the genetic engineering technique in the early 1970s turned out to be the first phase of a new industrial era and a new technological field. It would be wrong to say that genetic engineering was the only technique underlying this new industrial revolution. Rather it was a series of new techniques and advances in molecular biology that occurred in the 1970s. The industrial application of a variety of new biology related techniques were named biotechnology. Firms that developed and utilized biotechnological disciplines were

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referred to as biotechnology firms in the biotechnology industry. But evidently firms and industries have for ages been using biological processes as the basis for products and services. All of a sudden bakeries, breweries, wineries and dairies were perceived as biotechnology firms without having the slightest interest in belonging to this new industry since the concept of biotechnology has a distaste for modernity and hype high tech. At the same time it was obvious that firms were competing to be part of the new industry while well-established firms and industries did their utmost to avoid being related to the concept of biotechnology. Companies that aspired to be part of the biotechnology community did so in order to attract resources from public R&D programs and the venture capital community and to get access to state of the art knowledge at major universities. Firms that neglected the new biotechnology did so in order to escape the growing public skepticism towards genetically modified products. The multifaceted problems became even more complicated when dominating pharmaceutical and chemical firms, for whom the new biotechnological techniques were almost tailor-made until the early 19905, did their utmost to avoid implementing biotechnology in their products and production processes. This has been changing over the last five years and from the perspective of small biotechnology firms, the large pharmaceutical and chemical companies have, as a group become dominating actors in a variety of ways. The large firms serve as sparring partners in testing new techniques and processes for the small entrepreneurial firms. Hence small firms get access to what they hope is their future market. Large companies have started to buy up small promising firms in order to implement their technological competencies into their own organization. Consequently small firms in the US are not compelled to engage in the important and costly product approval processes required to have a biotechnology product approved by the Federal Food and Drug Administration (FDA). Furthermore, large firms have also played a major role as incubators for new biotechnology firms by way of spin off R&D projects. The case of Incyte Pharmaceuticals in Chapter 8 is an example of a spin-off firm from the agro-chemical firm Monsanto. 2.2. THE RESEARCH FIELD OF BIOLOGICAL ENGINEERING - A N E N A B L I N G TECHNOLOGY

The nature of the concept of biological engineering is complex in the sense that it covers both new techniques and old ones that have experienced a renaissance. Due to the large and complex range of techniques in the field of biotechnology, n ~ single widely agreed upon definition of the concept exists that can serve as a guideline for inclusion and exclusion of a certain research projects or firms. In my research it has been important to have a definition that, on the one hand, excluded bakeries, etc., but which is also sufficiently broad to capture companies that work with biotechnology by providing new technologies for biotechnological companies and research laboratories. The reason is that these device-making companies have had to build up

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competencies in biological engineering in order to develop the equipment necessary for such activities. The following definition has been developed for the purpose of this study: Biotechnology is a common denominator for the development and application of process equipment, and scientific and technical methods, such as molecular biology and genetic engineering in the controlled use of microorganisms, animal cells, plant cells as the basis for the production of goods and services. This definition covers production and application of process equipment used in biotechnological production and biotechnological analysis. Firms that are engaged in such activities have built up biotechnological competencies and the economic prospects have been in favor of these mediating firms, especially in the early phase of the biotechnology industry era. Hence the field of biotechnological research consists of multiple techniques, research areas and scientific disciplines and there is an almost free flow of concepts and technical terms. The mix of concepts, disciplines and techniques is due to deficient clearness among concepts. Figure 2.1 illustrates key biotechnological techniques and seeks to place them in a biotechnological framework. The figure demonstrates that genetic engineering is a single branch in the field of gene technology that again is a cornerstone in biotechnology. Moreover, the figure shows the multiple techniques that must be combined in order to achieve the skills and competencies for mastering just one of the main areas from process to product in the biotechnology field. The most important techniques and technologies in biotechnology presented in the following sections. The presentation should be seen as introductory and a way of illustrating both the complex nature of the field of biotechnology and the interdependence of individual techniques.

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Figure 2.1. The inter-connectivity of the biotechnology area of techniques

Bi~technolo~

Clone formation of plants from cells or tissues

Scientific and technological application of biological systems

Clone formation of animals through transplantation Production of feeding stuff and foods through fermentation

Molecular bioloev Scientific and technological production of macromolecules

Identification of the genes of the immune system (animals, humans and tissue) Production of synthetic proteins through enzymes Production of monoclonal antibodies

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Gene.Technolo2v

(Genetic Engineering) techniques and principles from cell biology and geneti~ that allows the transformation of genes.

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Cell genetics e.g. hybridization and protoplast fusion Localization of genes and ~omosones Transformation of genes Cloning of genes through genetic engineering STEM CELLS

Source: Modified from original source: The Danish Agricultural Council on Research and Testing (1984) p. 5

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2.2.1 G e n e t i c e n g i n e e r i n g 1

It was the genesis of genetic engineering techniques, or recombinant DNA (rDNA), that led to the revival of the old biotechnological techniques such as fermentation and thus the constitution of the new biotechnology industry. In principle the rDNA technique allows for exchange and transformation of genes in-between all living organisms such as animals, humans and bacteria. Genes are long spirals with information or codes, the chemical name of which is DNA. The nickname of the technique is gene splicing which is a precise description of what actually takes place. The idea is to cut a gene from a donor organism and insert it into a plasmid or viral DNA for transplantation into a host organism, where the gene causes the production of a desired substance either for harvesting or for the benefit of the host organism itself. In itself there is nothing new in the technique. Such changes take place in nature all the time. Moreover traditional refinement techniques, such as when plant breeders are crossing related species in hope of a desired outcome they also modify the genetic material in these pants. However, the gene splicing technique makes it possible to control the process and simultaneously cross specific species. Hence it has been possible to clone a sheep, which was impossible prior to the introduction of genetic engineering. Going from the scientific potential to the industrial applications, genetic engineering techniques have facilitated changes in the genetic codes of any living organism. The industry is ~rimarily focusing on microorganisms from which high value products can be produced, such as human insulin and human growth hormone. But gene splicing is also used in the research and development of new plants and animals (mice, rats, sheep and cattle). An additional point is that genetic engineering techniques can be used to develop organisms that can produce substances in larger amounts than these can be produced naturally. It is even possible to produce organisms that can produce substances from other living organisms. In these so-called biological factories goats, sheep or mice have been given a specific characteristic enabling their glands to produce high value products, such as monoclonal antibodies. The substances can subsequently be extracted from the animal milk. 2.2.2. C e l l c u l t u r e

Cell culture is a technique where cells are taken from human or animal organs. These cells are grown in laboratory cell cultures and tissues and used both for industrial and scientific purposes. The method has been applied for decades and is i

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! When writing on the biotechnology disciplines it is advisable to use one of the major guidingbooksdescribing the techniques and the vocabulary. I hsve made extensive use of William Bains book from 1998: Biotechnology From A to Z. 2'nd edition.

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also used to produce pharmaceuticals. Furthermore, this method is used to grow plant cells from rare species because these are difficult to collect or they contain high value substances. One of the companies in this book, Kem-En-Tec, has for instance developed a technique to extract a high value substance, peroxidase, from horseradish peels.

2.2.3. Cell Fusion/hybridization Merging two or more cells into a single cell is called cell fusion or hybridization. The difference between this technique and gene splicing is that cell fusion is not changing the genetic material structurally. A new cell is created that has the genetic characteristics of both cells - a so-called hybrid. Cell fusion is applied in two main areas: hybridoma techniques used in the production of monoclonal antibodies and protoplast fusion used in plant breeding.

2.2.4. Enzyme technology Enzymes are special forms of protein that function as catalysts in chemical reactions. Enzymes are structurally complicated, and cannot be produced through chemical synthesis but require a biologic process. As catalysts, enzymes are advantageous in that they cannot enter into biological reactions with other substances. Furthermore, enzymes break down very slowly and small quantities can therefore do a lot of work. The development of genetic engineering techniques has opened up for the production of a variety of new industrial enzymes. The production of enzymes is a Danish specialty. The pharmaceutical company, Novo Nordisk, is the leading world producer of industrial enzymes with a world market share around 50% (Norus & Fingeret, 1997). The enzyme technology has a long history since beer brewing and cheese production have been using enzymes based on craftsmanship since the 1800s. Scientifically, the first enzymes were discovered and identified in the 1870s. Today more than 2,000 enzymes have been identified of which less than 10% are exploited commercially. Thus in spite of the long history of the industrial application of enzymes, this application is still underdeveloped. The case of ThermoGen in Chapter 7 shows how new biotechnology is sought to change the use of enzymes by developing a new group of enzymes and thereby create a niche market in the area of industrial enzymes.

2.2.5 Fermentation Fermentation is a process where relatively inexpensive and accessible raw materials (substrates) are transformed into one or more desired products through microorganisms, human cells, plant cells or animal cells by using enzymes. The process is performed in highly advanced stainless steel tanks as batch or continuous processes. Fermentation requires the skills and experience of a craftsman to perform. Fermentation is also one of the old biology based techniques that has experienced a renaissance with the introduction of the new biotechnologies. Traditionally, this

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technique has been used in the production of antibiotics, enzymes, amino acids and chemical products. Fermentation is one of the most central competencies for small biotechnology companies which they must master in order to be able to scale up from the experimental stage to full scale production (Norus, 1997a). The reason is that the substances developed by small biotechnology firms have a price of up to 25,000 USD per liter. Consequently, efficiency and optimization are variables in the production processes. The intensified interest in fermentation can help out some problems and bottlenecks that are major barriers to produce high value products making it feasible to engage in the commercial production of even small amounts of substance. 2.3. THE INDUSTRIAL APPLICATION OF NEW BIOTECHNOLOGIES In its simplest form biotechnology has existed for hundreds of years in the daily production of bread, wine, cheese and beer. Characteristic of this application of biology, it has been based on experience. The scientific understanding of the processes was not only lacking but was also inferior. The foundation of what we today label biotechnology was created in the 1930s and 1940s when the Rockefeller Foundation started to fund basic research in the area of molecular biology. At that time the funding was seen as a waste of resources due to the lack of industrial applications and economic prospects (Yoxen, 1981; Norretranders, 198~. Nevertheless, this initiative led to a qualitative change and caused biology-based areas to become acknowledged as scientific disciplines. The most important spin off from the Rockefeller Foundation's funding of molecular biology was the discovery of the structure of the DNA molecule in 1953, and later the first successful test with gene splicing in 1973 (Watson, 1970, 2000; Crick, 1988). Besides the discovery of the genetic engineering technique, other important discoveries were made in the area of molecular biology during the 1970s. Techniques and discoveries that also had great economic prospects (Bud, 1993,1994). In its present sense biotechnology is a complex technology that consists of multiple technologies, techniques, research areas and professional identities. Many of these technologies and techniques are based on old technologies that have been extended due to the development of the new technologies. Research and development in the area of biotechnology depend on advances in other technological fields. First of all it depends on information technology, e.g. the development of simulations of molecules and secondly it depends on developments in the area of new materials for example to build fermentors with improved performances. The development of biotechnologies therefore requires skills and competencies in multiple techniques and processes in order to manage the process of taking a product from the scientific and experimental stage to production. This is only the technical challenge of the new biotechnologies. Simultaneously the organization must have the product approved by the public authorities and subsequently be able to create a market for its products. Collaboration and networking with other firms and institutions are means of

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overcoming both the technical and the practical problems of taking new biotechnology products through to the customers that seem not to want at least some of the products. So why engage in this technology? Biotechnological techniques and products are applied in the development and production in the pharmaceutical industry, the chemical industry, the agro industry (both animal production and plant production), the food industry, the energy industry and the environmental industry. The broad fields of application mean that biotechnology has attracted great economic and political interest. The interest was intensified along with the growth of small biotechnology firms in the early 1980s. Small biotechnology based firms provided millions of dollars on the US stock markets. All these firms were spin offs from universities where the scientific and technological discoveries were made (Yoxen, 1983; Daly, 1985; Kenney, 1986). The start up of small biotechnology firms and the intensified public investment in basic research were primarily legitimized by the socio-economic prospects. The new biotechnology was picked out to solve economic problems, environmental problems, health problem and hunger problems in the Third World (Knudsen & Norus, 1989). 2.3.1. T h e p h a r m a c e u t i c a l i n d u s t r y 2

The new biotechnologies are almost tailor-made for the pharmaceutical industry. For ages this industry has used traditional biotechnological techniques in the production of vaccines, medicines and diagnostic products. Add to this that the pharmaceutical industry has developed profound insights and competencies in fermentation techniques and specialized in the purification procedures after the fermentation process in order to separate the desired agents from the substrate. In other words, the new biotechniques are to be regarded as additional tools that lead to competition with the established skills and competencies represented by the existing process techniques. The conservative attitude of the large pharmaceutical companies towards the new biotechnologies in the beginning of the biotechnology era (see Chapter 1) is a result of this competition between new techniques and old routines. Traditionally, the pharmaceutical industry has relied on chemical synthesis and thereby the skills of pharmacists and chemists. Hence the pharmaceutical industry predominately has employed staff with these educational backgrounds. Biochemists and molecular biologist possess the competencies related to new biotechnological techniques. Therefore an internal competition between old dominating skills and new revolutionary competencies has taken place in many large companies. The problem is not only organizational resistance to change. It has also to do with longterm decisions on the preferred technological approach. If a pharmaceutical company decides to make any adjustments in their production processes for a specific product, 2 Robbins-Roth (2000) has a very detailed description of the prospects and advantages in pharmaceutical products from 1973 to 2000. Also the book contains a series of tables and figures that show the number of pharmaceutical products that are in phase III clinical trials and the number of products launched into the market until the year 2000.

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then the product approval procedure must start all over again. According to the current rules, a company can possess a patent for only a few years. If the company wants to experiment with a new technology then its technology must prove reliable and economically feasible. So even though a new set of technologies from a functional and rational perspective seems better than an existing one, and perhaps is even cheaper, the organizational structure may be immune to such arguments. Conservatism in the pharmaceutical industry in terms of technological strategies is therefore a result of prevailing structures in the industry. Irrespective of this conservatism, the pharmaceutical industry has been the industrial sector that has attracted the greatest interest in relation to development and investment in new biotechnology products and processes. About 70% of all investments in biotechnology, both private and public, tend to be allocated to the pharmaceutical area. This book also illustrates that the pharmaceutical industry is the industry to make most use of new biotechnologies, both in terms of resources spent and number of firms. Four of the five cases concern the pharmaceutical industry.

Besides the technological explanations for the pharmaceutical dominance, there are two main economic reasons favoring thisindustry. First,the pharmaceutical industry has traditionally been research intensive. The R & D intensity is higher than the average R & D costs in other industries.Second, the politicalpriorityof the health care sector in the western societiesand the positive politicalattitude toward supporting medicine consumption have meant that ithas been relativelyeasy for pharmaceutical companies to justify the high prices by pointing to the high R & D costs. The high payoffs have enabled the companies to start up large portfolios of research and development projects, in the pharmaceutical industry, biotechnology is applied to develop three types of new pharmaceuticals: 1. Diagnostic products, products that can detect diseases and infections,such as AIDS, Hepatitis,and blood lead poison, pregnancy, etc. 2. Products used in medical treatment to alleviateor even cure diseases 3. Products that seek to cure and prevent diseases,such as vaccines The first group of products, diagnostics, concentrates on cancer and heart diseases. The majority of R&D activities are engaged in this area. The second group is also the second largest in terms of overall R&D costs. It is merely products that can substitute existing products in the treatment of diabetes (insulin), dwarfish growth (human growth hormone) and hemophilia (Factor VIII). These are existing products and new biotechnologies are used to improve such products without necessarily resulting in cheaper products. At the same time the products are curing diseases but not preventing them. The area of vaccines is the least developed pharmaceutical field in terms of biotechnology. Recently this area has attracted more attention since large public resources are spent on HIV and AIDS research. The short-term perspective is to

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develop vaccines against hepatitis and herpes, but the long-term perspective is the development of vaccines against malaria and AIDS/HIV. The R&D activities in the pharmaceutical area are primarily focused on the prevention of welfare diseases caused by societal conditions, e.g. environmental problems. Despite this, the prospects are very unclear due to the high degree of public regulation of the health care sector in terms of approval of new products, laboratories and productions processes. Moreover, the political priority of the health care sector has significant impact on the rate and direction of biotechnology in the pharmaceutical area. Regulatory policies towards the new biotechnologies in particular will have strong impact on the development of future biotechnology products since environmental, moral, ethical and philosophical issues will restrict the use of animal testing and patient involvement in clinical testing of new biotechnology based products. Public awareness and skepticism have been less intensive over the last couple of years, and there is a tendency to believe that the use of genetic engineering has provided the companies with a much better cellular knowledge of how their products are functioning. This will enable firms to develop more "rational" products with fewer side effects and open up for the introduction of more non-prescription products (Robbins-Roth, 2000). Therefore, it is beyond doubt that the implementation of biotechnology in the pharmaceutical industry will have structural impacts on the health care market. This will require new political norms for how to prioritize the health care sector and the resources. This is in particular a problem in Western Europe where the large public health care sector is under pressure. Politically, the discussion has focused on securing basic health care and leaving it to the citizens to insure themselves against certain types of treatment. The growing costs in the health care sector are also caused by the pharmaceutical industry's demand for higher profits. The costs of getting products approved are increasing resulting in the skyrocketing of costs for developing new products due to the time it takes to prepare the necessary documentation ready for the public authorities, such as the FDA. As will be clear from the following chapter, the FDA approval procedure is a critical factor with respect to biotechnological products, because the public authorities lack the necessary competencies in specific areas of the biotechnological disciplines. Approval procedures are prolonged because the public authorities must build up competencies along with the processing of applications. However, since 1996 the FDA approval time has tended to decrease which should indicate that the authorities have established competencies in understanding and operating the new techniques and technologies. But still, rising approval costs represent a barrier, especially for small and medium sized firms that have great difficulties in covering the expenses without entering into strategic alliances with large pharmaceutical and chemical firms (Robbins-Roth, 2000). Turning to the demand for new cures and medical treatments, a growing number of over the counter products will make it possible to buy diagnostic kits that can detect life-threatening illnesses. But it is an open question whether it is good or bad

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news that people can test themselves for cancer, HIV, etc. without receiving any kind of counseling. In case the result is positive, they will have to realize this fact without simultaneously receiving professional counseling. 2.3.2. The food industry Compared to the pharmaceutical industry, the food industry spends few resources on R&D. This does not imply, however, that R&D activities are scarce in the industry, but most R&D projects are undertaken by the major suppliers of food additives, such as preservatives, colorings, flavors and stabilizers to the food industry - the large chemical firms. Therefore in the development of new products the major food producers are part of a professional user-producer relationship with the chemical firms (Norus, 1995; Lundvall, 1992, 1985). The point is that R&D efforts in the food industry are almost absent, especially when it comes to biotechnology. However, the industry is aware of the potential of the technology due to its relations with major chemical firms that in turn are deeply engaged in the development of new biotechnology aimed at the food industry. The application of biotechnology in the food industry, where the old biotechnology disciplines are rooted, is overwhelming in for example the production of diary products, beer, alcohol, bread, sugar, starch and new foodstuffs. Genetically modified organisms can be used in the production of new types of food that is especially nutritious, e.g. the production of single cell proteins. Single cell microorganisms reproduce rapidly and can be fed with cheap waste products. Certain researchers have seen this type of food products as a means to solve t h e hunger problems of the Third World. Until now the technique has only been used in the production of animal food products (Holdgaard, 1986; Angold, 1989). A few food products have been developed and are sold as mycoprotein under the brand name Quorn| One example is Stir Fried Quorn in black bean sauce. These ready made fast food dishes are aiming at the growing market for low-fat, non-fat, and lowcholesterol products that in North America have been the food industry's response to the concept of political correctness (Bud, 1993). In general, the application of new biotechnologies in the food industry has been used to optimize production processes and facilitate changes the use of raw materials, improvements of starters, such as industrial enzymes. Seen from the perspective of innovation theory, the application of biotechnology in the food industry is analogous to the pharmaceutical industry in the sense that the new technology primarily is used in the development of new processes to substitute the use of high value products. In the case of Calgene (Chapter 8), the aim of lthe company is to develop and market a genetically engineered foodstuff, a tomato. Whereas in Chapter 7, the case of ThermoGen shows a small Chicago based firm that aspires to become a process supplier for the food industry.

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2.3.3. The agricultural sector

In the future the agro industry as well as the single farmer will be affected by the new biotechnologies. The farmer will face more genetically modified products that will have impacts on the dependency of specific agro chemical products. In agriculture, the new biotechnologies are applied in the following product areas: 1. Veterinary products such as vaccines and growth hormones 2. Genetically modified plants such as soy beans, tomatoes, rape seed and sugar beets 3. Fertilizers 4. Energy production The development of vaccines that prevent diseases such as foot and mouth disease differ from existing vaccines in that it will be possible to vaccinate healthy animals in the herd rather than slaughtering the entire herd to avoid the spread of this disease. Moreover, research and development are directed towards the development of a vaccine that can prevent diarrhea among sucking pigs. Both diseases have severe impacts on the farmers' economy as well as on that of the producing countries since importing countries, due to the danger of infection, will often boycott meat from these countries. This was the case with the swine fever in the Netherlands and in Germany, in Belgium where foodstuffs had been contaminated and with the British export of beef due to the mad cows disease in 1996. Also the 2001 foot and mouth disease in Britain shows the socio-economic consequences of these types of diseases both for the country export, but also to ~the local economies in the farming areas where both the farmers and the tourist earnings disappear. The research and development of growth hormones aimed at the production of new feeding stuffs to improve the production of milk and meat is a sensitive area where both public and private money is spent in a rather grotesque manner. Why invest in improved production of agricultural products at a time when the warehouses in the EU countries are overloaded with corn, wine, meat, butter, and oils that the EU member states must buy up regardless of salability due to the support of the agricultural sector? Public funded basic research aiming at a 40% increase in the output of milk and meat seems ridiculous. Especially when the production of organic foods in some European countries has risen. Genetically modified plants have promising perspectives, but the industrial application of biotechnology has taken place at a later stage than, e.g. in the pharmaceutical industry. The reason is that it has shown much more difficult than expected to modify and change the genes of plants and microorganisms. The companies that have engaged in plant biotechnology have, first of all, been able to build up a new scientific platform and thereby develop a methodological preparedness for developing new products. The jump from mastering the new

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techniques to being able to control the desired changes in plants has proven difficult. In focusing on the development of new fertilizers, it is necessary to distinguish between two groups of products - chemical and biological fertilizers. Biologic fertilizers can be divided into two groups, natural fertilizers such as fungi, bacteria, and virus, and genetically modified fertilizers. In the latter group the research has aimed at developing new plants that are resistant to climatic changes (drought and frost) and attacks by insects and fungi. Moreover, the firms are trying to develop plants that are resistant to specific insecticides such as Round Up TM. The agrochemical company Monsanto develops Round Up TM. Seen from an environmental perspective it is regarded by some experts to be better than other herbicides because Round UP TM breaks down much faster. The problem is that certain weeds are resistant to Round Up TM and certain plants are not resistant to the product. Therefore certain seed companies seek to develop genetically modified plants that are resistant to Round Up TM. Another problem with Round Up TM is that it is not good for the drinking water supplies. The secondary aim has been to improve resistance to vermin and to research disease resistance. Hence the development of plants that can replace chemical herbicides, the most promising perspective in plant biotechnology, has not been given much attention. However, the large agro chemical firms have shown the f~rst signs of interest. They have been buying up small plant breeding companies. This could be seen as the build up of competencies for either developing or controlling the development of new biotechnological plants. In general, plant biotechnology still lacks new products because the majority of inventions have led to new or additional problems. The Danish company Danisco had, for instance, developed a genetically modified sugar beet with a lower sugar content than the traditional sugar beet. The case of Calgene in Chapter 8 is about plant biotechnology. Calgene was the first company to launch a genetically modified industrial tomato, but even though the FDA approved the tomato it turned out to be difficult to have enough tomatoes produced to satisfy the market. The major problem is that nature seems much more complicated and unpredictable than expected. The skeptics fear that the new plants will provoke spontaneous and uncontrollable undesired mutations among existing bacteria and fungi. Despite the development of genetically modified strawberries, tomatoes, and soybeans, financial investors have not shows much interest in plant biotechnology. The capital invested in this area, mainly in the 1980s, was guided by a lot of hype and some excellent PR work that attracted the venture Capitalist firms. The interest lasted for 4-5 years, but now many have withdrawn from the area. The Danish company Danisco announced in the year 2000 that they closed down the research in plant biotechnology after 15 years of intensified research and development in the area (www.danisco.com).

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2.3.4. Biotechnology in environmental protection The production of bio substance is part of the previous area in plant biotechnology, while the potential is in the intersection between the environmental protection and the production of new energy sources. Using biotechnological techniques, it is possible to convert plants and animals as raw materials into energy, so called "green oil", but also pulp, cardboard, chip board, ethanol, and starch. The point is that bio substance based production relies on microorganisms, enzymes (manipulated or natural). The problem is, however, that if the energy consumption were to be based on the green oil then field cultivation would have to be optimal, which means that the desired reduction of chemical herbicides becomes unattainable. Nevertheless, the biotechnological development can be of great importance for the improvement of the environment. Microorganisms can be utilized in wastewater treatment. The research is concentrated on the removal of nitrate and phosphorus. In the near future, the development of anaerobe processes of wastewater treatment with simultaneous production of biogas will also be possible. The current problem in wastewater treatment is that biological processes work less efficiently at low temperatures during the winter season. Moreover, unintended discharges of chemicals normally kill the active microorganisms in the wastewater treatment plants. The technology has been somewhat improved to the effect that microorganisms can tolerate harsh conditions, but the new biotechnologies and genetic engineering can bring these conditions even further. The future perspective is to develop and produce microorganisms that both function at low temperatures and can clean up even chemicals from the wastewater. 2.4. THE DEVELOPMENT OF COMPETENCIES - CROSS-FERTILIZING OF PROCESSES AND TECHNIQUES It should by now be clear that the nature of biotechnology is extremely complex. On the one hand, the technology consists of a variety of interrelated techniques and processes that potentially can be used in multiple industries. But the picture is even more complex since the development of biotechnology is relying heavily on other technological fields. Therefore, biotechnology can more appropriately be described as an "enabling technology" in that it combines new materials and information technology in ways that facilitate new products that could not be produced by applying any of the elements isolated (Oakey et al., 1990). One example would be the development of biotechnological process plants that requires combining skills in biotechnological processes with advanced computer measurements and the construction of stainless steel tanks (Norus, 1995,1998d). The implications of labeling biotechnology as an enabling technology are that biotechnology are defined as a series of related cross disciplinary concepts rather than trying to break each of the underlying techniques into a single technology e.g.

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genetic engineering. Instead of building up concepts grouped round types of products or industrial segments for instance foodstuffs or pharmaceutical products the idea is to acknowledge the variety of industrial applications that the advantages in modern biology has opened for. Moving the analytical focus from a technology specific view to how the biotechnology has been utilized at the organizational level, three factors must be clarified. First, biotechnological firms have been extremely sensitive to bad publicity. Second, the vast majority of biotechnology firms are very small and very entrepreneurial. Third, biotechnology firms have demonstrated ability to solve technological and financial problems by forming networks with a variety of actors in the field of biotechnology. The beauty of these facts is that they are conflicting and break with the conventional wisdom of how technologies come into being. Why are large numbers of investors, despite fluctuations, still prepared to invest huge numbers of dollars when new biotechnology is problematic in terms of technical instability, ethics, and economic prospects? How can small biotechnology firms with few financial resources and very few employees direct the development in such a way that we would expect that only large companies with huge financial resources will be able to stay in the competition? It is peculiar that firms whose only resources are the specific knowledge of their employees in a narrow area will engage in network collaboration with other competing firms at the risk of their ideas being stolen as a result of the collaborative arrangements. It is obvious that firms in biotechnology are trying to develop very different products and processes that are both desirable and problematic. Sensitivity toward bad publicity has been a general problem for the biotechnology industry as a whole no matter what type of products the firms have aimed at developing. On the positive end, ~firms are developing software products for digital image processing for analyzing, identifying, and characterizing biochemical structures as well as diagnostic test kits to detect for blood lead poisoning aimed at children's health care. To the group of products that from an ethical perspective are more problematic is for example the production of cloned mice that from birth are infected with a specific cancer disease, which makes the mice more suitable for animal experiments. Another example is a "do it your self test kit" to detect for HIV in your own bathroom.

Despite the blurred perspective, it is interestingthat bad publicity in rare cases can be referred to the perspectives and aspects of the products. Instead, rumors of the F D A concerning the product approval procedure have provoked changes in investors interestsin biotechn01ogy stocks.In the US, itis the Federal Food and Drug Administration (FDA) that has the authority to carry out product approvals. In the following chapter, I will go more into details with the procedure for product approval and present the public institutionsand regulatory bodies and their specific role in the area of biotechnology. The product approval procedures in the U S have three phases that must all be successfullycompleted before a biotechnology product can be sold. Signals from the F D A have led to fluctuations in the interest in

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biotechnology firms over time. Especially in cases where the active substance has shown efficacy, firms have been dosed down almost overnight. For this reason the whole biotechnology industry was put in the doghouse by the end of the 1980s. However, positive signals concerning the successful completion of the approval procedures have at times caused biotech-mania in the stock markets. The companies that have launched new biotechnology products have handled the ethical aspect and the consumer rejection by taking their products to the market and seeing if the consumers would buy the products. This has been done under the motto that if products are authorized by the FDA they should be marketed despite skepticism about their long-term effects on humans and the environment. Calgene pursued this strategy when it launched its first genetically modified tomato. But here the problems begin. Obviously, the individual customer can choose not to buy fresh tomatoes that are genetically modified. It is far more difficult to avoid the same sort of tomato when it comes to products, such as ketchup, peeled tomatoes, frozen vegetables and fast food if producers are not under legal obligations to include this information in the informative label. On the other hand, one could argue that genetically modified products are harmless to eat since the technology in principle only can control mutations that also could take place incidentally in nature. Regardless of which perception we adhere to, the pendulum swings back and forth according to the point in time we seek information. The biotechnology industry has either been in deep recession or shown almost skyrocketing growth in terms of investments. In the coming years this developmental path is expected to oscillate between growth and recession. The dominance of small entrepreneurs in the biotechnology industry is due to the development of new techniques that have primarily taken place in university departments and to a lesser degree in private R&D departments. Consequently, university professors were the pioneers of the infant industry. The most prominent example was, of course, when the founding fathers of genetic engineering, Boyer and Cohen, established Genentech in South San Franciscos. Indeed, Genentech was a pioneer in the biotechnology industry. It was one of the first firms to be introduced on the stock exchange in the early 1980s. At that time small entrepreneurs spent vast amounts of dollars on what was really nothing but glorious perspectives. Biotechnology was launched as the next major technology following the computer technology, and when small biotechnology firms appeared in Silicon Valley and round Boston, the very areas that successfully had given birth to the computer industry, the connection between business success and physical localization was obvious. Add to this that the timing was excellent, since the interest in computer technology was declining, and investors that had made money on computers seemed to be looking for new technological areas. The physical localization and successful behavior was thereby further reinforced. ,..

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Alchemy to IPO- The Business of Biotechnology (Robbins-Roth; 2000).

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Figure 2.2. shows the concentration of the biotechnology industry from a total population of 1297 biotechnology firms in the US. The figure illustrates that the states of California and Massachusetts are the major areas of biotechnology. Figure 2.2. The Geographical concentration of the US biotechnology industry

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The first sign of crisis in the biotechnology industry appeared in the mid 1980s when it became clear that some of the small biotechnology companies had spent huge resources on R&D projects without paying attention to the business development. The vast majority of the small biotechnology firms lacked commercial perspectives and had no business cultures. The industry had a bad reputation as being governed by former university professors whose interests in and flair for management and business development did not match their scientific credentials. Instead of focusing on product development, small firms had a natural focus on project development implying that there was no distinction between the activities taking place inside small biotechnology firms and those going on in research labs at universities. Project portfolios were not prioritized to the effect that investor money ran out of the small firms like sand out of an hourglass. Although the investors were fully aware of the risk of investing in biotechnology these firms ended up to what reminds of a giant research grant to founders who acted without any feel for investor expectations. To complicate this situation further, the strategy of the firms was to develop into vertically integrated firms that could master primary functions from R&D, and production to marketing. However, being so possessed by research the entrepreneurs overlooked that they had to build up additional skills and competencies in order to master large-scale production processes. Consequently, the entire industry had to redefine itself and its role by changing the overall strategies and attempting to compensate for the organizational and managerial weaknesses that the initial management model had caused. The issue of the extent and importance of the network collaboration as a strategic platform should be transformed into a question of why and how small biotechnology firms have been able to preserve their strong position despite the ups and downs that have characterized the industry. Two types of strategic responses can answer these questions. A response that reflects emphasizes the internal forces of the biotechnology firms. A response that reflects an external explanation and which emphasize the technological strategies of large chemical and pharmaceutical companies in relation to the new biotechnologies. To take the external explanation first, it is obvious that these companies have adopted a defensive and resistant strategy towards new biotechnologies. This has left plenty of room for small entrepreneurs since large companies sought to prove that biotechnology was not a reliable technology worth investing in; an argument that they widely used, especially in the down periods. Going to the internal explanation, continuous difficulties have been avoided by establishing strategic alliances on, for example, the marketing and sale of promising research projects. Types of collaborative arrangements guided by network formations involving different types

47

of institutions and organizations have secured that small biotechnology firms are still dominating actors in the commercialization of the new biotechnologies. 2.5. NETWORK FORMATION AND RESOURCE DEPENDENCY Thanks to profound insight into the history of technology and trial and error learning the small firms have been able to overcome the critical mass problem through strategies that mobilize the necessary knowledge, skills and financial resources in external networks. This has led the small biotechnology firms to hand over ownership of the technology and management authorities to venture capital firms. The majority of entrepreneurs have also given up trying to become vertically integrated firms. Instead they have formed licensing agreements where a large company produces and markets their products and services. This is not only due to the lack of skills and competencies in these areas, but also a result of the investment and exit strategies of the venture capital firms that normally will stay no more than 35 years with a single investment. Sales are either done through public stock offering or the small biotechnology firm is sold to one of the large chemical or pharmaceutical firms that has entered into biotechnology over the last couple of years. But what is left of the corporate independence? Has the small biotechnology firm given up the authority over the most important and interesting aspects of setting up a new business? From a classicaleconomic point of view the answer is yes. There is nothing left.O n the other hand, such an explanation cannot come to grips with the opinions of the entrepreneurs. From the perspective of the entrepreneurs, it is the basic idea of the company that has their interest. The basic idea is a term used without any relations to the profit or the managerial aspects. Instead the basic idea is a notion that relates to the development aspects of the basic knowledge behind the products and techniques that the firm is exploring and exploiting. A theoretically based explanation of the nature of the biotechnology industry and the behavior of the small biotechnology firms will fit into a resource dependency approach (Pfeffer & Salanzick, 1979; Pfeffer, 1987). Biotechnology firms are responding to external problem through the development and formation of networks to other stakeholders in biotechnology. These formative arrangements are allowing the companies to remain in control over the development of the core technologies, but at the same time they are handing over authority of parts of the company in which the founders are not interested.This callsforth a system of stakeholders in the biotechnology industry that has both the interest in and the competency for taking over the functions that are left out. The next chapter will seek to explain how this system is constructed by presenting the actors, their roles and how their strategies have developed over time in such a way that small biotechnology firms have been able to set the technoiogical agenda for the commercial development of the new biotechnologies.