Critical Factors

Several key factors shape the way bioindustry public policy issues emerge:

• Research: Public universities provide the infrastructure for a significant amount of basic biotechnology related research. Technology transfer and faculty associated company start-ups enhance regional economies. Bioindustry requires a highly trained workforce. ³⁴⁵
  The discovery and possible development of a new and promising product is not enough to ensure that it has a market. The discovery must be cost-effective when compared to existing products and often is sold as part of a general health care system for a particular illness. These factors are gaining in importance as the health care and agricultural market places become more vertically integrated. To a significant degree, research agendas are being redefined by marketing priorities.

• Ethical issues: New research techniques and product production methods have created a new relationship between man and life, leading to new public policy issues. Efforts to clarify this relationship and to work out its ethical implications are constantly pressured by the momentum of scientific inquiry, medical or other needs of the public, and the competitive need to develop and market a new product.

• Regulatory complexities: Which aspects of the new technologies should be regulated, how, and by which level of government? Key questions include: Is a product safe? How is risk determined? How should a product be labeled? Should a new genetically engineered plant be field tested and who should be informed about it? Are regulations excessive, too time consuming, or in some other way unnecessarily delay the introduction of new products?

• Product development and manufacturing: Biotechnology companies are skilled at basic research but may not be as proficient in conducting clinical trials and field tests, navigating the federal regulatory process, or scaling up to pre-production and full scale manufacturing. Global marketing and distribution may present learning challenges as well.

• Financial requirements: Small biotechnology companies have trouble obtaining the capital they need to expand. The long lead time before profitability is a big issue. Biotechnology companies often take 12 years to bring a product to market. Foreign investment , venture capital, and mergers with large national and international companies are major new funding strategies. A particular challenge is generating the substantial amounts of capital necessary to build manufacturing plants.

• International markets and global competition: Multinational corporations understand international markets, distribution networks, and local country requirements. Small local biotechnology companies are not as sophisticated. The incentive may be for California's research companies to be acquired by multinationals which may manufacture products elsewhere.

Is There a Role for Government?

There is no single, accepted, comprehensive theory of regional industrial growth, but rather a set of partial theories that explain or emphasize different aspects of these processes. This is particularly true for an industry that involves an entirely new technology such as bioindustry. As demonstrated in this paper, there are so many complex issues that a government agency or business consortium could not find a single optimum economic development policy and recognize it as such.

Further, it is very difficult to determine which government economic intervention strategies may work for a particular and unique historical moment. Certain types of intervention may only be effective in combination with other public or private initiatives. While a particular policy may succeed in one area, such as improving overall growth in profits, it may fail in another, such as increasing the number of associated jobs or per capita disposable income.

Many policy issues are beyond the state's ability to control such as FDA product approval. Probably most decisively, a series of complex interactions make it difficult to predict which state government policies are most likely to contribute to a specific short-term future outcome for any one bioindustry company, let alone the bioindustry in the long run. Complicating factors include:

• The highly technical and emergent nature of biotechnology;

• The unique evolution and interactive relationship between bioindustry and its markets;

• The timing of new research developments and individual business decisions that speed or delay clinical or field trials;

• Changes in regulatory, budgeting, national health, agricultural, and other biotechnology-related policy; and Unexpected and inherently uncontrollable national and global economic changes (such as changes in the dollar's value).

Recent research does indicate that state governments can help to provide a supportive environment for industry development. ³⁴⁶ Government can act as a catalyst and provide short-term incentives to encourage bioindustry to build capacity or to grow or attract needed services and venture capital. ³⁴⁷

Research

Continuing support for California's university and college systems could directly contribute to the growth and development of the state's bioindustry (p. 22 ^* ). Options include:

• Support basic research and incentives to speed technology transfer. Consideration could be given to easing conflict of interest rules and regulations for professors and students who wish to commercialize their research.

• State funding for biological sciences, perhaps through a series of targeted grants, to build a trained workforce and future entrepreneurs (p. 64).
• Budgetary and other incentives to create inter-departmental consortiums that research and capture the hybrid technologies that will define the industry's future (such as appears to be emerging between nanotechnology, electronics, evolutionary theory, and biotechnology)(p. 11).

• San Diego's "Scientific Research Zone" might be a model that could be applied to other colleges to encourage cooperation with and technology transfer to private bioindustry (p. 25).

• The state could request the University of California to undertake a study of how the increasing vertical integration of agribusiness and patenting of seeds and livestock (including the mass-production of animals using cloning) might affect California's growers, food processors, and agricultural workers. The goal would be to evaluate and, if necessary, recommend ways to update various farm labor training and state farmer advisory systems so that farmers can use sustainable agricultural technologies, genetically engineered seeds, weed and pest management systems, as well as computer management systems and other technology required by agribusiness restructuring (p.13).

• California's congressional delegation could encourage federal investment in "precompetitive" biotechnology research and development in promising new crossover areas, such as microelectronics, nanotechnology, and biotechnology. Federal investment might lower the cost of technology development and speed up the commercialization process in this internationally competitive arena. ³⁴⁸ (p. 11, 29).

• Consideration could be given to tailoring capital gains, sales taxes, depreciation, research tax credits, and other elements of the corporate tax structure to compensate for delays in bringing high cost biotechnology products to market, and to encourage collaboration between companies and universities. Such a policy could attract and keep biotechnology companies in California.

Biotechnology Ethical Issues

As biotechnology pushes to the frontiers of human knowledge, it raises serious and important ethical issues. Universities, government, public interest groups, scientific associations, industry organizations, and private companies are struggling to address them. The emergence of a forum to hasten the development of a general ethical structure for guiding public policy debate might be beneficial. By taking the lead, California could help to define national policy in a way that is consistent with the needs of the state's bioindustry. Possible options are:

• The membership of the Interagency Task Force on Biotechnology could be expanded to include bioethicists (perhaps from the University of California, Stanford and the California State University system). The Task Force could then establish a Bioethics Subcommittee to examine emergent issues. Examples discussed in this report include (pp. 49-63):
  • The status and treatment of transgenic animals;

  • Harvesting of fetal tissue for research;

  • The importation of human organs and fluids that lack evidence of an appropriate patient or other consent form;

  • Collection, ownership and marketing of human biological materials;

  • Growing and harvesting other species' organs for human transplant; and

  • Collection and ownership of species collected from the state's public lands.

• The University of California or The Center for California Studies, California State University, could follow the lead of Anne's College in Oxford, England, and stage a California Consensus Conference on Biotechnology. The goal would be to give citizens an opportunity to participate in a discussion about bioindustry. A panel of citizens could be recruited which would question a wide range of experts and prepare a consensus report. Danish consensus conferences were successful in triggering significant parliamentary debates leading to legislation that assisted the industry. The conferences could also help to educate the public generally about the biological, ethical, economic, and social issues surrounding California's bioindustry. ³⁴⁹ The Center for California studies has run consensus conferences in the past on land management and is currently funded for one on governance. This experience could be applied to this subject as well.

• Conflict of interest issues arise as publicly funded research is transferred to U.S. and foreign companies. State standards could be developed that require royalties or other payments that recoup the public's investment (pp. 44-45).

Genetic testing and the availability of health insurance coverage continues to be an important public policy issue. Existing California statutes prohibiting such discrimination could be brought into conformity with the suggested guidelines developed by the Working Group on Ethical, Legal, and Social Implications of the Human Genome Project and the National Action Plan on Breast Cancer. (p. 64).

Economic Development

States that rely upon a strategic assessment of their infrastructure and bioindustry needs and opportunities, can more effectively assist the development of biotechnology. ³⁵⁰ A strategic assessment typically weighs a state's strengths and weaknesses relative to what is needed to develop an industry and assesses long term costs. ³⁵¹ For example, a state or region which lacks a university with significant biotechnology research capabilities has a major weakness. Alternatively, a commitment by community colleges to work closely with bioindustry to train workers could be a strength.

Some state efforts build on a state strategy that sets broad conditions and relies upon decentralized decisions in government, universities, and the private sector, to determine the final allocation of funds, tax benefits, permitting variances, and other benefits. ³⁵² For example, Michigan, New Jersey, and North Carolina have all developed strategic plans for bioindustry development. These states have also targeted government funding for capital construction projects and grant assistance. California government could spotlight biotechnology as a key industry, showing why investors should consider California firms over others and as a means to attract new biotechnology firms.

Strategy Options

The California Council on Biotechnology could design a state bioindustry economic development strategy. The strategy could:

• Analyze California's bioindustry and its global technological, investment, and marketing structure;

• Identify key research, resource, manufacturing, workforce training, regulatory, funding, taxes and other policy issues that need to be addressed in order for the industry to grow;

• Propose methods for improving technology transfer and workforce training, including enhancing relationships between the industry and the state's colleges and universities;

• Coordinate with the California Economic Strategy Panel's state economic development strategy;

• Recommend new forms of state/local private industry collaboration to improve the delivery and effectiveness of government programs and services; and

• Use performance-based program evaluations to ensure that the strategy is being effectively implemented and continually improved.

Economic Policy For A Global Biotechnology Industry

California's biotechnology industry is part of a strong trend toward global technological and economic integration. One analyst points out, "a key competitive advantage of the United States lies in our ability to attract international investment. . . . Only the United States brings together the state-of-the-art plants of the best Japanese, European, and U.S. companies. This translates into a powerful performance advantage." ³⁵³

California could seek to maximize the flow of foreign technology investment and foreign companies to the state. Options include:

• The International Export Development Program in the Trade and Commerce Agency, in cooperation with the Council on Biotechnology, could develop a strategy for increasing foreign investment in small California-based bioindustry companies. The strategy would identify state and local incentives such as tax credits, and waiving of permitting or local tax requirements, that could attract and increase foreign investment, and could examine the use of target tax incentives. The Council on Biotechnology could also formulate a plan to assist multinational pharmaceutical corporations to locate manufacturing plant sites in California, and to engage in joint ventures, licensing, and other mutually beneficial relationships with local biotechnology companies (pp. 69-70).

• A California higher education/industrial laboratory international internship program could be created to facilitate professional training and encourage technology transfer.

Bioindustry Networks

Business networks typically involve a group of three or more private sector firms (and perhaps a government agency) working cooperatively through a contract, joint agreement or other formal relationship to enhance their mutual competitiveness. For example, small biotechnology firms frequently partner with large pharmaceutical companies to obtain capital or to gain access to market distribution systems.

Small business networks may form to engage in any of the following bioindustry activities:

• Conduct research;

• Share information on clinical or field testing methods;

• Purchase accounting or other business services;

• Engage in technology transfer;

• Conduct marketing research for new, jointly developed drug delivery systems;

• Manufacture, sell, or market products or services;

• Contract to provide services or products to a larger firm;

• Train workers;

• Improve business and management practices;

• Obtain specialized consulting services, such as those involved in clinical testing;

• Purchase capital equipment;

• Generate business financing;

• Improve manufacturing methods; and

• Export goods and services. ³⁵⁴

Bioindustry network development might be encouraged in the following ways:

• Three "Centers for Flexible Bioindustry Networks" could be established on University of California campuses in San Diego, Los Angeles, and San Francisco. Legislation could permit industry tax deductible donations. The Centers could manage technology transfer from the universities, and bring together small bioindustry research, suppliers, and manufacturing companies, both in California and internationally. One goal would be to increase the number of networks, alliances, virtual corporations, and other types of associations to improve competitiveness (p. 91).

• Government could provide incentives to organize effective small biotechnology networks. Grants and start-up loans could encourage network formation. A limited three-year tax credit is another possible network-forming incentive. ³⁵⁵

Product Development

Studies indicate that if a biopharmaceutical product is to fail, it is most likely to do so as it moves from the research to the clinical testing phase. Success is related to appropriate research design and a company's knowledge of regulatory requirements.

• The Council on Biotechnology could encourage industry associations to develop a mentor program, much like the Small Business Administration small businesses retired executive program, for small biotechnology companies. Tax credits could be provided for companies participating in these activities.

• Biotechnology industry associations could encourage companies that produce similar products to share clinical testing expertise, regulatory information and resources. The industry might require a common voice and focus to impact government policy. For example, biotechnology companies that produce pheromones (a type of biopesticide) by joining together, were able to reduce EPA approvals from two years at a cost of $100,000 to 60 days at a cost of less than $10,000. ³⁵⁶ Tax credits could also be provided to large companies that engage in this activity.

Health Care

• Health care marketplace developments are very important to biotechnology in California. It might be useful for the state to encourage networking between biotechnology companies and managed care organizations. The goals would be to develop new cost effective pharmaceuticals and procedures and to utilize new therapies to achieve cost containment goals.

• The Medi-Cal program could adopt a cost-containment strategy for evaluating new biotechnology-based pharmaceuticals and medical devices. The emphasis would be on evaluating the systemwide cost and benefits of a new drug or device rather than simply comparing respective unit costs (p. 12).

Manufacturing

California is an important biotechnology research center, but has limited manufacturing facilities. This is unfortunate, particularly given the state's large investment in its public universities and colleges, which have played a key research role. Industry surveys indicate that new biotechnology companies tend to locate near major research universities, and that a well trained workforce and venture capital availability are more important than tax breaks. Proposals for growing and attracting contract manufacturing and large scale bioindustry manufacturing operations might be included in the state bioindustry development strategy suggested above. Consideration could be given to:

• Identifying and supporting workable alternatives for the development of key infrastructure needs such as the availability of water and access to radioactive and other waste disposal. For example, as the industry grows, the handling and disposal of biological waste byproducts, such as unfermentable materials, antibiotic residues, and other manufacturing wastes, might need additional consideration, particularly if they remain active or have new or toxic byproducts whose biological fate in the environment is unknown (p. 84).

• Using different bonding options, the state could consider providing initial construction funding for government-sponsored or private biotechnology manufacturing prototype sites. Much like a business incubator, these manufacturing facilities assist small companies to move an approved product from the testing phase into full scale manufacturing. Closed military bases could be considered as possible locations for biotechnology manufacturing prototype incubator (p. 83).

  General obligation bonds are one potential source of funding. Language could be added to the bond initiative statute stating that the bond would be paid off from rental fees, making the bonds self-liquidating. Alternatively, tax credits could encourage large biotechnology manufacturers with idle capacity to contract this capacity out.

• State tax incentives and local permit and tax waivers, among other options, could be used to attract biotechnology contract manufacturing plants.

• The Bioindustry Council could determine if California bioindustry must go out of state to locate materials and services, and identify various targeted incentives to encourage their development in California.

• The availability of biomaterials (polyester for vascular grafts, for example) for manufacturing may be determined in part by product liability laws. The Attorney General could study this issue and develop recommendations.

Regulations

• It has been ten years since an Interagency Task Force on Biotechnology evaluated state and federal regulations affecting bioindustry. The study could be brought up to date and expanded to include regulatory issues at the regional and local government level. Model local government regulatory programs, procedures, and working relationships could be identified. Recommendations could be developed to reduce and eliminate overlap between state and local regulations. Every effort should be made to make regulations performance oriented and user friendly consistent with protecting the public. In conjunction with this initiative, the Interagency Task Force on Biotechnology could also:
  • Prepare a user-friendly document describing a model path for state and federal regulatory and permit approval processes;

  • Hold regional training forums for local government permit review staff on reviewing bioindustry permit applications; and

  • Recommend a model regional permitting process that reduces duplicative requirements.

• Bioindustry and local governments could form regional "permit streamlining" groups much like that developed by Joint Venture: Silicon Valley. The goal would be to review and make suggestions for improving and streamlining bioindustry related permit approval processes. ³⁵⁷ (The Joint Venture: Silicon Valley efforts resulted in significant reductions in the time required to obtain a permit.) (p. 38)

• Cities in other states provide such incentives as: "property tax abatement, subsidized land use tax until operational, and construction fee waivers." ³⁵⁸

• Some European countries (Germany, the Netherlands) have developed expedited permit procedures. The State might recommend options to the federal government if appropriate (pp. 28-30).

• The Task Force On Biotechnology could evaluate the role of the state's Food and Drug Branch, Department of Health Services, to determine if its activity in reviewing and approving new drugs is duplicative of federal activities.

Financing

• Reexamine state tax policy with an eye toward balancing encouragement of increased private sector funding for biotechnology and bioindustry with enhanced public investments in educational and other infrastructure requirements. ³⁵⁹ Options include: R&D tax credits, tax loss transferability, bio-processing scale-up incentives, and sales tax exemptions on newly approved products for a set period of time.

• Oklahoma uses tax credits to guarantee bank loans to the state. The state uses the loans for venture capital investment. The Oklahoma Capital Investment Board is a public trust of the state which invests in venture capital funds that then invest in developing industrial sectors. To raise funds, Oklahoma auctions tax credits which can be used to reduce a company's future tax liability. These credits are used like collateral to obtain banks loans to fund the Board. The future tax credits are only issued if the money the Board invests fails to generate a sufficient return to pay off the loan. (The author can provide more detail upon request.) From March of 1992 (when the program started) to 1994 the Board has committed $18 million to venture opportunities.

• Illinois and Ohio operate linked deposit programs in which a certain percentage of state certificates of deposit are deposited in banks that are willing to provide loans to targeted industries. The agreements limit the interest rate the banks can charge to businesses.

• A number of states have researched start-up or Small Business Innovation Research (SBIR) bridge loan programs. California might establish similar loan programs. Options include:
  • A university faculty two-year research grant program for up to $50,000, requiring a dollar-for-dollar match from business.

  • A research development loan program that offers five-year loans for salaries and equipment of up to $250,000 per project (some states take an option to buy company warrants if the company makes a public offering).

  • An SBIR bridge loan program to help a company with a promising product move from Phase I to Phase II of clinical testing. This could help small biotechnology companies meet their costs during this period. The loans would also leverage federal funds.

• Taxable or non-taxable industrial development bonds issued by city and county development agencies could be used to assist eligible bioindustry companies.

• The Public Employees Retirement System might establish a fund to help small or medium-sized businesses to participate in industrial development bonds. This could be done by guaranteeing a portion of a letter of credit to the degree that it is profitable (the California Teachers Retirement System has a similar program. ³⁶⁰

• The State Assistance Fund for Enterprise Business and Industrial Development Corporation was originally established to make loans to small energy-related high-tech businesses. It could be redirected or expanded to increase its portfolio of bioindustry loans. SAFE/BIDCO claims to have a good success rate with what are considered to be high-risk loans by private banks. ³⁶¹

The following bills, introduced during the 1995 legislative session, would provide various tax credits to biotechnology companies:

• AB 365 (Hannigan) would expand the qualified research expense tax credit to specified medical, educational or research facilities for biopharmaceutical research that are owned by institutions of higher education. It would also increase from 8 percent to 12 percent the qualified research expense credit under the personal income and banking and corporation tax law.

• SB 943 (Campbell) would allow biotechnology firms to expand the time that they can carry over their net operating losses from three years to a period equal to that applied to new business in California.

California's 1993 Investment Tax Credit applies to the biotechnology industry. It allows a 5 percent tax credit for qualified manufacturing equipment including construction of "clean rooms." Generally, investment tax credit provides a sales tax credit for capital investments and an income tax credit for a portion of investment costs.

Workforce Training

• Bioindustry is competing for trained research and technical personnel worldwide. California could give bioindustry-related training a high priority as part of its economic development strategy including tax credits to smaller biotechnology firms to train their personnel to meet regulatory and other government mandated production requirements (p. 65).

• The Employment and Training Panel could create a biotechnology initiative directing additional training funds to bioindustry employees as a priority.

• The Bay Area Bioscience center has developed a plan to increase community college bioindustry technician training programs. This plan might be adopted by the EDNet program for statewide implementation in community colleges. Community colleges could more aggressively market the skills of their students and the quality of their training programs. A lack of connection between the industry and community colleges has tended to keep training programs small (p. 64).

• Using existing resources, a statewide high school education program could be modeled after PROBE (funded by the Marin Community Foundation), bringing together bioindustry scientists with high school science teachers. The program equipped Marin County high school classrooms with molecular biology equipment, developed biotechnology classroom activities and trained a core group of teachers. It is now self-supporting. ³⁶²

• A data base of biotechnology educational materials could help teachers upgrade their science courses. Industry could be encouraged to fund such programs either voluntarily (for example Genentech funded a program entitled Access Excellence) or through limited tax credits. ³⁶³

• Expand the state's existing college and university fellowship programs to target biotechnology-related fields. State-of-the-art laboratory facilities for biological education funding and industry donations or tax write-offs for current and useful equipment to provide it might be possible. ³⁶⁴

• As with other bioindustry sectors, agribusiness may require technically trained employees. The Employment Development Department could analyze what types of new occupations may be created by the application of biotechnology in agriculture and suggest appropriate skills set and training programs.

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