Bioindustry: A Description of California's Bioindustry and Summary of the Public Issues Affecting Its Development
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By Gus A. Koehler, PhD.
California is a world leader in biotechnology. The industry is important to
the state's economy and is poised for additional growth. A multitude of
complex, interacting critical factors will determine how the industry evolves
and whether California continues to benefit from its dominant
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
- 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.
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
- The highly technical and emergent nature of biotechnology;
- The unique evolution and interactive relationship between bioindustry and
- 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
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
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
- 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.
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
- 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
- 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
- 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
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).
California Biotechnology Development Strategy
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
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.
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
- Coordinate with the California Economic Strategy Panel's state economic
- 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."
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.
- A California higher education/industrial laboratory international
internship program could be created to facilitate professional training and
encourage technology transfer.
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
Small business networks may form to engage in any of the following bioindustry
- 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
- 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
- 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
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
- 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 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).
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
- 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.
- 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
- 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
- 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.
- 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
- 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.
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.
- 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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