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Building Philippine Biotechnology

Ma. Antonia O.G. Arroyo, MPhil cantab

Biotechnology is a potentially lucrative hightechnology industry where the Philippines can add value, compete, and carve out a niche for itself in the global marketplace. There are substantial challenges to be met: risks present in any biotech industry and risks unique to the Philippines.

Biotechnology: where science and enterprise meet

Biotechnology is a collection of techniques that harness

the characteristics of living things to make products or provide services. By this simple denition, among emerging industries, biotechnology is actually the worlds oldest. Classical biotechnology covers traditional activities such as making dairy products, bread, soy sauce, and beer. Modern biotechnology, on the other hand, operates at the molecular level of life directly manipulating DNA and proteins. However, whether youre in the business of producing cheese or vaccines, the task is the same: managing the machinery of living things for a useful result. The rms that succeed in this high-growth, high-risk industry are those that can capitalize on the technology to do business better, faster, or cheaper.

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Thus broadly dened, the biotechnology sector is currently estimated to account for more than a third of the world GDP.1 Medical biotech is the largest sector worldwide, making up 12%14% of GDP in key markets. Healthcare and medical research spending in the US is projected to rise to 17% within the next decade.2 At the end of November 2004, the US biotech industrys market cap grew by 8% to US$372 billion, raising US$18.4 billion in private equity nancing and completing over 139 partnerships since 2003.3 These statistics are tempered by the inherent risks of investing in biotechnology. There are vast differences in scale and scope between this and earlier economic and technological waves. Biotech has co-evolved with other sciences from the very beginning: the once discrete disciplines of biochemistry, microbiology, pharmacology, embryology, and molecular biology have joined together into a single powerful ow of knowledge. The umbrella term bioscience encompasses the academic research that underpins the biotech industry. In 1986, bioscience merged with computing when the rst automated gene sequencer was invented at Applied Biosystems. The sequencer brought about the completion of the Human Genome Project in 2000, and the term bioinformatics was coined to describe the emerging elds4 that sought to decipher the tidal waves of data brought about by the sequencing of the human genome.5 Since biotechnology integrates several elds and deals with complex living systems, biotech rms face higher research and development (R&D) costs and longer time frames compared to those of information technology. Of all biotech applications, drug development entails the highest risks and the highest returns. With development costs estimated

Of all biotech applications, drug development entails the highest risks and the highest returns.

_________________ 1 Ernst & Young, 11th Annual Biotechnology Report (2004). 2 H. Gleckman, "Welcome to the Healthcare Economy," Business Week, 26 August 2002, 152. 3 Burril & Co., Annual Biotechnology Report, (2005). 4 Emerging elds of biotechnology include genomics and proteomics, the study of all the genes and proteins in a particular organism. 5 J. Enriquez, G. Pisano and G.L. Bok, "In Vitro to In Silico: Coping with Tidal Waves of Data at Biogen" (Case Study, Harvard Business School, 2002), 9, 122, 602.

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at US$802 million per drug, only one out of every 10,000 compounds screened makes it to market.6 Timelines are equally daunting: it took 29 years after the discovery of DNAs structure for the rst recombinant DNA therapy (Genentech and Eli Lillys insulin) to be marketed. Similarly, monoclonal antibodies7 were rst developed in 1975, but the rst therapeutic monoclonal antibody did not reach the market until 1998, when IDEC Pharmaceuticals Rituxan was approved for non-Hodgkins lymphoma. These timeline issues were exacerbated by investor mindsets that expected short-term returns from a science whose progress should be measured in decades, not quarters. Thus, while the global industry has attracted more than US$200 billion in investments to date, it has also suffered from extreme volatility. Major slumps in public equity markets occurred in 1984, 1988, 1994, 1997, and 2001 following boom periods.8 The recall of Mercks Vioxx and Pzers Celebrex, as well as Chirons handling of its u vaccine production will only lengthen these timelines in the medical biotech sector, since the US Food and Drug Administration (FDA) will most likely put more regulations in place. Agricultural biotechnology, the second largest sector, has its own share of problems. Agri-biotech has the potential to increase food production; reduce the dependency of agriculture on chemicals and pesticides; lower the cost of raw materials such as corn starch, rubber, oils, solvents, avorings, fragrances, and dyes. 9 2003 estimates of the potential market for agri-biotech applications ranged as high as US$67 billion per year.10 It is because agriculture is big business that passions run high, especially with regard to genetically modied organisms (GMOs) and the welfare of farmers in the developing world. We have witnessed this in the Philippines, most notably in the trial by media of Monsanto and Bt-corn by Greenpeace in the late 1990s. The controversy over GMOs is, in fact, the most
_________________ 6 JA Di Masi et al., "The price of innovation: new estimates of drug development costs," Journal of Health Economics 22 (2003): 151-185. 7 Antibodies that descended from one original cell and can be mass produced. Designed to attach themselves to one type of particle, and one particle only, monoclonal antibodies are like heat-seeking missiles that locate and mark any given target. 8 J. Coe, "Future Biotech Growth Strategies," Reuters Business Insight Report (2004). 9 Biotechnology Industry Organization Guide for Reports and Editors (2003). 10 Martin Livermore, Lecture at Cambridge-MIT Institute, 2003.

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The SGV Review June 2005

publicized science debate in the Philippines. It was in reaction to this issue that the Biosafety Act was created and this legislation now governs all biotechnology research in the country. Biotech raises more hopes and fears, revelations and confusion, excitement and alarm than any other eld of science or business today. Such is the breadth of its impact on previously unrelated sectors, the arcane nature of the R&D, and rampant commercialization that there has been a growing intensity of public debates all over the world. There is a wide range of issues, such as the price of health care, the use of genetic information, the possible pitfalls of genetically modied food, the privatization of research, and biodiversity.

Biotech raises more hopes and fears, revelations and confusion, excitement and alarm than any other eld of science or business today.

Any biotech rm must be prepared for the risks involved in consumer perceptions. As in the birth pangs of any technological era, it will take time for the public to acquire a new level of literacy in this eld. Emerging and maturing biotech industries The biotechnology industry became truly borderless in 2000, in part because of massive capital inux and international deals. While the US is still the largest biotech market, there are emerging clusters in the EU, Japan, Canada, South America, and the Asia Pacic region. The EU has a strong research base, especially in biomedical sciences, but its biotechnology capabilities lag compared to the US due to underinvestment and a widening culture gap between academia and industry. Policies are in place in most member nations to address these issues. Additional funds for the sector have also been coming from US biotech companies which have been investing in EU rms, particularly in Ireland, to gain local manufacturing and sales infrastructure.

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GMOs and the Public Trust1

GMO is a plant or animal that has been genetically modied through the addition of a small amount of genetic material from other organisms through biotechnology. Currently, the GMOs on the market today have been given genetic traits to provide protection from pests and tolerance to pesticides, or to improve its quality. More than 200 million US consumers have been eating GMO derived food since 1996 and more than 60% of processed foods in the US are derived from GMOs. However, the debate on food safety and security continues to rage around the world. In the Philippines, the most famous GMO is Bt-corn and Bt-rice. In this case, the donor genetic material is from a naturally occurring soil bacterium, Bacillus thuringiensis, and the gene of interest produces a protein that kills moth larvae, in particular, the Asiatic corn borer. Corn borers are responsible for reducing as much as 30-90% of the expected yield of corn in Mindanao. The holes made by the borer in the cobs increase the damage to the grains because these tend to promote the growth of fungi that produce carcinogenic toxins such as aatoxin. Bt corn is farmer-friendly and is used as an alternative to pesticides. Monsanto and Syngenta continue to do business in the Philippines with their genetically modied plants and seeds. Pro-GMO groups such as the Biotechnology Coalition of the Philippines, whose members include scientists, businessmen, academics, and priests, cite the dire need to increase agricultural yields per unit area in order to produce sufcient food, increase farmers incomes, and reduce rural poverty. Dr. Saturnina Halos, one of the most respected researchers in agricultural biotechnology, cites the need for policy makers to separate technical/safety issues from the ideological/political issues. Science can solve the former, while regulation can prevent the potential problems such as multinationals control of the food supply and lack of access to technology by small farmers most often cited by anti-GMO groups such as Greenpeace.
1 Saturnina C. Halos, PhD. 29 September 2001. GMO presentation at the "Biotechnology FAQs" seminar.

The European biotech industry is led by the UK, which accounts for more than half of the total European market. France and Germany account for 20% each of the EU biotech market, despite the fact that Germany has spent four times as much as France to develop its biotech capabilities.11
_________________ 11 Ernst & Young, Beyond Borders: The Global Biotechnology Report (2003).

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The German government triggered fast growth with aggressive investments and deep subsidy pots. The German approach not only distorted market forces but also removed any penalty for failure, which caused the contraction in 2001.12 In Asia, the dominant countries in biotech are Japan, China, India, and Singapore. The Japanese pharmaceutical market has recently surpassed Europe as the second largest worldwide. The Japanese market is valued at about US$60 billion and accounts for more than 15% of global R&D expenditure. This market will grow concurrently with its population of 130 million, which, by 2015, will have the largest proportion of senior citizens13 in the world. China and India, both burgeoning high-tech giants, present very different pictures of biotech industries. Chinas biosector is embryonic but has high potential, whereas India has major pharma companies which will need to shift from manufacturing generics to discovering and developing new drugs. Singapore is the most successful of all the relative newcomers to biotech in the ASEAN region. Although Malaysia, Taiwan, and Korea all offer attractive investment conditions for their emerging biotech industries. Singapores trump card is the aggressive public funding by the countrys paternalistic Economic Development Board (EDB). The EDB aims to build the country into a world class biohub attracting 15 top biotech or pharma companies by 2010. Recent initiatives by the EDB emphasize biomedical research geared toward commercializing and promoting start-up formation to make Singapore a regulatory haven for stem cell research.14 Singapores biggest problem is its continued shortage of entrepreneurial scientists and managers. It is in this area that the Singapore government will meet its greatest challenge it is difcult to inculcate creativity and

_________________ 12 M. Fernandes and D. Miska, Strategic Rethink for German Biotechnology, Nature Biotechnology 20 (2002): 970-971. 13 Senior citizenship is reached at age 65. 14 C.M. Tang et al., "Realizing Potential: The State of Asian Bioentrepreneurship.," Nature Biotechnology: Bioentrepreneur from Bench to Boardroom (21 April 2003).

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the entrepreneurial spirit in a population that has become used to an autocratic democracy. These qualities are difcult to impose, even on a willing populace. The Philippine niche Many nations have already created Many nations have already created industry-specic institutions that industry-specic institutions systematically encourage the development of entrepreneurial business that systematically models and foster the development of encourage the national high-technology industries. development of The birth of biotech in the US, Japan, entrepreneurial China, India, and Singapore is merely business models and an iteration of a pattern they previfoster the development ously established when developing of national hightheir strengths in electronics and IT. technology industries. The EU, South America, Malaysia, Korea, and Taiwan are experimenting with ways to generate their own biotechnology clusters. The magnitude and rapidity of global industry development begs the question: Should the Philippines build up its own capabilities? Answering this question rst requires an analysis of the key components of biotech sector formation. A rms success is linked to the existence of an institutional framework that has a strong research base, promotes technology transfer, enables access to high-risk capital, and provides incentives to attract and motivate highly skilled employees. Due to the uncertainty of technical development involved, rms must also be able to change strategies and technologies swiftly in order to maintain effective skills and make sound investments. Consequently, a relatively uid labor market is also advantageous to the viability of a biotechnology sector. Underpinning all these factors must be a culture of entrepreneurship. Given these factors, how does the Philippines measure up?

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Key Factors in Biotechnology Industry Success

Factor Culture of Entrepreneurship Assessment Excellent Typical Filipino resourcefulness and ingenuity Naturally formed social networks Interdisciplinary networks weak but easily bridged on an individual level

Adequate nancial markets

Flexible labor markets

Strong R&D base Access to technology

Fair Few hindrances to hiring and ring employees Work force and not business owner favored by labor laws and constitution Poor Low gross domestic expenditure on R&D (GERD)15 R&D manpower deciency

Fair Lack of seed stage or early stage funding Lack of awareness among local private equity investors of biotech opportunities Stock market too immature to handle an IPO by a technology company at this time but acquisition or trade sale a viable exit

Poor Scientists typically confused or unaware of intellectual property concepts 16 Technology transfer still in its infancy Few incubators present

Based on these factors that have been hindering the development of the industry, one cannot be highly optimistic. Fortunately, another factor tips the scales in the Philippines favor: the incredible diversity of terrestrial, marine, and microbial life in our country. Identied as one of the worlds most biologically rich countries, the Philippines is among the top three biodiversity hotspots and ranks rst in marine biodiversity.17 Out of the 500 known coral species worldwide, 488 are found in Philippine seas. The Philippine coral reefs are home to over a third of the 2,300 sh species reported in the country. There is literally an ocean of opportunity in natural products, nutraceuticals,18 and potentially therapeutic natural compounds.
_________________ 15 Gross Expenditure on Research and Development. World Competitiveness Yearbook (Lausanne, Switzerland: IMD International, 2003). 16 Cabanilla et al., Analysis of the Role of Policies in the State and Prospects of Biotechnology: Biosafety and Intellectual Property Rights in the Philippines (UP Los Baos: Center for Policy and Development Studies, 1997.) 17 Conservation International (2004). 18 Nutraceuticals is dened as food or parts of food that provide medical or health benets, including the prevention and treatment of disease. For instance, bananas are genetically modied to contain vaccines that decrease infant death due to diarrhea, cholera, and hepatitis.

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However, decades of experience should teach us that merely extracting and characterizing compounds is not enough to capitalize on their value. The earliest Philippine medical biotechnology discovery is erythromycin, a common antibiotic from Philippine soil bacteria that was commercialized in 1952 by Eli Lilly. The soil bacteria was extracted from samples submitted by Filipino scientist Dr. Abelardo Aguilar.19 Prior to this, the rst Philippine agri-biotech breakthrough was achieved by Dr. Juan Salcedo, who discovered in the 1940s that milled rice mixed with Vitamin B1 was a good cure for beriberi.20 Prialt Ziconotide is a more recent example of a missed opportunity. Dr. Baldomero Olivera and Dr. Lourdes Cruz isolated and characterized toxins from venom of a sh-hunting snail in 1985. Dr. George Miljanich of Neurex (USA) was working on the same conotoxin21 and found it could be used as a pain killer. Neurex patented the compound and the rm was later sold to Elan Pharmaceuticals for US$700 million. Recently concluded clinical trials have shown that the drug is 1,000 times more effective than morphine, produces no side-effects, and is non-addictive. On December 29 2004, Elans Prialt Ziconotide was approved by the FDA. Industry pundits ascribe Elans US$8 billion market cap gain to the drugs approval.22 To add value to the Philippines natural biodiversity, it is imperative that both the public and the private sector work together. Of particular concern is biotechnology legislation. Both the US and the EU adopted a double strategy, implementing credible regulation to reassure a skeptical public that risks could be managed, while at the same time fostering industrial and scientic research even to the extent of marching in and forcing technology transfer (as in the case of the US Bayh-Dole Act). The Philippines has extensive guidelines on risk management in the form of the Biosafety Act, but has no enabling legislation to promote technology licensing.

_________________ 19 M.A. Bengwayan, International and Cultural Property Rights of Indigenous and Tribal Peoples in Asia, (London: Minority Rights Group International, [2003]). 20 Beriberi is a vitamin deciency disease caused by inadequate bodily stores of thiamine (vitamin B1). It can damage the heart and nervous system. 21 A toxin made by sh-eating cone snails to immobilize their prey. 22 S. Schaeffer, BioCentury: the Bernstein Report on BioBusiness (3 January 2005): A14.

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Addressing this issue will address the R&D quality and access problem. Transferring technology from the academe to the industry is the primary bottleneck in Philippine biotechnology today. Any policy would have to: Promote a more interdisciplinary approach to education so that scientists and engineers become familiar with the fundamentals of intellectual property, technology management, and communication skills Require research institutions to have practical policies that mandate licensing deals to small and medium enterprises, compensate both the funding body and the inventors, and still prevent conict of interest

By brokering better licensing deals between universities and the industry, the industry will be able to provide prestige and passive income to Filipino inventors which will help stem scientic brain drain. In addition, these licensing deals will create mentor capitalists who will provide much needed seed stage capital and expertise. This, in turn, catalyzes downstream deal ow for local venture capital and private equity investors who invest in mid- to late-stage rms. Given such evidence of high returns from technology, both the private and public sector should increase their gross expenditure on R&D. Thus, working on the least efcient part of the biotech assembly line will ease the birth of a thriving industry. The way forward Despite these challenges, biotechnology has been growing steadily in the Philippines, mostly in universities and research institutions but also in pockets of the industry. Successful biotech entrepreneurs include: Mr. Danilo Manayaga, founder of the Secura Group of Companies, which manufactures a monoclonal rabies vaccine and is poised to penetrate the global market for natural products such as papain and bromelain enzymes Engineer Bonifacio Comandante of Buhi Corp., which is using his pioneering hibernation technology to transport sh and shellsh without water

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Mr. Robert So, founder of Ecosystems Technologies Inc., the rst environmental biotechnology rm in the country, which has put up a total of 52 sewage treatment plants in its 10 years of operation

Technologies that are raring to penetrate the industry are Dr. Gloria Despacio-Reyess biodegradable plastic for surgical implants and commercial packaging, as well as Dr. Saturnina Halos biofertilizers. The DNA forensics and paternity testing lab at the University of the Philippines (UP) Natural Science Research Institute is also eager to expand into the private sector in order to deal with the demand from overseas Filipino workers for proof of liality so that their children are allowed to migrate. Currently being researched are potential therapeutics from UPs Marine Science Institute, and robust biosensors being developed at the University of Santo Tomas that could potentially be used to check anything from blood sugar to water quality. UP Los Baos also has several agri-biotech diagnostics to detect bacterial pathogens in meat, milk, and poultry; as well as highly sensitive kits to detect viruses and blights that affect key Philippine crops such as papayas, bananas, and mangos. Straddling the eld of biotechnology and nanotechnology is the work of Dr. Erwin Enriquez at Ateneo de Manila University. His work dwells on the use of carbohydrates derived from local seaweed varieties which may be used in the synthesis of semiconductors and ber optics. Biotechnology will be an integral part of innovation. Some uses will improve nature, while some will be based on what can be extracted from nature. It will be in the conscious emulation of lifes genius innovation inspired by nature, grounded in sensible policies, and fueled by entrepreneurial adaptation that Filipinos will be able to add value and compete on a global scale. SR
______________________________ Maoi Arroyo is the CEO and founder of Hybridigm Consulting, the rst biotechnology consulting rm in the Philippines. Hybridigm enables its clients to commercialize technology, partnering with them on the journey from science to enterprise. Hybridigms current client roster includes private equity investors in the UK, start-up biotech companies in Shanghai, as well as six existing local biotech entrepreneurs. Ms. Arroyo was a member of the inaugural class of the Master's in Bioscience Enterprise professional practice program developed by the University of Cambridge, Harvard-MIT Division of Health Sciences and Technology (HST), and the MIT Sloan School of Management. She is a recipient of a British Chevening Scholarship and obtained her rst degree in Biology (BS) from the University of the Philippines.