Thresholds for profitable Genomic Innovations

Thresholds for Profitable
Genomic Innovations
Applying Genomics to Canola
Improvement Workshop
December 5, 2013
Stuart Smyth
University of Saskatchewan
Outline
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Introduction
Historical analysis of rates of return
Cost-benefit framework and HT canola
Methodology
Scenarios:
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Research policy
Regulatory barriers to innovation
IPR scenarios
Results
Analysis
Conclusions
Introduction
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The distribution of benefits with agbiotech is
potentially different than that of other
agriculture innovations and even other
innovations in general
Examining the returns to research, especially the
internal rate of return (IRR) may better identify
what barriers contribute to the innovation
“valley of death”
Returns to Research (1951-85)
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Using canola as a model, only a few studies have
been done:
Nagy and Furtan (1978) estimate the IRR for the
period of 1960-74 at 101%
 For the period 1951-82, Ulrich, Furtan & Downey
(1984) estimate the IRR to be 51%
 Ulrich and Furtan (1985) incorporated trade effects
and higher yielding varieties and estimate the IRR to
be 50%
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Returns to Research (1985-2008)
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Since 1985, several developments occurred:
There has been a re-evaluation of the health
attributes of canola oil – mono-unsaturated fats vs.
poly-unsaturated fats in palm oil; USDA granted
canola GRAS status (Gray and Malla, 2001)
 A large infusion of private capital, shifting the focus
from broad yield enhancing research to narrower
niche areas
 IRR from this shift is estimated to be 20-95% (Malla,
Gray and Phillips, 2004)
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Cost-benefits of Research
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Four distinct phases:
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Research phase – resources spent to develop a canola variety
that has commercial value
Gestation phase – time between investment and generation
of the new technology
Adoption phase – new variety is adopted by market
Knowledge stocking phase – the innovation contributes to
the knowledge or germplasm upon which new research is
based
Previously estimated that the canola industry efforts to
commercialize GM canola one year early resulted in a
NPV of C$100M (Smyth & Phillips 2002)
Costs and benefits over the cycle
Knowledge Stock
Phase
Adoption Benefits
Knowledge Stock
Benefits
Research
Phase
Time
Research Costs
Gestation
Phase
Adoption
Phase
Testing/registration
cost
Source: Alston, Norton & Pardey, 1995.
HT Canola Costs and Benefits
450.0
400.0
Consumer benefits
350.0
300.0
Producer net
benefits
$ million
250.0
Developer benefits
200.0
150.0
Gestation
100.0
R&D
50.0
0.0
-50.0
88
91
94
97
00
03
-100.0
Years
06
09
12
15
18
Methodology
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Developed baseline cost-benefit
Scenarios: shocked system with five policy changes
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R&D subsidy:
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Regulatory change:
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double cost of system
delay approvals by 2 years
Change IPR system:
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$50M evenly spread over programs
$50M paid front end loaded on first third of R&D
weaken protection leading to 50% dilution
Compared baseline to scenarios
HT Canola Baseline Cost-Benefits
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HT canola costs-benefits:
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Research phase – 10 HT traits @ $15M over 10 years
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Gestation phase – >$10M regulation cost per event plus seed
development >$300M over 35 years
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Adoption phase – 1995-2020; $3B for HT owners and $2.7 B
for farmers; $1.7B for consumers; significant cannibalization
of existing chemical business (~90% of producers paid
average $30/acre before HT canola)
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Knowledge stocking phase – unpriced
IRR for developers ~ 20%
Research Policy Scenarios
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Federal government during early period did
mostly public research
In later period, government moved to matched
funding, led by private capital (50:50)
In recent years, no public sector variety
development participation in field trials
Regulatory Scenarios
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The regulatory approval process is slowing (Jaffe, 2005)
as 94-99 took 5.9 months and 00-04 took 13.6 months
Pray, et al., (2005) estimate regulatory approval for Bt
cotton in India to be US$1.8M
Kalaitzandonakes, et al., (2007) estimate the global
regulatory cost of IR and HT corn to be US$6.2M –
15.4M (10 core markets)
Phillips McDougal (2011) study estimates regulatory
registration costs to be $17M with a time period of 48
months between 2008-2012
Outlook rising to 65 months
NPV at 10% Rate (1985-2020)
Baseline NPV
1985-2020
Three
MNEs
Rest of
Cdn
industry Farmers
$233.1
-$400.2
$208.5
Canada ROW World
$26.5
$19.2
$45.7
Deviations from Baseline
R&D Subsidy
($50M evenly)
$26.6
$2.6
$29.2
$29.2
R&D Subsidy
($50M upfront)
$35.8
$3.8
$39.6
$39.6
Regulatory change
(2x cost)
-$36.6
-$55.7
-$55.7
Regulatory change
(delay 2 years)
-$65.5
$76.7
-$47.7
-$37.4
-$3.9 -$41.3
Change IPR system
(50% dilution)
-$150.5
-$2.6
$125.5
-$27.6
-$27.6
IRR (1985-2020)
Internal Rate of Return
(1985-2020)
Canada
World
20%
11.1%
11.8%
R&D Subsidy ($50M
evenly)
2.8%
1.5%
1.6%
R&D Subsidy ($50M
upfront)
7%
2%
3%
Regulatory change (2x
cost)
-2%
-2%
-2%
Regulatory change (delay 2
years)
-3.1%
-1.6%
-1.6%
Change IPR system (50%
dilution)
-4.3%
0.1%
0.1%
Baseline
Three
Developers
Deviations from Baseline
The Scenarios Compared
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Timing of subsidies key for impact; front-ended
subsides more than double the commercial benefit
(IRR), at marginal costs for government
The speed of the regulatory system is more important
than the cost for firms but vice-versa for government
(potential mismatch of interests); regulatory burden is
the one policy that has the potential to absolutely
destroy value without necessarily any offsetting benefit
IPR changes more zero sum; have potential to change
incentives for private investment and redistribute rents
between innovators and users
Cost of new trait discovery and
development
Category
Cost (US$M)
Early discovery
$17.6
Late discovery
$13.4
Construct optimization
$28.3
Commercial event production & selection
$13.6
Introgression breeding & testing
$28.0
Regulatory science
$17.9
Registration & regulatory affairs
$17.2
Total
$136.0
Source: Phillips McDougal, 2011
Present value of net cash loss from
regulatory delays (IRR=20%)
Cost of new trait discovery and
development
Category
Cost (US$M)
Early discovery
$17.6
Late discovery
$13.4
Construct optimization
$28.3
Commercial event production &
selection
$13.6
Introgression breeding & testing
$28.0
Regulatory science
$17.9
Registration & regulatory affairs
$17.2
Total
$136.0
Source: Phillips McDougal, 2011
Present value of net cash loss from
regulatory delays (IRR=50%)
Marginal loss of net cash flow from
regulatory delays (IRR=50%)
Regulatory implications
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Canada and US expect to approve new varieties
using science-based regulations within 2 years
In the EU regulatory process, delays continue
EU regulations require the Commission to
schedule a Committee vote in 3 months and a
vote of the Appeal Committee in 2 months
Or Broken?
"In terms of the risk management stage, nearly all respondents, whether [member state]
Competent Authorities or stakeholders, believed this was not fully operational.“
- EU Report on the state of the biotech regulatory system
Jack A. Bobo | Senior Advisor for Biotechnology | U.S. Department of State
Conclusions
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For firms: timing of subsidies, changes in IPR
system and delays in regulatory system
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For government: regulatory costs, timing of
subsidies, regulatory delays
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Priorities not necessarily aligned
Conclusions
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Any regulatory decision that takes more than 6
years, or is expected to take 6+ years, will impact
investment decisions
Regulatory uncertainty is highest for those
regulatory systems that are not based on science
BASF may well be the first of many firms that
move their ag R&D out of Europe