U.S.-Japan Technology Linkages in Biotechnology: Challenges for the 1990s (1992)

An agreement was reached in March 1990 between Calgene and Kirin to jointly develop and market potato seedlings. Although the partnership is still relatively young, which makes it difficult to assess its impacts on the two companies, the joint venture illustrates some of the business issues that are relevant to agricultural biotechnology. In addition, the alliance contains several novel structural features that may shed light on possible future directions for U.S.-Japan biotechnology linkages.

It might be useful to begin with a description of the partners and where agricultural biotechnology fits into their businesses.

Kirin is the fourth-largest brewer in the world, with unconsolidated sales of about $10 billion. The nonbeer businesses that contribute significant amounts to sales include engineering services (centering on bottling factories), food, and soft drinks.

As a result of the long-term vision adopted in 1980, which put forth the goal of becoming a company that "contributes to life and health around the world," Kirin began to diversify into services (restaurants); engineering; information services; food products (dairy, tomatoes, coffee); and life sciences (pharmaceuticals, agricultural biotechnology). Corporate R&D spending is $110 million per year. The firm's principal subsidiaries are the Kirin-Seagrams joint venture, Coca-Cola bottling franchises in western Japan and New England, and the Kirin-Amgen joint venture to manufacture and market EPO and G-CSF (see Case III below). Kirin has more than 30 domestic and overseas subsidiaries.

The focus of Kirin's Agribio Division is the plant laboratory. Kirin is seeking to utilize biotechnology to develop new varieties for mass propagation. To compete with established seed companies, a new strategy was adopted that incorporates the use of cell fusion and artificial seed technology for breeding and propagation, an emphasis on "seedlings" rather than seeds, leveraging the strong brand consciousness of Kirin products, and formation of a global network of subsidiaries and joint ventures. Globalization makes it possible to exploit market opportunities quickly. Joint ventures with companies possessing complementary technologies are particularly attractive because they allow Kirin to maximize the return on technology developed internally. Kirin's other partnerships in agricultural biotechnology include Tokita Seed (vegetables), Flower Gate, and Twyford (in vitro plants).

Calgene, founded in 1980, is a publicly traded company that focuses exclusively on agricultural biotechnology. The firm's projected revenues for 1991 were $35 million; it has spent a total of $70 million on R&D; and it has raised $120 million to $130 million in capital since its founding. It was the first company to apply for Food and Drug Administration (FDA) approval of genes to be introduced into plants. The firm's core products are genetically engineered tomatoes, cotton, and rapeseed. Calgene has 300 employees, including 100 scientists, in five operating groups. Half the employees are located at its headquarters in Davis, California.

Calgene is actively pursuing vertical integration, seeking direct access to markets in all of its core businesses.

Long-established business and personal relationships as well as a "strategic fit" were crucial in putting the partnership together. In 1984 Kirin bought an equity stake in Plant Genetics, Inc. (PGI), the agricultural biotechnology company that later merged with Calgene. PGI also performed contract research for Kirin in the area of synthetic seeds. Zachary Wochok, a founder of PGI, worked with Yoshihiro Imaeda and Kirin's legal repre-

sentative, Joel Marcus, to set up the alliance. Both companies were doing research on potatoes but did not cooperate in this area from the beginning.

Several factors make the potato market an attractive target for the application of agricultural biotechnology. First, potatoes are a multibillion dollar crop worldwide. Consumption in the United States is growing at a rate of 7 percent per year, mainly due to sales of french fries and other fast foods. Second, potatoes are relatively easy to manipulate through genetic engineering. Finally, although governments around the world are involved in trying to improve potato yields and quality, there is very little private sector involvement or market discipline.

One key technical issue is reduction of the "bulk-up" period required for seed potatoes. Potatoes are grown from "seed pieces," and it takes 7 years, using conventional techniques, to produce enough seeds to sell to farmers, a process known as bulk-up. Reduction of the bulk-up period to 3 to 4 years would result in a significant efficiency gain. If the period could be reduced to 1 to 2 years, the resulting proprietary product would drive the potato market.

Kirin first approached PGI about extending its collaboration to seed potatoes after the latter's initial public offering in 1987. PGI was investigating the introduction of genes into potato varieties to promote pest and disease resistance. For its part, Kirin had developed a technique, called the "microtuber," that allows generation of a seedling from a single cell rather than through seed pieces. If it performs up to its potential, the technology will allow a reduction in the bulk-up cycle to 1 to 2 years. Wochok and others at PGI were skeptical at first, but Kirin continued to update them on their progress.

In 1989 PGI and Calgene, located next door, merged. Kirin's PGI stock became Calgene stock, and Kirin again raised the question of collaboration in potatoes. Discussion continued through 1989. That year Calgene researchers went to Hokkaido for a Kirin presentation on its microtuber field experiments. Calgene became more confident, although questions remained about scaling up the technique and how effective it would be in the United States. Calgene had already achieved a reduction of the bulk-up period to the 3-to 4-year time frame through its own ongoing research program and was selling pest-resistant seed potatoes to farmers.

The main issues were the valuations of Calgene's seed potato business and Kirin's microtuber technology. The former issue was the main stumbling block. The valuations of Calgene's potato receivables, inventory, and other assets made by the two sides at the start of discussions were disparate by a factor of 10. The two sides resolved their differences on this point

during a day-long meeting in December 1989, which was a "make-or-break" session for realizing the partnership. Kirin used stock price valuation and projected profit/price earnings ratio figures submitted by Calgene. Kirin also calculated new figures based on its own assumptions about growth prospects and factored in what it would contribute to the venture.

At the end of 1989 the companies shook hands on the basic agreement. The formal negotiations were completed less than 3 months later without the involvement of investment bankers. The basic outline was for Kirin to provide financing to the venture and for Calgene to contribute the personnel and core technology. Kirin already had a high opinion of PGI (now Calgene) personnel, quality control practices, and the systematic collection of germ plasm. In addition, Kirin determined that a partnership with Calgene was the most effective way to commercialize its microtuber technique. Calgene's experience with recombinant DNA and cell fusion in many species and its collection of genes isolated for possible introduction into potatoes were additional benefits that a premerger partnership with PGI would not have provided. Ideally, the venture will be able to introduce genetic improvements into popular types of potatoes and provide a new, more efficient production method.

The Kirin-Calgene partnership contains a number of elements, including equity, licensing, and contract research. Kirin made an initial asset purchase of 30 percent of Calgene's seed potato business for $2.5 million. The companies formed an operating joint venture, called Plant Genetics-Kirin (PGK), in which Calgene held a 70 percent share and Kirin 30 percent. Kirin has since increased its stake to 35 percent. Kirin licensed its production technology_the microtuber technique_to PGK and will be paid in a series of "equity kickers." If the microtuber reaches "agreed performance milestones," Kirin's stake in the joint venture will rise to a maximum of 50 percent. Calgene now appoints two members and Kirin one to PGK's management committee. When its equity reaches 40 percent, Kirin will add a financial representative to the committee.

In evaluating Kirin's technology, the idea of "equity kickers" was suggested at an early stage. The basic concept is that, to the extent that Kirin's technology works, the value of PGK will increase and so should Kirin's stake. The performance milestones are qualitative rather than quantitative, and both sides are confident that they will be able to agree on whether they have been met. This structure protects Calgene and rewards Kirin if its confidence in the microtuber technique is justified. The phased growth in equity stakes also addresses Calgene's reluctance to go into a 50–50 joint venture at the outset.

In another set of contracts, Calgene licensed its own core technology to the venture. This consists of genes that are introduced into potato varieties to make them more resistant to pests, particularly the Colorado potato beetle. Outside of the PGK framework, Kirin is paying Calgene $1.5 million over 2 years for contract research on potato genes that promote pest and disease resistance. Kirin is the Asian licensee for Calgene's core pest-resistance technology, and the joint venture is the licensee for the rest of the world.

The agreement also contains termination mechanisms. Corporate strategic objectives may change over time, but the joint venture has explicit goals built into the business plan. The companies hope that the management systems put in place will ensure that the objectives_both annual and over the 5-year horizon_will remain explicit and are incorporated into the strategic planning of each side. Budgets and other operational matters will remain manageable if both companies remain focused on clear strategic goals.

Calgene faced a basic dilemma of how to pursue new opportunities, in areas like potatoes and alfalfa, while pushing for vertical integration in its tomato, cotton, and rapeseed products. The distribution system for potato seedlings is fairly complicated. At this point, PGK sells seedlings to farmers, but the key to future profitability will be the degree of vertical integration that can be achieved. With the combination of better yields as a result of the pest-resistance features and a shortened bulk-up period, the venture's superior product may allow it to move downstream. Ideally, rather than selling a "turnkey" product to farmers, PGK would contract with them, process the crop, and then negotiate directly with major consumers like McDonald's.

Besides the contribution of complementary technology, Kirin's participation also ensures that the resources for a worldwide push, particularly into the critical European market, will be available as products come on line. Although Calgene has a joint venture in Scotland, it would be very difficult for the firm to move quickly into foreign markets by itself. Kirin's clear commitment to potato development was another factor that made it an attractive partner for Calgene.

PGK itself has a marketing and sales emphasis_intellectual property rights to technologies are retained by the parties and licensed to the partnership. At this point, Calgene charges the venture for facilities and personnel, but PGK itself was expected to begin hiring its own employees in late 1991. Technical exchange goes on between the two partners through reciprocal research exchange visits and placements of up to 3 months. As in most biotechnology linkages that involve researcher exchange, the mechanisms

are written into the agreement. So are the monitoring and control systems. These center on quarterly meetings of scientific counterparts, business counterparts, and a joint science-business session.

Kirin is responsible for producing a quality microtuber efficiently and PGK will be responsible for field testing in the United States. Calgene sent researchers to Hokkaido during 1990 to get the benefit of Kirin's experience in running field tests of microtuber potatoes. Even though the American personnel are responsible for meeting the performance milestones, Kirin can visit at any time to evaluate the field tests.

Whose technology is more critical to the venture's success_Calgene's or Kirin's? The answer is still uncertain. Clearly, Calgene's pest-resistance genes are the basis of the current commercial effort, but the performance of the microtuber technique will directly impact the degree to which PGK can vertically integrate. Ultimately, this will determine PGK's profit margins.

Even though the initial dollar amounts of the partnership's various elements are small, the potential importance of the product and the belief that "informality does not bind" led both sides to conclude that a structured joint venture would be more efficient in the long run than an informal collaborative arrangement.

What are PGK's weaknesses? One vulnerability that often arises in U.S.-Japan biotechnology linkages is overdependence on the contributions of particular individuals in making the alliance a success. It is often the case that long-standing relationships facilitate the formation of a venture, but this also means that partnerships rely heavily on the key players to keep the business on track and to resolve disagreements. Since personnel rotation and lifetime employment are still standard human resource management practices in large Japanese companies, the problem of vulnerability is more likely to arise on the U.S. side. In the case of PGK, Zachary Wochok played a key role in building the alliance. As deeper relationships are developed between the scientific and business sides of the partners and PGK develops its own momentum, PGK will be less dependent on the contributions of key individuals.

Those involved in putting PGK together cite several key elements that allowed the two sides to come to an agreement. One was the strategic fit of complementary technologies and capabilities. Previous relationships also were important. Wochok and Joel Marcus played key roles. Though the latter serves as Kirin's legal representative, Calgene had confidence in him because of a previous association. Another important element that contributed to forming the venture was the equity enhancement mechanism. Finally, patience, determination, and regular face-to-face communication during the negotiating process also were critical.

The distribution and licensing agreement between Monotech, Inc. and Showa-Toyo Diagnostics (STD) covering Monotech's in vitro cancer diagnostic products and technology was concluded in 1982, and the first products were on the market in Japan in 1985. Monotech is a rapidly growing U.S. biotechnology firm, and STD is a joint venture between a large Japanese textile and chemical manufacturer and a medium-sized health care company. The arrangement currently covers five products, and the venture has annual sales of 2.1 billion yen ($15.5 million at 135 yen per dollar).

Because the relationship has a substantial track record, it is possible to look back and assess the effects on the firms. Other emerging U.S. biotechnology companies may be able to learn from Monotech's experience. Looking to the future, it is also possible to ask whether changes can be made in the structure of the linkage to ensure that it serves the strategic interests of the partners in the 1990s as well as it did during the 1980s.

To fully understand the role of the linkage in the strategies of the partners, it is necessary to begin with a brief overview of the companies and the role of biotechnology and diagnostic products in their businesses.

Monotech is one of the leading U.S. biotechnology companies. Its research and market focus is on the field of monoclonal antibodies. The in vitro diagnostic products that are the basis of the linkage to STD were Monotech's first commercial products, and income from them has played a major role in bridging the gap to the revenue stream expected from the company's first therapeutic product, Mabex. Mabex is a treatment for gramnegative sepsis. In 1990 Monotech registered sales of over $30 million and comparable income from R&D limited partnerships. The company registered a net loss of about $130 million as a result of exercising options to buy back shares in several of the limited partnerships it had set up to fund product development. Monotech spent about $45 million on R&D in 1990 and had almost 900 employees as of March 1991.

Showa Materials is one of Japan's leading textile firms, specializing in synthetic fibers. It has diversified aggressively into engineering plastics, carbon fibers, and health care, and about 10 percent of its sales are in "new operations." In the health care area, in addition to its cancer diagnostics

activities through STD, Showa has developed antiulcer and cardiovascular therapeutics. In biotechnology Showa has several marketing agreements with U.S. companies for diagnostic products, and in therapeutics the company has put its emphasis on beta interferon, where it has collaborated with both American and Japanese companies. Showa earned a net profit of 40 billion yen ($296 million at 135 yen per dollar) on consolidated sales of 844 billion yen ($6.2 billion) in the fiscal year ending March 1990. Showa Materials has over 10,000 employees and owns about 6.1 percent of Toyo Health.

Toyo Health is a health care company specializing in clinical reagents. In 1989 it earned a net 1.6 billion yen ($12 million) on consolidated sales of about 60 billion yen ($440 million). Besides the cancer diagnostics based on Monotech's analytes, Toyo distributes and manufactures other human diagnostic products under license. Toyo has over 800 employees, a figure that does not include subsidiaries.

Monotech's In Vitro Diagnostics Division, headed by Joseph Atkins, is the most established of its business divisions. Its main line of products are cancer blood tests. Monotech sells complete test kits that utilize radioimmunoassay (RIA) methods through distributors as well as analyte (monoclonal antibodies), which is fabricated into kits by several licensed partners. Monotech analytes account for 25 percent of the world end product market for cancer immunodiagnostic tests. Over three-quarters of the Diagnostics Division's sales_which have represented the bulk of Monotech's total sales to date_are international, and one-third of the international sales are in Japan.

A monoclonal antibody clings to a single antigen and is produced by a single B lymphocyte. In the mid-1970s biochemists developed a method to capture individual antibodies and the cells that produce them. Among the applications of monoclonal antibodies to health care is in immunoassays to detect tumor antigens secreted into the blood. A blood sample is combined with the analyte and its chemical tag. The antibody binds up with the antigen, and the amount of antigen is then measured by comparing the sample profile to a reference curve.

Monotech's five main products in the in vitro diagnostics field are:

1. MI-1 is used to detect ovarian cancer. It is approved for use in Japan (1986), Europe, and the United States (1987).

2. MI-2 detects and monitors gastrointestinal and pancreatic cancers. It is approved for use in Japan (1985) and in Europe. It is available for experimental use in the United States.

3. MI-3, which is used to detect breast cancer, is approved for use in Japan (1987) and Europe, and is available in the United States for research.

4. MI-4, which detects gastric cancer, is approved for use in Europe and Japan (1987) and is available for research in the United States.

5. MI-5 monitors the resistance of cancer cells to drugs during multidrug chemotherapy. It has been approved for use in Japan and Europe (1989) and is available for investigational use in the United States.

Showa-Toyo Diagnostics is a 50–50 joint venture between Showa Materials and Toyo Health. It was formed for the purpose of marketing Monotech's in vitro products in Japan. During the "biotechnology boom" of the early 1980s in Japan, monoclonal antibodies were one technical area that received a great deal of attention. Showa was already taking steps to diversify into health care and biotechnology and was interested in this field.

During 1982, Monotech's cofounder and current chairman, William Nelson, made extensive efforts to find partners to market the firm's diagnostic products in each of the major markets_the United States, Europe, and Japan. Since Japan has very high rates of gastrointestinal cancer and MI-2 would be the first product to emerge from the pipeline, gaining access to that market received particular emphasis. Nelson visited Japan as part of this effort, and Showa was one of the interested parties. Showa enlisted Toyo for its diagnostics marketing experience. To narrow the field of possible partners to a manageable size Nelson set up a "lottery" for the products. He told interested parties that for a nonrefundable fee of $10,000 they would be considered. A number of companies came forward, and Monotech's management evaluated the business proposals. Through a process that was part intuition and part analytical, the Showa-Toyo joint venture was chosen. In particular, Monotech liked the idea of a separate venture built around the products.

The motivations of the partners were fairly straightforward. Monotech wanted aggressive marketing of its products in Japan. In this field, as in many others, the Japanese distribution system contains layers of wholesalers, and it would be unthinkable for a U.S. company, particularly a start-up company, to contemplate an independent sales effort. Showa wanted experience in the management and marketing of biotechnology products and an opportunity to integrate into manufacturing and development. Toyo wanted Monotech's cancer tests as an addition to its line of diagnostic products.

The linkage between Monotech and STD is fundamentally a licensing and marketing partnership. The contract provides for a transfer of products

and assistance in development. Management of the approval process in Japan is the responsibility of STD. Since reactive effects in patients are not an issue for in vitro diagnostics, clinical trials and the approval process in general are not as expensive or time consuming as they are for human therapeutics or in vivo diagnostics. The main issue for establishing a product's effectiveness as a diagnostic tool is an assessment of the level of risk associated with a given blood level of antigen in specified clinical situations.

The products have been very successful in the Japanese market. The gastric cancer rate is high in Japan, and MI-2 is the best way to detect the disease. Monotech manufactures complete kits utilizing radioactive tags that the venture distributes. The venture can also incorporate the analyte into nonradioactive delivery systems. Monotech gets a royalty of approximately 20 percent of end-product sales. About 60 percent of sales are the complete kits that Monotech ships, and 40 percent are royalties on kits manufactured by STD and independently by Toyo. STD itself has over 100 employees, who provide technical support, manage the product approval process, ship the product, and_increasingly_manufacture and market it. Monotech has two technical meetings each year with STD, one in the United States and one in Japan. Business meetings are held semiannually as well.

The fundamental knowledge that STD requires to support sales of the tests concerns the reactive properties of the analyte. Technology transfer is relatively simple and is accomplished by visits of three or four STD researchers to Monotech for several weeks prior to the technical meetings. In the licensed development of delivery systems by STD and other Monotech partners, Monotech provides more analyte for experimental purposes, and the partners specify generic methods of non-RIA tagging to the particular analyte. Partners that fabricate kits under license also do some purification of the antibody. Monotech does not have its own non-RIA delivery system development program.

In contrast to Mabex and other Monotech therapeutic products, for which large amounts of antibody are required, the manufacturing process for the analyte does not present major problems. Large-scale bioprocessing is not necessary. One gram of antibody will last for a million or so tests, and sufficient amounts can be manufactured easily in mice.

The technology and strategic issues in the field of in vitro diagnostics are somewhat different than those that arise in pharmaceuticals_both their apeutics and pharmaceutical diagnostics. For its therapeutic and injectable diagnostic imaging products, Monotech is trying to build an independent global marketing capability and integrate downstream. For in vitro diagnostics,

the company distributes the product initially with a standard radioactive delivery system. Extending the life cycle of the product and reaching a wider market have two interrelated elements.

The first depends on clinical work with the analyte that Monotech undertakes with its research partners all over the world. For example, MI-1 is already used along with other diagnostic methods in detecting ovarian cancer and in ''managing'' postoperative treatment. Clinicians have more recently found that MI-1 may be cost effective as a screening test for postmenopausal women, since false-positive values of the antigen are less common in older women. In supporting and participating in clinical work on new areas in which the test can be used, Monotech expands the market for the test.

The second element is the delivery system. Monotech depends on its partners to drive the delivery system technology. The MI-2 analyte will likely have a long product life, but the test will be performed differently as delivery systems are improved. One well-known example is the glucose test for diabetes. Chemically, it is the same test that it was 20 years ago, but since then the delivery system has advanced to the point where patients can perform it at home. So Monotech, which licenses kit manufacturing and supplies analyte to several companies on a nonexclusive basis, gets wider breadth from the variety of partners and from competition among those partners. In addition to STD and Toyo, Monotech also licenses delivery system development to a major U.S. pharmaceuticals company and a French health care firm. These licensees sell kits in Japan through different distributors.

To a large extent, the radioactive tag is the classical way of performing immunoassay tests. On a new undefined analyte, it is best to start out with an RIA delivery system. When the performance characteristics are understood and the test is peer reviewed, nonradioactive systems utilizing enzymes (enzyme immunoassay or EIA) and chemiluminescence can be developed. This has many benefits. For example, in Japan radioactive isotopes can be used only in the large reference labs and in hospitals that have special facilities. Many Japanese hospitals cannot perform RIA tests. In addition to the safety issues, an emotional aversion to radioactivity in Japan plays a part. Therefore, access to a large part of the Japanese hospital market requires the development of non-RIA kits and instruments.

In addition to safety and the psychological edge, non-RIA also allows development of kits with a longer shelf life_6 weeks for RIA versus as long as a year for non-RIA. Other "user-friendly" characteristics can be chemically engineered as well. In particular, EIA and chemiluminescence allow a proper reaction to occur even when reagents are added non-sequentially. This means that the test can be automated. The technician, rather than pipetting in various chemicals in a prescribed order, can insert a test

tube containing the sample into a machine and walk away, returning later to assess the results.

Monotech's contract with STD allows the venture to use the analyte in developing alternative delivery systems; indeed, it is in Monotech's interest for the venture to do so. At first, STD wanted to change the contract to allow it to develop RIA systems. This would have transferred kit fabrication to Japan from Monotech but would have done nothing to increase the overall market. One of Toyo's subsidiaries is a reference laboratory, and long-term development of systems to reach the hospital market may not have had the short-term impact on earnings that internalization of RIA kit manufacture would. After intense and drawn-out discussions, Monotech convinced the venture to concentrate on non-RIA kits and instruments.

Since then another complication has arisen. The two parents, Showa and Toyo, are developing competing non-RIA products. Though the venture is 50–50, Showa has more influence on the management of the joint venture. Its program is partially inside STD and is complemented by an in-house effort. Toyo's program is independent. Monotech sells the analyte to Toyo as well as to the joint venture.

Competition between the Japanese parents seems to be taking a toll. Instead of one non-RIA development program in STD, each of the parents has an independent program. There are two system development programs and two kit development programs, and Toyo has a focused monoclonal antibodies program as well. This has escalated the costs of development, resulted in competing products reaching the market, and ultimately led to lower margins. STD has a growing independent sales force as well. It had used the Toyo sales team, but Toyo's development of competing products is making continued use of this channel untenable.

Showa and Toyo now have different ideas about the place of the venture in their strategic visions; both want to integrate into manufacturing and product development independently. This may be diluting their focus on growth and may represent an obstacle to STD becoming a major player in the Japanese diagnostics market in the long term.

Presently, Monotech holds no equity and has no formal management role in STD. It does have influence, albeit distant and infrequent, as the licensor and critical supplier. Up to now, the rapid growth in Japanese sales by the venture has served Monotech well. Will continuation of the current arrangement serve Monotech's interests as well in the 1990s?

An alternative that Monotech might pursue is to seek a more active role in the venture. Monotech's global perspective and insight would likely make a material contribution to increasing the size of the Japanese market for the products. To give the venture closer strategic and tactical direction, it would be necessary for Monotech to let the venture see more of its own technology. Concretely, this would consist of Monotech working more closely with the venture on new analytes and exposing the venture on a more timely basis to clinical work being done. This would give STD an overall marketing edge over other Monotech licensees in the Japanese market and a time advantage in developing delivery systems.

Closer involvement might bring other benefits to Monotech beyond a larger market for its products. For example, Japanese companies have made significant strides over the past decade in diagnostic biotechnology fields. STD might give Monotech knowledge and access to technology developed in Japan that it might not find out about, or have an inside track to license, otherwise. In this way Monotech might use STD to monitor and acquire Japanese technology, help it commercialize, and exploit the capabilities of the venture in the global market. It would also improve Monotech's distribution and technology presence in Japan.

Monotech has been discussing issues broader than current product and market concerns with STD and the Japanese parents over the past several years. But there are obstacles to Monotech becoming more involved. For example, an equity stake for Monotech in the venture would be desirable and perhaps necessary to generate the synergies discussed above. Competition between the Japanese parents would complicate the negotiations toward a fundamental restructuring of this kind.

It may or may not be possible for Monotech to change the structure of the relationship and upgrade its involvement. To Joseph Atkins, president of Monotech's Diagnostics Division, the experience of American Medical Equipment (AME) in Japan is relevant to Monotech's current situation. AME had a joint venture with Oda Denki in computed tomography (CT) scanners, which AME played a major role in pioneering. The Japanese market grew very rapidly, and the joint venture was very profitable because of AME's technological lead. But over time Japanese competitors caught up to AME by developing products with features (basically smaller size) that were tailored to the Japanese market. For its part, Oda wanted to integrate into manufacturing and demonstrated an ability to reverse engineer all of the scanner's hardware. What Oda was not able to duplicate was AME's software for the scanner. If Oda had had its way at that point, it might have chosen to license the software and take over manufacturing itself, but AME was able to leverage its technology in order to increase its involvement in the joint venture. It was a 51–49 venture in favor of AME, and over the past 8 years AME's ownership has moved to 75 percent,

market share in Japan has solidified, and the partners have closer technological links. The venture has grown its own technology, and AME now exports mid-sized machines from Japan as the global CT scanner market has stratified.

Monotech may not have as much leverage now as AME had in the early 1980s. But the company has some new products in the pipeline for diagnosing lung, breast, and bladder cancers. With the growing emphasis on preventative health care, the Diagnostics Division sees its products as well positioned for long-term growth. And just as the Japanese market is critical for the long-term growth of the Diagnostics Division and Monotech as a company, Showa sees its relationship with Monotech as an important component in its long-term strategy to build a larger presence in health care.

The Monotech-STD linkage may be in a period of transition. The case illustrates how in some applications of biotechnology cooperation and competition can be managed, though the process is often complicated. Another theme is how an emerging U.S. biotechnology company can get the most mileage out of its fundamental strategic asset_technology. Through awareness of changes in the global market and maintenance of a technical edge, American biotechnology companies may be able to define and accomplish changes in the structure of their technology linkages to Japan in order to ensure maximum leverage and increasing benefits over time.

Kirin-Amgen, Inc., the joint venture established in 1984 to develop and market erythropoietin (EPO) and, later, granulocyte colony-stimulating factor (G-CSF), is perhaps the best known and most successful U.S.-Japan biotechnology linkage. Kirin-Amgen persevered through over 5 years of product development, clinical trial management, and building manufacturing and marketing capability before EPO was approved for sale in the United States in June 1989. The two products have met with resounding success. Because of the significant and obvious benefits that have accrued to both sides, some have pointed to Kirin-Amgen as a model for linkages between emerging U.S. biotechnology firms and large Japanese corporate partners. However, with two blockbuster products on the market, the venture may be facing a dry spell in its development pipeline. At this point it is uncertain whether Kirin-Amgen will continue to play as prominent a role in the strategies of the partners.

Kirin undertook a major diversification program in the early 1980s (see Case I). Pharmaceuticals have received particular emphasis in the program. The long-term plan put forward in 1981 gave several reasons for entering

the pharmaceuticals business, including the industry's knowledge-intensiveness. The technological basis of pharmaceuticals had some similarity to those of existing businesses, and the "new biotechnology" gave Kirin an opportunity for market entry in a technical field where the more established Japanese pharmaceutical companies were just as inexperienced as it was. Kirin hoped to leverage its accumulated fermentation, biochemical, and engineering expertise to build a technical critical mass for biotechnology. The company also hoped to establish an international information network that would speed the identification of promising technologies. A corporate Technology Information Division was established in 1986, and about 70 percent of its personnel are devoted to pharmaceutical activities.

Amgen, Inc., based in Thousand Oaks, California, was founded in 1980. George Rathmann, who was previously vice president for R&D at Abbott Laboratories, was hired as the company's first CEO and served in that capacity until 1988, when current CEO Gordon Binder took over. Because of the success of its first two products, Epogen and Neupogen (the brand names given to EPO and G-CSF), Amgen's quarterly revenues passed Genentech's during 1991, and the firm is now the sales leader among dedicated biotechnology companies. It is anticipated that Amgen will be the first biotechnology company in the Fortune 500. Amgen had sales of $361 million during its 1991 fiscal year (which ended March 31, 1991) and it employs 1,179. The company spent almost $85 million on R&D in fiscal year 1991.

Amgen's success is based on two proteins, EPO and G-CSF. EPO is a protein that stimulates the production of red blood cells and replaces blood transfusions in the treatment of kidney dialysis patients and patients with other indications. EPO is produced naturally in the kidneys. It received regulatory approval in Europe in 1988 and U.S. FDA approval in 1989 and was approved in Japan in early 1990.

G-CSF is one of a class of colony-stimulating factors that "control the differentiation, growth and activity of white blood cells."⁸⁰ G-CSF stimulates the production of neutrophils, white blood cells that fight infections. It was approved by the FDA in early 1991 for use by patients undergoing chemotherapy. It received approval in Europe at about the same time, and was waiting for approval in Japan at the time of this printing. Amgen is taking the drug through clinical trials for other indications, such as burn cases and pneumonia.

In February 1984 George Rathmann received a telephone call from a Kirin representative who wanted to know why Rathmann was not answering

the numerous telex messages that Kirin had sent to him. It turned out that Kirin was using the wrong telex number, and that the Japanese firm wanted to set up an appointment the following week to discuss licensing rights to EPO. Amgen's Fu-Kuen Lin succeeded in cloning EPO in October 1983, and Kirin scientists had read an announcement about it. Kirin decided that it wanted to be in biotechnology, thought that EPO was an interesting product, and decided to try to acquire the rights to it.

Not many other large companies were interested in EPO at the time. There were several reasons for the early lack of interest, which seems surprising on the surface because of the drug's subsequent success. To begin with, even after the protein was cloned, there was doubt about whether EPO would be efficacious with no side effects, which turned out to be the case. Further, the economic feasibility of producing an effective dosage at a price that would represent a savings over the blood transfusions that EPO treatment would replace was another area of considerable uncertainty. Also, EPO is an injectable, and few pharmaceutical products that are limited to that delivery system have achieved prominent success. Finally, EPO represents a significant change in therapeutic approach_a significant advance as it turns out_but it was difficult to estimate the overall size of the potential market a priori because there were no competing drugs on the market.

Rathmann met with Kirin's representatives in March 1984. The basic concept for the partnership was arrived at then. Amgen first proposed, without citing specific figures, an exclusive Japanese license for Kirin in exchange for a front-end payment and a significant royalty. Kirin insisted on more than marketing rights in Japan. The negotiations might have ended there, but Amgen responded by proposing that EPO be developed and marketed in a joint venture. The main advantage of a joint venture was that risk and return sharing would be self-compensating for unknowns on both the downside and the upside. In contrast, a license and its accompanying royalty rate assume something about market size and profit margins. In a 50–50 joint venture, the partners would share equally in the costs if it proved to be more expensive than expected to take EPO through clinical trials and would likewise share the benefits if the sales were higher than anticipated.

Kirin was amenable to the basic concept, which included some adjustments to a basic 50–50 structure. At the outset Kirin put up $12 million and Amgen put up $4 million because Amgen was contributing the fundamental technology of manufacturing EPO. It was initially anticipated that most of this start-up capital would be spent getting the drug through clinical trials in the United States; the Japanese approval process was expected to drag on for a longer period but to be cheaper. The venture would be managed by a board composed of three representatives from each company, with the president/CEO post held by Amgen and the chairman slot controlled by Kirin.

Protection for Kirin was built into the joint venture as well. The main

point in question at the outset was whether the manufacturing technique could be refined to the point where making EPO from host cells would be economically feasible. It was agreed that Amgen would spend its $4 million contribution on bringing the production method to the point of economic feasibility within 18 months. If this could not be accomplished within the specified resource constraints, Kirin would have the option of taking its $12 million and walking away. The level of "feasibility" that was arrived at was about 50 times the level of efficiency that was being achieved at the time of the preliminary agreement, in the spring of 1984. Amgen passed this milestone within several months, the technology transfer of the methods for producing host cells and for using the cells to manufacture EPO was accomplished in late 1984, and Kirin committed its initial $12 million. Rathmann served as president/CEO of Kirin-Amgen until 1988, when Gordon Binder replaced him. Yasushi Yamamoto represents Kirin's board of directors as chairman of the joint venture, replacing Dr. Kubo.

Through 1988 the management of the venture went smoothly. The board made no decisions that were not unanimous, which might be expected in a 50–50 joint venture. Though the chairman leads the board of directors, which has formal supreme authority, the president/CEO is responsible for managing the venture.

The joint venture's main function has been to manage the technical exchange and product development collaboration between the partners. Since the actual R&D is done by the partners themselves in exchange for a fee charged to the joint venture, in practice Kirin-Amgen assumed a largely planning and monitoring role.

The partners have different marketing arrangements for EPO. Sankyo is marketing the drug for Kirin in Japan for all indications, and the Ortho Pharmaceuticals subsidiary of Johnson & Johnson is seeking approval for nondialysis indications in the United States. Amgen was granted a 7-year monopoly in the dialysis market under the Orphan Drug Act. At one time Kirin-Amgen owned all the rights to EPO, but the fights were transferred back to Amgen in the U.S. market and to Kirin in the Japanese market. Amgen has waged a long and complicated legal battle with Genetics Institute and its licensee, Japan's Chugai Pharmaceutical, over patents for EPO. Kirin has Japanese rights, Amgen has rights in the United States, and the venture owns rights in other markets. Kirin and Sankyo face competition in the Japanese market, where Chugai accounted for over half the sales of EPO as of mid-1991. Originally, a 5 percent royalty on all sales of EPO by the partners and their licensees was to go to the joint venture. However, it was later decided that only dialysis sales in the United States and Japan would

be royalty bearing to Kirin-Amgen and that EPO marketed for other indications would not be royalty bearing. Kirin manufactures EPO in Japan, while Amgen manufactures it in the United States for the American market.

In late 1984 the partners began discussions about the inclusion of other molecules in joint venture product development. Kirin was investigating a protein called thrombopoietin, and Amgen was exploring G-CSF with Sloan-Kettering. Kirin proposed developing both of them within Kirin-Amgen. Amgen was agreeable but wanted to pursue the independent programs for a while longer. Amgen spent more on its program and, ultimately, G-CSF was successful while work on thrombopoietin has thus far produced less promising results.

In the summer of 1985, Amgen agreed to put G-CSF into the joint venture. The partners agreed on a 50–50 split outside the United States and Japan. This arrangement was changed several years later. Amgen proposed that either the two companies agree to enter the European market together or that Amgen should be allowed to buy back the European rights. The two sides agreed on the latter course, and Amgen bought back the European rights in 1986. The two companies established marketing rights in other areas, with Kirin getting Taiwan and Korea and Amgen getting Australia and Canada. Amgen comarkets Neupogen with Hoffmann La Roche in several of its territories outside the United States.

As with EPO, Kirin insisted on manufacturing the G-CSF that it would market. There are manufacturing facilities in the United States and Japan for both products that were financed and owned by the partners individually. Development and clinical trials were financed by the joint venture. During 1991 Kirin-Amgen paid Amgen $14.6 million for contract research, and Amgen paid the venture $17.1 million in royalties on sales of Epogen and Neupogen.

All the technology transfer was accomplished at the science and engineering level between the two partners, mainly through visits of Kirin research personnel to Amgen. At times when contact was most extensive, four Kirin researchers at any one time were posted at Amgen, with some staying as long as 3 years. Kirin saw this as a particularly beneficial component of the relationship. Much of the technology exchanged related to the proper way to treat host cells in order to maximize the production of EPO. There were also visits by Amgen researchers to Kirin for periods of up to a month. Techniques for the purification of EPO were transferred to Kirin as they were improved upon. Amgen also provided Kirin with basic materials from its cell bank, such as cloned cells, for use in research and manufacturing.

After the initial hurdle of commercially feasible efficiency was cleared, the focus of product development moved to clinical trials in various countries. Technical personnel and information also were exchanged during all phases of the design and construction of the manufacturing facilities in the United States and Japan.

Press reports at the time Kirin-Amgen was launched speculated that one reason Amgen chose to team up with Kirin was the latter's fermentation technology and potential to develop bioprocessing skills. In fact, the differences between fermenting beer and bioprocessing cloned proteins are so great that no technical synergy could realistically be expected. Amgen's main reason for linking with Kirin was the Japanese firm's interest in EPO. Though Kirin actively contributed to the process of developing EPO, the bulk of the know-how that came to be used for treating the host cells was developed by Amgen.

Still, important technological contributions from Kirin did materialize. To begin with, the collaboration during clinical trials brought substantial benefits. Kirin handled all the clinical trials in Japan, for both EPO and GCSF, including animal trials. These are not required for the FDA, but they were used in the United States and other parts of the world to bolster the case with regulators. Perhaps of even greater benefit was the establishment of a "world view" during the clinical trial process, which provides something of a three-dimensional perspective on the clinical importance of the drug. The fact that leading clinicians all over the world were working on the trials simultaneously provided a tremendous check and probably saved a significant amount of time. With different teams working simultaneously and exchanging information, clinical interpretation and documentation were validated to an extent that would be impossible in one place.

It was also particularly important to the process of regulatory approval for the manufacturing techniques to be translatable between the partners. This is because EPO has five isoforms, and it is critical that the partners be able to show regulators that the proportions are standardized for the purpose of evaluating efficacy and side effects. Particularly in a case where companies are working to improve the efficiency of a manufacturing process, knowledge may be accumulated and not written down. That the joint venture was able to prevent such "droppage" is perhaps due to the effectiveness of Amgen's technology transfer to Kirin.

Kirin made one unexpected technical contribution when the partners were designing their individual manufacturing facilities for EPO. Kirin and Amgen consulted closely during this stage. Amgen had wanted to use a manufacturing process in which "roller bottles" wash nutrients over the genetically engineered host cells that produce EPO. Kirin believed that the roller bottle process could be automated and with the help of one of its suppliers was able to develop a machine that handles the roller bottles. An

Amgen employee visited Japan for about a month to learn the specifics of running the machine. The automated process is used at Kirin, Amgen, and Johnson & Johnson in making EPO. The manufacture of G-CSF uses a different process.

The commitment of the top managers of both companies throughout has clearly been critical to the success of the venture, particularly through the long period during which resources had to be expended in the absence of a revenue flow. In contrast to the usual view that Japanese management has a very long-term outlook and that it is the American partner to a joint venture whose commitment is likely to waver, it may have been more difficult at times for Kirin to maintain the degree of commitment that it did. The core business of the company is still clearly brewing and selling beer. Yet Kirin did manage to maintain an unwavering focus on the venture in terms of resources and attention.

A number of significant benefits have accrued to Kirin as a result of the venture. First and foremost, Kirin was able to break into the ethical drug market in Japan with two hit products. The Japanese partner had a long wait, but it is now enjoying high returns on its investment. Kirin was also able to achieve its stated goal of technology leveraging. Finally, the company was able to use the experience gained by its technical personnel through Kirin-Amgen to establish a basic research facility in the United States. Kirin took this step in 1988, with the establishment of the LaJolla Allergy and Immunology Institute.

After Kirin-Amgen's initial $16 million in capital was used up, it took over $80 million more to take EPO through to FDA approval. Those costs were split equally between the partners. Most of the interaction has occurred at the scientific level, and Amgen credits Kirin for the quality of its technical leadership. For Amgen, maintaining its focus on the venture was a straightforward proposition. EPO was the company's flagship product and main hope to become an independent pharmaceuticals company. Kirin-Amgen was the vehicle chosen for its commercialization, and commitment to the venture had to be maintained to bring the product to market.

Though there are no new products in the Kirin-Amgen pipeline, there is ongoing technical interaction. This mostly involves clinical studies on new indications.

The Kirin-Amgen joint venture continues to collect royalties from sales of the two products and passes these on to the partners and will continue to do so for many years. At the same time, the goals and priorities of the

companies are evolving. Over the past several years Kirin has given more attention to the Japanese beer market, as domestic competitors have mounted a serious challenge. For its part, Amgen is exploring several partnerships with smaller U.S. biotechnology companies, in addition to the work it is doing internally, as a means of expanding its product line.

Clearly, the joint venture has addressed some of the complementary needs of the two partners and balanced the asymmetrical assets that drove the Kirin-Amgen partnership at the outset. Both sides now have a wider range of options. Benefits will continue to flow to the partners, but the future importance of Kirin-Amgen in their strategies is unclear.

The agreement between Hitachi Chemical Research (HCR), a subsidiary of Hitachi Chemical Company, Ltd., and the University of California, Irvine (UCI), to occupy the same building on the UCI campus is part of a clear trend toward increasing interaction between Japanese corporations and American academic research institutions. This trend is apparent in biotechnology and in other fields, such as computer sciences and electronics.

However, this particular linkage represents something of a departure from traditional relationships between U.S. universities and corporations. The foundation of the interaction is an exchange of leases: HCR built the facility on university-owned land and has established a basic research lab for its proprietary programs on the top two floors; in return, UCI's Department of Biological Chemistry occupies rent-free lab and office space on the first floor of the building and will take over the entire building in 2030. The corporate and university researchers share a reading room. It is expected that their physical proximity will facilitate formal research interaction, but this will be managed on a project-by-project basis on the same terms that normally govern UCI collaboration with industry. HCR has no formal funding commitment to UCI, and UCI made no commitment to HCR.

Research at the lab began in the spring of 1990, so it is too early to assess many of the impacts on Hitachi Chemical and UCI. What can be said now is that the partners are working hard to ensure that the relationship benefits both sides, and they hope that the structure of their agreement and the process for reaching it can serve as something of a model for new forms of university-industry research interaction.

Hitachi Chemical Research is a wholly-owned U.S. subsidiary of Hitachi Chemical Company, Ltd. Hitachi Chemical has traditionally focused on developing and manufacturing synthetic resins for applications in electronics

and also produces molded parts for automobiles and housing equipment. The company is emphasizing new ceramics and is seeking to diversify into the pharmaceuticals business. Hitachi, Ltd., owns over 50 percent of Hitachi Chemical. In the fiscal year ending March 1990, Hitachi Chemical registered sales of over 466 billion yen ($3.5 billion at 135 yen per dollar), earned 19 billion yen in operating profit ($145 million), and spent over 12 billion yen ($92 million, or 2.6 percent of sales) on R&D.

The University of California at Irvine is one of nine campuses in the UC system. The university manages three U.S. Department of Energy laboratories. University-wide, the system receives about $4 billion in extramural research funding per year and has 10,000 faculty members. At the Irvine campus, industrial sponsors provide between 5 and 7 percent of the research funding in a given year. Most research performed at UCI, biochemical research in particular, is funded by the federal government through NSF and NIH. Federal funding to the nine campuses accounts for over 10 percent of the federal budget for academic research. Biochemical research connected with the medical school has increased substantially over the past decade. The Department of Biological Chemistry has 10 faculty members and receives extramural research funding of over $2 million per year.

The agreement with Hitachi Chemical is one of a number of relationships that UCI has entered into over the past decade with the view of using its land resources to meet priority academic needs. UCI has lease-swap arrangements similar to the HCR lab with several nonprofit organizations such as Beckman Laser and the American Heart Association. In addition, the university previously leased land to another private pharmaceuticals concern, the Nelson Research and Development Company, allowing it to build an R&D facility in exchange for use of space in the new building by the Department of Psychiatry. That relationship was established in the mid-1980s but was dissolved after about 5 years when Nelson was acquired by Ethyl Corporation and its research operations were moved to Richmond, Virginia. UCI bought out the remainder of the Nelson lease and now uses the entire building.

UCI uses its land to meet other needs besides research space, one example being the construction of housing for sale to faculty members with shared appreciation, thus making it possible to sell the housing at a lower cost than market value for fee-simple housing. This is an important recruiting tool given the high cost of housing in Southern California.

In 1984 UCI was recruiting Professor Masayasu Nomura, a prominent Japanese biochemist, and was faced with the problem of providing enough research and office space for him and for the projected future growth of the

biochemistry research faculty. In the course of his recruitment, contact was made with Hitachi Chemical, which agreed to support an endowed chair. Subsequently, this led to an expansion of the relationship, which culminated in the building. Research at the building Nelson constructed on campus was just getting started at this time, so UCI had an existing prototype for an arrangement that would match complementary needs and resources. Leases had already been written that could be adapted to the particular case, and the campus also had accumulated experience in negotiating agreements for shared facilities, which was useful in dealing with Hitachi Chemical.

Hitachi Chemical was receptive to the basic concept of a swap of leases and the construction of a shared research facility at the outset, and it set up the Hitachi Chemical Research subsidiary to negotiate an agreement and manage the lab. The basic agreement being contemplated was, indeed still is, quite unusual in the context of university-industry research. Some issues would likely arise regardless of the nationality of the company, while others were specific to HCR's parent being Japanese. In the negotiation process, the campus coordinated interaction with HCR and the UC president's office and legal counsel. This contributed to the smooth management of the negotiation and implementation process and a focused effort to ensure maximum benefits for the campus within the framework of university policy.

UCI was perhaps most concerned about potential political repercussions. In 1987 concerns were being raised in Congress and elsewhere about the potential adverse impacts on U.S. competitiveness of Japanese and other foreign corporate involvement in U.S. academic research. Public universities are supported by their respective state governments, and federal funding is critical to the research enterprise. For a number of large public research universities, federal support is comparable to or exceeds state support. Political concerns have been raised about relationships between foreign companies and research institutions supported with public funding.

At the federal level, some members of Congress are concerned that the open research policies of U.S. universities combined with the willingness of foreign companies to invest in U.S. academic research can, in effect, translate into subsidizing foreign industry in an increasingly competitive global economic environment. Some focus on relationships with Japanese companies, asserting that comparable benefits are unavailable to U.S. companies operating in Japan and that the ability of Japanese companies to access U.S. academic research allows them to ''free ride'' on U.S. basic research.

Political concerns also arise at the state level. California, like other state governments, encourages business development in biotechnology and in other growth industries. Some programs seek to leverage the research

capability present in the public university research system. Some would argue against the UCI-HCR relationship on the grounds that research interaction between state universities and California firms should take priority over interaction between universities and foreign companies. On the other hand, in an example of the mixed signals that academic institutions sometimes receive when it comes to Japan, California is trying to position itself as a key participant in the emerging Pacific Rim economy. Restrictions on relationships such as the one between UCI and HCR could be difficult to reconcile with such a stance.

Although UCI officials went out of their way to ensure that Hitachi Chemical was given no consideration that would not be extended to domestic or local companies, they were concerned that it might be perceived that they had done so. The university realized that very few, if any, U.S. companies would be able or willing to make the large long-term commitment necessary to build the UCI-HCR facility and operate it. The university decided that the best way it could allay concerns would be to ensure that its relationship with HCR was governed by normal university procedures and that HCR did not receive special treatment regarding intellectual property rights or other areas. While it is generally known that UCI can entertain land for space arrangements with domestic industrial sponsors, a general solicitation was not judged necessary in view of the fact that UCI was happy to entertain any proposal from any company and that it was not negotiating a unique lease.

The UC regents approved the project in March 1988. Ground was broken on the $12 million, 40,000-square-foot facility in January 1989, with UCI and Hitachi Chemical taking occupancy in the summer of 1990. Over the 18 months from the time ground was broken to when the building was occupied, HCR and UCI interacted closely on design, construction, and outfitting the building. The parties also defined the procedures and responsibilities for interaction.

Before the Hitachi building was constructed, the Department of Biological Chemistry's research facilities were scattered in three locations. One of UCI's goals was to bring the department together. This influenced the layout and which faculty members moved into the new building. The first floor of the Hitachi building houses two faculty members with large research groups and one with a smaller group. This floor is connected by a corridor to the rest of the biochemistry research facilities.

Because it was known beforehand who would be moving, it was possible to design the space according to the needs of the users. Since the university had no budget for design and construction (there was a small

administrative budget) and it would be responsible for any changes that it initiated in the design, it was desirable for UCI to clarify the design parameters at an early stage. This was largely accomplished; the university initiated very few changes in design.

The university's goal was for a "turnkey" facility. Hitachi agreed to provide all equipment defined as "nonremovable," including cold rooms, the ionized water system, compressors, and an emergency generator. For one piece of equipment, Hitachi had planned to use its Japanese supplier, but UCI researchers explained that it needed equipment with higher specifications, and Hitachi switched to UCI's U.S. supplier. HCR pays two-thirds of the costs of maintaining these common facilities, while UCI pays one-third. Decision making on building and facilities matters is accomplished by a joint committee.

The reading room on the second floor is shared. Hitachi also has a lecture room, which it allows the university to use on request. There is no formal agreement, but UCI sometimes holds classes in this room.

One issue that arose during construction had nothing to do with research interaction or the fact that HCR is a subsidiary of a Japanese corporation. This was the question of insuring the lab, where toxic and hazardous materials might be used for research. HCR eventually agreed that it would self-insure through a $5 million escrow account. The issues of ensuring compliance with state regulations regarding hazardous materials, animal research, and other areas must be dealt with whenever a chemical or biotechnology research lab is constructed. Complications may arise in determining responsibilities in a novel university-industry partnership such as this one.

UCI's Office of University/Industry Research and Technology, in the course of implementing the agreement, placed a top priority on making sure that university policies in a number of areas were clear and mutually understood. University policies that govern research interaction are covered in a number of documents and come to several hundred pages in all. Federal and state regulations have an impact as well. The office summarized these policies in a document called "Guidelines for Research Interaction," which was agreed to by both UCI and HCR and was to have been distributed to all occupants of the building in 1991. The document spells out the roles of a number of university offices and academic departments as well as the appropriate procedures for initiating, implementing, and managing various forms of research interaction between UCI and HCR. These include sponsored research, consulting agreements with faculty, transfer of research materials, use by one party of the other's facilities, and services for fee. The

guidelines encourage the use of explicit written agreements by the parties to govern interaction. It might be useful to examine how the guidelines treat aspects of interaction related to intellectual property rights, export controls, and conflicts of interest.

Hitachi's lab and the UCI researchers on the first floor are conducting research on biochemistry with a view toward possible human health care applications. In biotechnology, basic science and applied research are often quite close. Furthermore, intellectual property rights are usually a more important consideration for companies in pharmaceuticals than in other industries. Therefore, the topic receives a great deal of attention in structuring research relationships between companies and universities in this field. The university has an interest in making sure that it owns the rights to commercially valuable technology developed in its labs while simultaneously maintaining academic freedom.

The standard University of California approach to intellectual property rights is university ownership of all research results produced using university resources. At a state university, research is ultimately aimed at benefiting the public, with the generation of income as a secondary priority, so intellectual property rights (IPR) and licensing policies are not as flexible as they are at some private institutions. UC's policy states that all university employees as well as "all noncompensated persons who use university resources," including facilities and equipment, are required to sign the university's patent agreement. A key element in the UCI-HCR linkage is that the Hitachi portion of the building and the land are not considered "university resources," so that Hitachi owns all intellectual property developed on its floors. The floor occupied by UCI faculty is considered university property. The policy also states that, in the case of "joint inventions of at least one UCI inventor and at least one HCR inventor," UCI and HCR will each own an equal interest in the invention.

HCR or any other research sponsor that pays all direct and indirect research costs may be granted the first right to negotiate an exclusive license. In cases where HCR supports research along with other sponsors, the company may be granted the right to negotiate a nonexclusive license. A sublicense to the parent company, Hitachi Chemical, can be considered in this situation as well. HCR, in addition to technology developed in projects that it sponsors itself, may also be allowed to license technology that arises from other research at UCI.

The university may grant a short delay to HCR for filing patent applications before researchers publish the results of research that HCR sponsors. Unlike the United States, most countries use a first-to-file patent system in which the first applicant is granted the patent, assuming other requirements for patentability are met, so it is important to file before results are published. UCI may give this delay by agreement but if necessary would forgo

foreign rights to technology rather than compromise academic freedom by delaying publication too long.

In all licensing negotiations for university-owned intellectual property, the prospective licensee must submit a business plan for commercializing the technology, which UC then evaluates. It would be unusual for a company to sponsor research that it is clearly incapable of commercializing, so this evaluation normally does not raise obstacles.

A second issue covered in the guidelines is compliance with federal regulations regarding export controls, since specific licenses from the government may be necessary prior to exporting a technology or filing foreign patent applications. Since UCI has contracted with HCR, a U.S. company incorporated in California, it is specified in the ground lease that responsibility for compliance with export control regulations lies with HCR. In addition, UCI's policy is that only fundamental research is conducted on its floor, to ensure compliance with federal policy allowing fundamental research to remain open and unclassified.

A final issue is faculty consulting. Most faculty members and nearly all of the senior professors at the UCI medical school have some relationship with corporations through research sponsorship or consulting. Universities often encourage this activity because it gives faculty insight into the types of technical problems faced by industry.

From the university standpoint, the main concern is avoiding potentially harmful conflicts of interest. These would arise when a faculty member has a major financial interest in a corporate sponsor of his or her university research. When HCR proposes sponsored research at UCI, faculty members receiving the grant must disclose any financial interest in HCR or its parent to the UCI Conflict of Interest Oversight Committee. The university needs to consider a number of factors, including whether HCR and UCI's activities are being kept separate, whether the faculty member participated in the decision to make the award, and ensuring the openness of the university research environment. The committee uses this information to decide whether the award should be taken.

Jack Jacobs, science director of the HCR R&D lab, previously worked at Merck and has a great deal of experience in conducting research in collaboration with universities. He holds a UCI adjunct faculty appointment in the Department of Biological Chemistry. There are over 20 HCR staff members on the top two floors of the building. HCR hired three researchers from UCI_by mutual agreement with the university_from a program that experienced a reduction in its funding. None of the researchers were tenured faculty. For HCR, "raiding" UCI of its top researchers

would not contribute toward good long-term relations with the university. When recruiting researchers, Jacobs can raise the possibility that working at HCR may facilitate an adjunct faculty appointment subject to UCI's requirements and approval.

The three UCI research groups on the first floor do basic biochemical research representative of what is being done in many research universities. One group is working on mapping human chromosomes, which may have implications for pinpointing and curing genetic disorders. The other groups are working in more basic areas_RNA processing in yeast and the organization and biosynthesis of ribosomes. The work is presently funded by a variety of NIH, NSF, and private foundation grants.

Interaction between the UCI faculty members housed in the building and HCR personnel has not been extensive thus far. Indeed, the first research contract, invention, and licensing agreement between UCI and HCR resulted from a project that Hitachi sponsored for UCI's Department of Pharmacology, which is not housed in the HCR building, and the University of Oregon. UCI and HCR have also established a standard request form letter that UCI researchers can complete in order to use advanced equipment located on the HCR floors.

For the university, the positive impacts are fairly straightforward. A number have already been realized. The university has the use of high-quality space more quickly and at a lower cost than if a lab had been built through state support. Quality facilities of this type allow faculty members to be more productive and improve the quality of graduate education. Also, to the extent that HCR gives assistance or research positions to graduate students, this will allow the graduate school to train more students.

Direct sponsorship of research by HCR that arises from the physical proximity is an expected benefit, though the extent is not yet clear. There are also spin-off benefits from sponsored research. When HCR agrees to license technology, it pays for the patent applications and the issue fee for the patent as well as the royalty on sales of the commercial product. The university has not encountered negative impacts from the agreement and does not anticipate any, though it should be pointed out that research at the facility had been going on for about a year and a half as of this writing.

There are no concrete plans to make closer interaction between UCI and Hitachi's Japanese biotechnology lab or other Japanese research institutions a formal part of the relationship. Professor Nomura has strong ties to the research community in his native country, and it is expected that personal relationships may lead to closer UCI-Japan interactions over time.

UCI sees this relationship as an innovation in the structuring of university-industry research interaction that benefits itself, HCR, and U.S. biotechnology as a whole. The campus hopes that new relationships with industry will further cement its position as a leading-edge research institu-

tion. New modes of cooperation with industry that are likely to arise in coming years will require universities to consider issues beyond licensing, and UCI is pleased with the results of its coordinated approach.

For HCR and its Japanese parent, the impacts are perhaps less clear at this point. From the point of view of the company, this linkage represents a leap into uncharted territory in a number of respects. For example, biotechnology is a relatively new technological field for Hitachi Chemical and pharmaceuticals are a new business. In addition, the decision to launch into biopharmaceuticals by building a basic research capability represents a departure from the approach taken by Kirin and other large Japanese companies, in which a gradual shift of research focus was accompanied by linkages with U.S. biotechnology firms to obtain product rights and technology closer to the commercialization stage. Finally, focusing a basic research thrust on a laboratory in the United States and a novel relationship with a U.S. university will present Hitachi Chemical and the HCR subsidiary with an additional layer of organizational and business challenges.

It might be expected that a combination of "trial and error" and "learning and listening" will prevail at HCR for the time being. At this point, the facility is mostly staffed by U.S. researchers with academic and corporate backgrounds. The lab does have the potential to play a key role in building the parent company's biotechnology capability by serving as a training ground for Japanese researchers, who could familiarize themselves with methodology and developments in U.S. biotechnology through short-and long-term visits. In addition, the fact that a technology with commercial potential has already been developed through this relationship points to the possibility of a substantial payoff in the long run from an investment that very few U.S. companies in the pharmaceuticals industry would be willing to make.

Wednesday, June 12, 1991-NAS Green Building Room 104

2001 Wisconsin Avenue, NW, Washington, D.C.

National Research Council's

Committee on Japan

Introductory Comments by Chairman

Future Global Technology and Industry Trends

Break

Trends in Technology Linkages

Senior Management Perspectives (Working Lunch)

Roles for Universities and Government

Investment Issues

Concluding Discussion of ''Big Picture Questions''

Closing Remarks by Chairman

Adjourn

Other Participants/Discussants

Kathryn Lindquist, State of Maryland, Department of Economic and Employment Development

Lesley Russell, U.S. House of Representatives Committee on Energy and Commerce

Weijian Shan, University of Pennsylvania