Cancer treatment is a major focus of biotechnology research in the United States. In 1988, over two-thirds of U.S. biotechnology patents were in the health care field and half of biotechnology medicines tested on humans or awaiting Food and Drug Administration (FDA) review were related to cancer treatment (Smigel, 1989).
Despite the great promise of genetically engineered synthetic drugs, "natural products" derived from plant and animal materials remain a basic source of many pharmaceuticals. Approximately half of the world's medicines contain some natural product (Brown and Swierzbinski, 1985). Production of many drugs by complete synthesis, though technologically feasible in the laboratory, remains prohibitively expensive on a commercial scale.
The importance of natural products is both good news and bad news for medical researchers. The good news is that ingredients for treatment of cancers, AIDS, and other diseases literally may be "growing on trees." The bad news is that many medicinal plants are in scarce and dwindling supply. Many such plants grow in the wild and previously were thought to lack significant commercial value. Consequently, little economic incentive exists to preserve the habitats of these valuable resources.
The case study here examines the commercial development of the anticancer drug taxol, which researchers derive from Pacific yew tree bark. One can draw two principle lessons from the study. First, advances in genetic research have blurred the boundaries between agricultural, forest, and medical science and made natural resource and innovation policy issues increasingly interconnected. Thus, industries that rely on the manipulation of genetic materials have a stake in the preservation of genetic resources. Second, although institutional innovations in research arrangements are critical to biotechnology development, policymakers do not fully understand the economic implications of these arrangements. Research arrangements include public/private cooperative research agreements and public research institutions' use of patents and licensing. These new research arrangements do not easily lend themselves to traditional economic analysis. In particular, theoretical distinctions between "public sector" and "private sector" research and development (R&D) are inaccurate and of limited use in evaluating innovation policy.
II. HISTORICAL BACKGROUND
Taxol disrupts cancer cell growth and shrinks tumors of some late-stage ovarian and breast cancer patients. Approximately 30 percent of ovarian cancer and 50 percent of advanced breast cancer patients have responded to taxol treatment (Blume, 1991). Clinical trials have begun to examine the drug's effectiveness in treating lung and other cancers (Cragg et al., 1991). Over 200,000 people die per year of ovarian, breast, and lung cancer in the United States. Thus, taxol's development has potentially great social and economic significance.
A. Discovery and Initial Tests
Collecting and screening natural products involves a public goods problem for firms that may be unable to prevent others from free-loading on their initial investment. Raw plant and animal materials occur naturally and cannot be patented. Thus, firms would have difficulty excluding others from either exploiting genetic materials contained in plants and animals or from gathering information about the value of such materials (Brown and Swierzbinski, 1985). These difficulties discourage firms from making investments to determine the market potential for natural products. Expected private returns from the search for anticancer agents are less than the full social benefits, leading to private under-investment in such basic research.
In 1960, the National Cancer Institute (NCI) entered into an interagency agreement with the U.S. Department of Agriculture (USDA) to search for natural anticancer agents. …