Implications of Biosafety Regulatory
Costs and Time Delays on R&D
José Falck Zepeda
Senior Research Fellow
International F...
Issue #1. Recuperating a specified return
over time
Model 1. A simplified “typical”
biotechnology developer
• Typical biotech investor Phillips
McDougall 2011)
– Invests US$ ...
Marginal loss of net cash flow from delays in
regulatory approval process (IRR = 20%)
50.0

If IRR is 50% then
threshold c...
Issues and Implications
• Regulatory delays have a negative impact on
returns to investments
• With a 20% rate of return, ...
Issue #2. Recuperating an investment with increases in
cost of compliance or delays in the onset of benefits
Case study 1. Model investor case
study (continued)
• 136 million US$ with a recovery time of 10
years
• 20% rate of retur...
NPV with increasing time to onset of
benefits
40,000,000
20,000,000

(20,000,000)

Year 0
Year 1
Sum of cash
flows
389,269...
Impact of risk and uncertainty on the
stream of benefits over time
• What happens to the riskiness of
investments as the o...
Risk impacts and the stream of
benefits
40

20

Values in Millions

0

Wider
dispersion
around the
mean …
the higher
the r...
Impact of risk and uncertainty in the
stream of benefits
• Investment returns become riskier over time for
a well characte...
Case study 2. Net benefits from the
adoption of GM crops in the Philippines
Bt
MVR tomato
eggplant
Net Benefits
baseline
(...
Contrasting baseline net benefit levels from GE
crop adoption with higher costs in the Philippines

Notes: 1) Source: Baye...
Contrasting benefit levels from GE crop adoption
with larger regulatory lags in the Philippines

Notes: 1) Source: Bayer, ...
Issues and implications
• Regulatory costs are not likely to have a significant impact
on the returns to investment
• Exce...
Issue #3. Regulatory and knowledge
cost/benefit tradeoffs
Cost and benefit tradeoffs
• Learning process and the avoidance of
negative impacts
• Face the issues of irreversibility, ...
Case study 3. The case of fungal
resistant bananas in Uganda
• Ex ante study – used the real
options approach
• Conclusion...
Potential implications for decision
making (1)
• Gain more and/or better information about
technology impacts for decision...
Potential implications for decision
making (2)
• Additional requirements will increase the cost of
regulatory compliance
•...
Socioeconomics, regulatory delays and
decision making
• Policy option for parties to the Cartagena Protocol on
Biosafety i...
Time to change and develop functional
biosafety and decision making systems
in an era of absolute transparency
“To continu...
Obrigado!!! Gracias!!!
José Benjamin Falck-Zepeda
Senior Research Fellow / Leader Policy Team Program for Biosafety System...
Article 26.1 of the Cartagena Protocol on Biosafety
• Applies to decision on
import only, or
• National measures
• Volunta...
FALCK ZEPEDA GMCC 2013 Implications of Biosafety Regulatory Costs and Time Delays on R&D
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FALCK ZEPEDA GMCC 2013 Implications of Biosafety Regulatory Costs and Time Delays on R&D

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Presentation I made at the GMCC13 conference in Lisbon. Here I discuss the implications for the public and private sector innovation from time and cost delays due to regulations. I pay special attention to the implications from such delays in terms of the type and number of public sector technologies addressing developing countries' problems of a public good nature.

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FALCK ZEPEDA GMCC 2013 Implications of Biosafety Regulatory Costs and Time Delays on R&D

  1. 1. Implications of Biosafety Regulatory Costs and Time Delays on R&D José Falck Zepeda Senior Research Fellow International Food Policy Research Institute - Program for Biosafety Systems (IFPRI - PBS) Photos: Bt/RR maize Isabela province, Northern Luzon, Philippines, 2012. Philippines had approximately 500,000 hectares of Bt/RR maize under cultivation. Program for Biosafety Systems – http://pbs.ifpri.info/
  2. 2. Issue #1. Recuperating a specified return over time
  3. 3. Model 1. A simplified “typical” biotechnology developer • Typical biotech investor Phillips McDougall 2011) – Invests US$ 136 million in a new GM crop – Average time for regulatory approval of 48 months • Financial implications of a 20% rate of return – Require a total Net Present Value (NPV) of US$ 27.2 million – Each year of delay represents a loss in NPV of US$ 22.7 million Source: Smyth, McDonald and Falck-Zepeda, 2013
  4. 4. Marginal loss of net cash flow from delays in regulatory approval process (IRR = 20%) 50.0 If IRR is 50% then threshold closer to 4 years!!! 40.0 30.0 Marginal Loss (%) 20.0 10.0 0.0 1 2 3 4 5 6 7 8 9 Years Threshold Source: Smyth, McDonald and Falck-Zepeda, 2013 10 11 12 13
  5. 5. Issues and Implications • Regulatory delays have a negative impact on returns to investments • With a 20% rate of return, expect year 6 of regulatory delay to be the trigger point for suspending investment in new R&D projects • Current regulatory approvals taking 48 months implies that the upper boundary has likely been reached Source: Smyth, McDonald and Falck-Zepeda, 2013
  6. 6. Issue #2. Recuperating an investment with increases in cost of compliance or delays in the onset of benefits
  7. 7. Case study 1. Model investor case study (continued) • 136 million US$ with a recovery time of 10 years • 20% rate of return on investment in real terms – NPV of the investment is 27.2 million dollars – Require a stream of nominal payments of 38.9 million per year • Allow same number of payments and value of each payment, but increase time to onset of the benefits
  8. 8. NPV with increasing time to onset of benefits 40,000,000 20,000,000 (20,000,000) Year 0 Year 1 Sum of cash flows 389,269,139 389,269,139 Present value 163,200,000 136,000,000 (40,000,000) NPV 2 4 6 8 NPV (US$) 0 10 27,200,000 - (60,000,000) (80,000,000) (100,000,000) (120,000,000) Year after onset of benefits NPV • Keeping same number of payments + rate or return (20%) • Losses from delays compared to the baseline of no-delay Year 2 389,269,139 108,967,421 (27,032,579)
  9. 9. Impact of risk and uncertainty on the stream of benefits over time • What happens to the riskiness of investments as the onset of benefits is pushed into a later date? • Repeat NPV calculation for the “model” investor using @RISK to conduct simulation through repeated iterations
  10. 10. Risk impacts and the stream of benefits 40 20 Values in Millions 0 Wider dispersion around the mean … the higher the risk -20 -40 -60 -80 -100 -120 1 2 3 4 5 6 7 Years of regulatory delay 5% - 95% +/- 1 Std. Dev. Mean 8
  11. 11. Impact of risk and uncertainty in the stream of benefits • Investment returns become riskier over time for a well characterized recovery path • What happens if developers forced to “forsake” the element of predictability? – Ambiguity: Cannot make a determination due to lack of knowledge about parameters (e.g. completion of regulatory process) – Uncertainty: Unexpected events • Likelihood that an investment will not be made increases with increased uncertainty and ambiguity
  12. 12. Case study 2. Net benefits from the adoption of GM crops in the Philippines Bt MVR tomato eggplant Net Benefits baseline (NPV in US$) 20,466,196 16,748,347 Bt rice PRSV resistant papaya 220,373,603 90,765,793 Effect of increasing cost or time of compliance Source: Bayer, Norton and Falck Zepeda (2008)
  13. 13. Contrasting baseline net benefit levels from GE crop adoption with higher costs in the Philippines Notes: 1) Source: Bayer, Norton and Falck Zepeda (2008), 2) Baseline values for each technology expressed in millions US$ using a discount rate for the estimation of Net Present Value = 5%, 3) Change in Net benefits defined as the total benefits estimated using the economic surplus minus total regulatory costs.
  14. 14. Contrasting benefit levels from GE crop adoption with larger regulatory lags in the Philippines Notes: 1) Source: Bayer, Norton and Falck Zepeda (2008), 2) Baseline values for each technology expressed in millions US$ using a discount rate for the estimation of Net Present Value = 5%, 3) Change in Net benefits defined as the total benefits estimated using the economic surplus minus total regulatory costs.
  15. 15. Issues and implications • Regulatory costs are not likely to have a significant impact on the returns to investment • Exception are organizations that have budget/financial constraints – National research organizations in developing countries – International research systems developing public good products – Small private firms in developing countries • Regulatory delays have a significant negative impact on net returns – Number and type of technologies – More “higher return” products and less public good products
  16. 16. Issue #3. Regulatory and knowledge cost/benefit tradeoffs
  17. 17. Cost and benefit tradeoffs • Learning process and the avoidance of negative impacts • Face the issues of irreversibility, ambiguity and uncertainty – Irreversibility is one of foundation blocks of the precautionary principle/approach and regulatory protocols such as the Cartagena Protocol on Biosafety
  18. 18. Case study 3. The case of fungal resistant bananas in Uganda • Ex ante study – used the real options approach • Conclusions – If approval delayed, forego potential annual (social) benefits of +/- US$200 million – Maximum total development costs cannot exceed US$108 million. Citation: Kikulwe, E., J. Wesseler and J. Falck-Zepeda. 2008. Introducing a Genetically Modified Banana in Uganda: Social Benefits, Costs, and Consumer Perceptions. IFPRI Discussion Paper 767, Environment and Production Technology Division, International Food Policy Research Institute, Washington, D. C. USA. Copyright Kikulwe © 2009
  19. 19. Potential implications for decision making (1) • Gain more and/or better information about technology impacts for decision making - may support valuable technologies • Need to balance gains in information, additional costs & effort, and impacts on innovation • Potential for introducing uncertainty that can lead to an unworkable system especially with ill defined process
  20. 20. Potential implications for decision making (2) • Additional requirements will increase the cost of regulatory compliance • Potentially regulatory delays will likely cause a – reduction in the number of technologies especially those released by the public sector and crops/traits of a public good nature – some public sector institutions may not be able to deploy technologies due to fixed costs necessary to enter market
  21. 21. Socioeconomics, regulatory delays and decision making • Policy option for parties to the Cartagena Protocol on Biosafety in Article 26 • Multiple approaches possible for implementation • Prudent to carefully evaluate tradeoffs including implementation issues – Clearly defining scope and issues – Methods and assessment approaches – Integration with environmental/food/feed safety assessment – Compliance with other international treaties – Consistency with national laws and regulations – Proportionality
  22. 22. Time to change and develop functional biosafety and decision making systems in an era of absolute transparency “To continue making things as we have done until now is not an option: we must develop a shared vision between agriculture and environment agendas and move towards a paradigm shift” “We must face the challenges with technology, not ideology…including developing proper governance and regulatory processes that work” From a declaration of scientists and regulators at the 2012 Central American Conference on Agriculture and Environment (CIAA) at Zamorano University in Honduras
  23. 23. Obrigado!!! Gracias!!! José Benjamin Falck-Zepeda Senior Research Fellow / Leader Policy Team Program for Biosafety Systems IFPRI 2033 K Street NW Washington, DC 20006-1002 USA j.falck-zepeda@cgiar.org Brief bio/pubs: http://www.ifpri.org/staffprofile/jose-falck-zepeda Blog: http://socioeconomicbiosafety.wordpress.com/ Follow me on Twitter: @josefalck
  24. 24. Article 26.1 of the Cartagena Protocol on Biosafety • Applies to decision on import only, or • National measures • Voluntary – NOT mandatory • Especially WTO • Strictly a specific focus and target group • Explicit impact indicator 1 . The Parties, in reaching a decision on import under this Protocol or under its domestic measures implementing the Protocol, may take into account, consistent with their international obligations, socio-economic considerations arising from the impact of living modified organisms on the conservation and sustainable use of biological diversity, especially with regard to the value of biological diversity to indigenous and local communities

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