Abstract
Introduction
In this discussion of the financing of industrial biotechnology innovation in Brazil we assess the current situation, bottlenecks, and the need to diversify company support instruments. It is well known that high-tech economic activities such as industrial biotechnology are high risk, with high degrees of uncertainty, and require substantial amounts of financial resources for their development. Within this group of sectors–comprised mainly of energy, food, or chemical companies ranging from those with basic technology to those who are world players–businesses must deal with the challenge of combining financing instruments and different partners into a network in order to innovate and be competitive. We seek to show that the Brazilian system of innovation needs to be more complex and capable of structuring more appropriate funding instruments for companies at different levels in the production chain, from the small to the large, and at different degrees of technological development.
Companies, Locations, and Areas of Activity
Biotechnology involves the use of cellular and biomolecular processes with the objective of developing products and technologies that can contribute to a better quality of life as well as to better environmental protection. Biotechnology activities have been practiced for many years. Recently, they have come to play a larger role due to the dissemination of biotech processes throughout various sectors of the economy.
In Brazil, companies in the biotech industry, or specifically companies that develop biotechnology activities in the areas of agriculture, bioenergy, the environment, and reagents for different sectors, number 109 (information regarding the number of companies in the biotech industry in Brazil and their features derives from a database created by the Brazilian Center for Analysis and Planning [Cebrap] and updated in 2014 as a result of doctoral research by Carlos Torres-Freire). 1 Half of these companies are located in the State of São Paulo, primarily in the capital and in important technology hubs in the State's interior such as Campinas and Piracicaba. A further 25% of them are in the two states of Minas Gerais and Rio de Janeiro. The remaining 25% of the companies are located in the south of Brazil and in a few of the northeastern states such as Ceará, Pernambuco, and Bahia. Regarding the principal activity areas of these companies, 42% develop products for agriculture, 24% for bioenergy, 20% focus on the environment, and the remaining 15% have more cross-cutting activities in the production of reagents, such as enzymes, that are used by companies in various sectors.
The fact that Brazil is one of the largest agricultural producers in the world has a direct impact on technological development in this area. The sector demands new technologies and research aids in the development of agricultural production. For example, the participation of Embrapa and public universities in transgenic research in Brazilian agriculture is widespread and positions the country among world leaders in both agricultural production and scientific output. This research and support were central to the development of soybean production in the Cerrado, fruit in the Northeast, and sugarcane in São Paulo.
Another group of companies with biotech activities in agriculture work in the area of biological control of crops with the direct use of live organisms and biopesticides. These are smaller-sized national companies with strong links to universities and research centers as well as to public research and development (R&D) funding. One example is BUG. The company was created in 2001 in Esalq, in Piracicaba, and develops and sells wasps that attack the eggs of pests like the sugarcane borer moth. It has received financing over the last 10 years from the São Paulo Research Foundation (FAPESP) through the Research for Innovation in Small Business (PIPE) program.
Bioenergy, an area in which Brazil is on the technological cutting edge, is the main focus of activity for 24% of the country's biotech companies. The State of São Paulo is responsible for half of national ethanol production, which increased rapidly during the first half of the 2000s. Brazil accounts for one third of the area planted in sugarcane worldwide and it produces approximately 25 billion liters of ethanol. 2,3 It should be noted that sugarcane processing plants that do not conduct research into second-generation ethanol or new reagents for first-generation ethanol are not considered to be businesses with biotech activities for the purposes of this article. They are, however, responsible for the numbers mentioned above. Of the approximately 400 sugarcane and biofuel plants in Brazil, many are located in the north of the State of São Paulo, in the western part of the State in the direction of the State of Paraná, and in the Northeast of the country.
Despite Brazil's biofuel industry crisis in the last 3 years, it has been observed that in the long term biofuel production has space to grow. World consumption is still small at around 1% of the total liquid fuels used in road transport, although in Brazil, ethanol accounts for 20% of the total. 4 This means that demand can increase a great deal.
The increase of renewable fuels use can significantly transform the production chain and bioenergy research, particularly with respect to biotech research related to yeasts and enzymes. With second-generation ethanol, for example, the principal process is enzymatic hydrolysis; the breaking down of the chain of cellulose polysaccharides. Here biotechnology is key in the search for the most appropriate enzymes (those with high yields and low cost). Additionally, there is also the search for better-suited microorganisms for the large-scale fermentation of pentose, which is the product of hemicellulose hydrolysis, another part of sugarcane that is rich in sugar. 4 In other words, funding of research and innovation regarding the genetic improvement of enzymes and yeasts can increase the productivity of ethanol, whether first- or second-generation.
Private sector biotechnology companies acting in the area of bioenergy in Brazil account for some parts of this research process. These are mainly large companies: production plants, multinationals, or joint ventures such as Syngenta (Basel, Switzerland), Novozymes (Bagsvaerd, Denmark), São Martinho (São Paulo, Brazil), GranBio (São Paulo), and Raízen (São Paulo; a joint venture between Shell and the Brazilian firm Cosan); or those with financing from giants from other sectors such as Odebrecht Agroindustrial and Butamax. It is also worth mentioning the case of CTC (São Paulo), which changed to become a limited company and is one of the main hubs for the genetic improvement of sugarcane-–the first project signed within the scope of PAISS, a joint plan between the Brazilian Innovation Agency (FINEP) and the Brazilian Development Bank (BNDES) for the sugar–ethanol sector was with CTC.
This brief overview demonstrates the background of the industrial biotechnology area. Some of the actions for the country to undertake to develop this segment can be achieved through policy decisions and new financing instruments. However, others demand an effort to coordinate and find linkages among the companies, research institutions and universities, and governments.
Market Dynamics: Big Players and Small Technology-Based Companies
In Brazil generally, there has been an upward trend in the number of companies involved in biotech activities since the middle of the 1990s. This means that the industrial biotech market in the country is composed mostly of young business enterprises. Most, 67%, were founded after 2000, during a period that saw greater investment in science, technology, and innovation.
In addition to being young, what is striking is that the majority of industrial biotechnology companies in Brazil are micro or small businesses: 68% have up to 50 employees (42% are companies with up to 10 workers). In other words, these are companies with a lean structure and that are still in the developmental phase of the product or process–a characteristic of economic activities based on science and high risks. On the other hand, 32% of the companies have more than 100 workers.
When one looks at the founders of these biotech businesses, it is possible to note that they come from essentially two sources: researchers linked to universities that started their own businesses, or professionals who left the biotech companies where they worked to open their own companies, often as spin-offs or to become suppliers to the larger original company.
In Brazil, this makes sense as 46% of industrial biotechnology companies have passed through business incubators or are still in them. Also, in the case of researchers, 70% of biotech companies have at least one owner with a post-graduate degree in their area of activity. This suggests that they were created by researchers with strong ties to academia, many of them probably as a result of their own research at the universities.
The fact is that the characteristics of the companies described above–small-sized, recently established, and by owner-researchers–help to understand the structure of the industrial biotechnology market in which large and small companies seek to cooperate. Small businesses have difficulty developing specific research, acquiring machinery and equipment, developing technical expertise and commercial capabilities, obtaining financing, dealing with regulatory hurdles, and taking on the process of patenting. These factors force them to look for partnerships with other businesses (particularly larger ones), for investors to finance their R&D, or for ties with public institutions to share research.
The other side of the coin is that the development of this specific knowledge by small businesses (and/or the university) is shared with large businesses, which are very interested in this collaboration precisely because they do not have one specific expertise or are not close to a university. In these arrangements, the large businesses bring regulatory, intellectual property, and market knowledge to the table as well as the structure for commercialization. On the other hand, the small businesses take on the responsibility for developing new scientific knowledge and specific technologies that, when combined with an adequate structure, can lead to new products. The cooperation between businesses can then be set up as a partnership for the joint development of products; joint venture, merger, or acquisition, in which expertise and resources are combined and risks are distributed. Licensing can also be a solution for looking for new technologies on one side, and for capitalization on the side of the license holder. The example of health care is well known, but in Brazil this also occurs in the biotech industry with the production of bioenergy, paper, and genetic improvements in agriculture, for example. Monsanto's (St. Louis, MO) purchase of the companies CanaVialis (São Paulo) and Allelyx (São Paulo) is a case in point when referring to the structure of the biotech market.
In addition to gaining genetic sugarcane improvements with the purchase of CanaVialis in 2008, Monsanto also acquired know-how in sorghum cultivation. This is a plant from the grass family, which like sugarcane can also be used for the production of ethanol. In 2011, the multinational commercially launched hybrid sorghum seeds (created using traditional transgenics methods) with characteristics such as greater productivity and disease resistance. 5
In the bioenergy sector, some of the large producers of sugar and alcohol are looking to develop new technologies for products and processes using biotech activities that go beyond their principal activity. São Martinho, for example, produces sugar and ethanol, but their Omtek unit produces yeast derivatives through biotech processes developed for the human and animal food markets. Grupo Balbo (São Paulo) has a commercial interest in PHB Industrial (São Paulo), which develops technology for biodegradable plastic resin made from sugarcane.
Verdartis (São Paulo) is another example. The small business, created out of research from USP Ribeirão Preto, with financing from FAPESP, from FINEP, and from the National Council for Scientific and Technological Development (CNPq), and located in a business incubator, is developing an enzyme for bleaching cellulose. The opportunity is interesting from a commercial standpoint, as the papermaking process requires expensive chemical compounds and care in the disposal of industrial waste. The enzyme acts by breaking down the cellulose substrate allowing for a reduction of chemicals used in the process. Through genetic engineering and bioinformatics, the company produces enzymes with specific characteristics for each industrial process. One of the principal clients for Verdartis could be Suzano Papel e Celulose (São Paulo), which has already worked with the company in the development of industrial scale catalyzers. 6
Our aim in this article is not to pursue a more detailed discussion about agriculture or bioenergy. Rather, our purpose is to assess the type of arrangements seen between large and small businesses in relation to the development of new products. We also focus on the opportunities for financing the innovation of the market structure of industrial biotechnology in Brazil.
Public Financing for Innovation by Companies in Brazil and Its Use by the Industrial Biotechnology Sector
Funding for innovation in Brazil occurs in an environment in which capital for investment is costly and meager. Since 2000, basic interest rates in Brazil have never been below 7.25% per year; they remained above 15% per year between 2000 and 2005. Accordingly, the country shows a low rate of investment–-less than 20% of Gross Domestic Product (GDP) since 2000–-and a short supply of credit to the private sector, equivalent to 69.1% of GDP in 2014 versus 125.2% when considering the world economy in the same year. 7,8
Based on both venture capital and private equity funds, the amount of investment is also restricted in Brazil: in 2013, these values were the equivalent of 0.37% of GDP versus 1.02% in the United States. 9 In an environment with these characteristics, innovative projects and business ventures–which require long-term effort and have high degrees of uncertainty–are particularly hampered. Based on the identification of these bottlenecks and on the questioning of the linear “science push” model, direct financing for businesses has been seen as an important component in the development of public policy regarding innovation in Brazil.
In general terms, companies in Brazil have access to the following means of funding for their innovation efforts: lines of credit with subsidized interest rates; grants; tax incentives; and direct investment (equity). Regarding the institutional arrangements of these instruments, FINEP and BNDES maintain lines of credit for innovation and operate with direct investment. FINEP is also able to offer resources for grants. Lastly, tax incentives are controlled by the Brazilian Department of Federal Revenue.
Table 1 shows resources invested by principal instruments for the year 2012. In the case of FINEP, an increase of 253% was seen in disbursements between 2012 and 2014, which shows some of the anticyclical measures adopted by the government as well as an effort to increase Brazilian productivity through innovation. 10 However, the expectation is that this value will diminish significantly in 2015 in line with the current fiscal and economic retraction.
Some public initiatives seek to fill the gaps in the availability of risk capital for small technology-based companies. FINEP, for example, instituted the INOVAR program in 2001, in which it selects seed capital, venture capital, and private equity funds for investments. The agency's participation portfolio in these funds corresponded to a total value of $243 million in 2012, distributed among 25 funds. 12 BNDES and Banco do Nordeste (BNB) also created a seed and venture capital fund called Criatec I, which had assets of $100 million in 2006. This fund was followed by two subsequent editions with similar assets in 2013 and in 2015. 13 Finally, at the state level, PIPE, launched in 1997 by FAPESP, deserves to be highlighted. Inspired by the Small Business Innovation Research (SBIR) program of the National Science Foundation, PIPE offers each selected company up to $360,000 dollars for conducting scientific and technological research projects and concentrates on spin-offs from universities. 14 Within the scope of this program, 1,204 projects have been concluded up to the present. 14
While the participation record categorizes the industrial biotechnology companies within the instruments mentioned, the existing databases are not systematized to the extent that permits comprehensive and complete segregation. However, in order to have even a partial measurement of this participation, we cross-referenced public information of governmental support for innovation with our own survey of companies active in the sector. Looking primarily at credit, it should be noted that the existing lines have an almost horizontal nature and go to various technologies used in industrial biotechnology (and are not specifically earmarked for biotechnology). In the credit portfolio of FINEP, looking at contracts from 2002 onwards, 12 companies from the sector were present, including Granbio, Suzano, and Grupo São Martinho, with a portion of them directed at the use of biomass for the manufacturing of plastics, fertilizers, and fuels. 15
With regard to financial subsidies, Brazilian regulations require that these resources be made available on a competitive basis through public calls for bids. In this case, projects are better directed when defining the technological areas or sub-areas likely to receive support. Table 2 sums up public calls for subsidies posted and highlights values reserved for biotechnology. Looking at the results of these public tenders, 17 industrial biotech companies can be identified, including the previously mentioned Verdartis. 15 When looking at the content of these proposals, one can see a predominance of projects related to the agricultural chain including biopesticides, biofertilizers, and seed inoculants as well as the production of second-generation ethanol. 16
Public Calls for Financial Subsidies for Innovation 16
As one can see, Brazil offers companies a range of programs and financial instruments, but there continues to be dissatisfaction with the impact of these efforts. Among the primary problems with these programs are precisely the lack of a formal system and a lack of ongoing evaluation. Indications of problems include the following: • The stagnation of productivity in the economy, especially in the industrial sector • Exports continue to be based on commodities • Investments in R&D are still dominated by public sources, or in other words, there has been no significant leverage effect • Low patent activity in contrast to the trajectories of Chinese and Indian companies • Concentration of support in large companies
Similarly, in the case of industrial biotechnology, there is still much to be achieved given the potential of the country, considering the biodiversity across its territory, and taking into consideration the research professionals and infrastructure in addition to the impetus for innovation.
Conclusions
While Brazil does provide mechanisms for supporting innovation, they are still insufficient to leverage the country's resources and capabilities in industrial biotechnology. The combination of financial instruments currently implemented in view of the arrangements between the sector's large and small companies, suggests the need to re-think the use of lines of support and identify better ways to tailor them according to the stages of the company within the production chain. Access to better financing conditions is concentrated in those companies that are in good financial health or belong to large groups. Small businesses, where radical innovations and possible paradigm breaks may occur, confront major obstacles in finding access to more favorable conditions.
To this end, efficient support instruments for technology-based business startups can contribute to the dynamism of the sector. How can support be given to these small businesses and help them overcome the so-called “valley of death?” How can a more stable and consistent funding structure be maintained, and how can the private sector be brought in to support innovation in this segment? These are some of the questions that, among others, could be the focus of future research into the analysis of possible policy innovations that would contribute to the reduction of bottlenecks and bring about gains for Brazil given the existing potential of industrial biotechnology.