Program for Biosafety Systems – http://pbs.ifpri.info/

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)

Three basic issues related to investments and regulatory costs and benefits

1. Recuperating an amount of investment return over time

2. Recuperating an investment with increases in cost of regulatory compliance or delays on the onset of benefits

3. Regulatory and knowledge cost/benefit tradeoffs

Issue #1. Recuperating a fixed amount of return over time

Model 1. A simplified “typical” biotechnology developer

• Invests US$ 136 million in a new GM crop

• Endures an average time for regulatory approval of 48 months (Phillips McDougall 2011)

• Financial implications of a 20% rate of return

– Require a total NPV of US$ 27.2 million

– Each year of delay represents an NPV of US$ 22.7 million

Source: Smyth, McDonald and Falck-Zepeda, 2013

Marginal loss of net cash flow from delays in regulatory approval process (IRR = 20%)

0.0

10.0

20.0

30.0

40.0

50.0

1 2 3 4 5 6 7 8 9 10 11 12 13

Marginal Loss (%)

Years

Source: Smyth, McDonald and Falck-Zepeda, 2013

Threshold

If IRR is 50% then

threshold closer to

4 years!!!

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

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)

• Investor conducts investment of 136 million US$ with a desired period of recovery of 10 years

• Investor requires a 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

NPV with increasing time to onset of benefits

(120,000,000)

(100,000,000)

(80,000,000)

(60,000,000)

(40,000,000)

(20,000,000)

-

20,000,000

40,000,000

0 1 2 3 4 5 6 7 8 9

NP

V (

US$

)

Year after onset of benefits

NPV

Keeping same number of payments + rate or return (20%)

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 over time?

• Repeat NPV calculation for the “model” investor using @RISK to conduct simulation through repeated iterations

Risk impacts and the stream of benefits

-120

-100

-80

-60

-40

-20

0

20

40

1 2 3 4 5 6 7 8

Valu

es

in M

illio

ns

Years after the onset of benefits

5% - 95% +/- 1 Std. Dev. Mean

Impact of risk and uncertainty in the stream of benefits

• Dispersion around net benefits increases over time => Investment returns become riskier

• Note that we have the ability to characterize recovery path and its parameters…

• What happens if investor cannot make a determination of the NPV?

– Likelihood that an investment will not be made increases due to uncertainty

Case study 2. Net benefits from the adoption of GE crops in the Philippines

Bt eggplant

MVR tomato Bt rice PRSV resistant papaya

Net Benefits baseline (NPV in US$)

20,466,196 16,748,347 220,373,603 90,765,793

Effect of increasing

cost or time of

compliance

Source: Bayer, Norton and Falck Zepeda (2008)

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.

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.

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

– Impact on the number and type of technologies

– More “higher return” products and less public good products?

Issue #3. Regulatory and knowledge cost/benefit tradeoffs

Cost and benefit tradeoffs

• Learning process - gains in knowledge through increased experimentation and/or inclusion of socioeconomic in decision making are possible

• Delays may have a positive impact if it helps avoid potential negative impacts

• Face the issue of irreversibility – Costs and benefits that may not be ever reversed

– One foundation of the precautionary principle/approach and regulatory protocols such as the Cartagena Protocol on Biosafety

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.

– Even considering irreversibility, adoption still benefits Uganda

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

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

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

Time to change and develop functional biosafety and decision making systems

“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 at the 2012 Central American Conference on Agriculture and Environment (CIAA)

SOCIO-ECONOMIC CONSIDERATIONS IN BIOTECHNOLOGY REGULATION Edited by: • Karinne Ludlow, Monash University, Australia • Stuart J. Smyth, University of Saskatchewan, Canada, and • José Falck-Zepeda, International Food Policy Research Institute,

USA Discusses 15 methodological areas ranging from impacts on producers and society and environment to trade, indigenous knowledge and ethical/equity. Includes also discussions on background and issues related to decision making. Springer Editors Spring 2014

José Benjamin Falck-Zepeda, Ph.D.

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

Food safety issue

RISK scientific RISK socially constructed RISK modern RISK political

High cholesterol foods High Moderate Moderate Low - moderate

Foods high in sugar High Moderate Moderate - high Moderate

High sodium foods Moderate Low Moderate Low

Dead mouse in beverage bottle

Low – high High High Low

Dead frog in package of frozen vegetables

Low – moderate

High High Low

E-coli in hamburgers High Low Moderate Low

Salmonella High Low Moderate Low

Mycotoxins High Moderate High - moderate Low

Filth and extraneous materials (insect fragments, stones, twigs, rodent manure)

High High High Low

GM foods Low High High High