Last March, Swiss agbiotech company Syngenta AG announced that it had accidentally sold U.S. farmers an unapproved type of genetically modified (GM) corn seed. And it had done so for four years. Farmers could have planted approximately 37,000 acres of the GM corn, according to the company’s estimate.

How did this happen? Syngenta had developed two strains of corn, Bt10 and Bt11, engineered to express Bacillus thuringiensis toxin protein as a pesticide. The company obtained approval to sell Bt11 for food and feed use and for cultivation in the United States, Canada, Argentina, Japan, South Africa, and Uruguay. Syngenta also acquired approval for food and feed use in the European Union, Switzerland, Australia, New Zealand, Taiwan, the Philippines, China, Russia, and Korea. Somehow, Bt10 seeds—retained for research—became inserted into five Bt11 seed production lines, which were sold to U.S. farmers beginning in 2001.

The error surfaced after the company overhauled its quality control program to screen products with a DNA-based test, instead of relying on field observations and examinations of certain proteins. The Bt10 contamination probably eluded earlier tests for a simple reason: Bt10 and Bt11 are difficult to distinguish. Physically identical, Bt10 and Bt11 express the same Bt toxin protein and contain a herbicide tolerance marker gene for selection. Although Bt10 has an extra, inactive antibiotic resistance marker gene, Syngenta says the main difference between Bt10 and Bt11 is that their genomes contain novel genes in different chromosomal locations.

After the discovery of the mix-up, Syngenta informed the Environmental Protection Agency, the Food and Drug Administration, and the U.S. Department of Agriculture. This was in mid-December 2004. By the end of March 2005, the EPA and USDA concluded that Bt10 contamination does not raise concerns about the environment or human and animal health.

All Bt10-tainted plantings and seed stock have been identified and destroyed or otherwise contained. Farmers must buy new Bt11 corn seed every year, so Bt10 should not be sown again. Yet a lingering problem remained. Syngenta suggested that Bt10 might have slipped into the food supply and international export channels. It had.

In early April, a European Union representative told reporters that about 1,000 tons of food and feed products containing Bt10 are thought to have entered the food chain in Europe. It wasn’t until late March that the European Commission learned about the Bt10 error, a delay that increased aggravation with the United States over GM crops.

EU Member States backed a Commission proposal to require U.S. corn gluten feed and brewers grain to be certified Bt10-free. Since a validated Bt10 detection method did not yet exist, the new measure acted as a ban until EU regulators approved a new test. By the end of April, the EU’s Joint Research Center did endorse a new DNA-based test for the unauthorized Bt10 and ended the short-lived ban. Now, shipments of U.S. maize gluten feed and brewers grain must include an analytical report concluding that the product does not contain Bt10.

By May 29, about 290 tests for Bt10 had been conducted on EU-bound maize products. One test caught a contaminated shipment of Ireland-bound corn gluten feed, and U.S. officials sent a warning before the ship arrived. Irish authorities took steps to ensure that the consignment would not enter the feed chain.

Around the same time, an American shipment tainted with Bt10 cropped up in Japan, the biggest buyer of U.S. corn. Japanese officials promised to test every U.S. vessel when it arrived and asked the United States to conduct its own tests of corn shipments before they left port. Although the United States requested a one percent tolerance threshold for Bt10 contamination, the Japanese government allows no exceptions to the zero tolerance rule on crops for human consumption.

Allocating responsibility with a baseball bat
GM crop contamination events tend to bring up the question of assigning costs. A USDA official told Reuters that his agency would not pay fees for performing Bt10 tests on Japan-bound corn at U.S. ports. Rather, private exporters or Syngenta would have to foot the bill. In 2000, the outbreak of Aventis CropScience’s StarLink corn also raised the issue of who bears the responsibility for an accidental contamination with crops containing a genetically engineered trait.

Strict liability theory could provide a solution for assigning responsibility. Strict liability is a type of liability without fault in which a person engages in an "abnormally dangerous" activity. Factors that a court may consider in determining whether an activity is abnormally dangerous include whether the activity involves a high degree of risk of harm, whether the gravity of the harm that may result from the activity is likely to be great, and whether the activity carries risk that the exercise of reasonable care cannot eliminate. A legislature can also define a certain type of activity as one evoking strict liability.

In 2005, California Assemblyman John Laird (D-Santa Cruz) introduced the Food Integrity and Farmer Protection Act, which would enable farmers to collect damages for an unintentional contamination with GM crops. The manufacturer of a GM plant or seed would be liable for the contamination of a farm product, facility, or other property of any farmer, grain and seed cleaner, handler, or processor. The law would supply a manufacturer with a defense if a farmer or another party caused the contamination deliberately or by gross negligence. The bill is on hold until 2006.

Other states have tread down this path. The Vermont Senate, for instance, approved similar legislation in April ("Liability Resulting from the Use of Genetically Engineered Seeds and Plant Parts"). If enacted, GM seed manufacturers would be liable for any damages suffered by farmers. Yet the House Agriculture Committee voted unanimously in May against bringing the bill to the full House. Massachusetts and Hawaii legislatures also introduced strict liability bills in 2005. Neither passed muster. Why do lawmakers show so little enthusiasm for strict liability?

Earlier this year, the Montana Senate mulled over legislation that would make manufacturers of GM wheat seed liable for damages resulting from the seed’s introduction into the state. Opponents of the bill, including two of Montana’s largest farm groups, argued that such a law would discourage companies from bringing genetically improved seed to Montana. A representative of the Montana Grain Growers Association asserted that, if enacted, the legislation would create a moratorium on the development of new technology for the state. Others voiced concern that the law would chill seed research by start-up companies and at Montana State University. "Probably dead" is the official status of the bill.

A strict liability bill also came up for discussion in the Hawaiian Senate this year; it has been deferred indefinitely. Echoing arguments from Montana, the state Board of Agriculture opposed the bill, arguing that it would limit the state’s ability to explore new technology.

When Vermont Senator Robert Starr (D-Essex/Orleans) discussed his state’s GM crop contamination legislation with the Times Argus, he said that "the dog in this bill is strict liability." Starr compared an implementation of the strict liability provision to "killing a fly with a baseball bat."

Legislators appear unwilling to accept the possible consequences of a strict liability law as a means to protect farmers. An alternative to assigning costs for a realized risk of GM crop contamination would be to minimize the risk in the first place.

The USDA issued several penalties to Syngenta for the Bt10 affair: a $375,000 fine for moving Bt10 material through interstate commerce without a permit, and a requirement for the company to sponsor a training conference on compliance with USDA biotech crop regulations. One of the conference goals is to develop best management practices that should prevent contamination of novel genes from GM plants. If such standards were devised, then simple negligence may suffice to allocate responsibility for any future GM crop contamination.

Selected Sources
Ames P. EU considers suspending U.S. corn gluten imports in biotech dispute. Associated Press. April 12, 2005

Last month, Part 1 of this article highlighted some of the dangers of unqualified growth of biotech firms including non-optimal market sizes, destructive competitive actions, environments that reward fraud, and higher costs to support increasingly complex operations. However, these failings should not undermine the importance of smart growth for businesses in particular industries, product phases, or affected by specific market dynamics. Firm growth is typically more important within an industry that is growing as a whole. New industries, like biotech, are more likely to require growth than mature or declining industries.

More importantly, this article does not seek to discourage growth fueled by value-added activities and novel innovation. Rather, it is trying to probe biotech management to ask, should my company grow? When is growth a good idea? Sustainable growth stems from enhancing the value proposition to a larger natural market. In determining whether new firms survive, managers should not ask whether a firm can engage in "business as usual," but rather can it do something different from incumbent firms—is it an agent of change?¹ Success in today’s environment is discovered in strategies that ingeniously find and create value, not simply promote traditional growth.

How to grow: Networking & alliances
A new breed of biotech firm is prospering by growing through downsizing. Instead of maintaining competitiveness by leveraging operational functions across a massive scale, these firms are keeping only the intellectual capital that is critical to its competitive advantage in-house and then outsourcing the rest. The model works well for several reasons. First, biotech firms can reduce the risk and time it takes to achieve productivity improvements by contracting with specialist vendors who are more efficient and nimble. In recent years, small biotech start-ups have been more successful at developing products and then licensing the technology to larger firms with superior manufacturing and marketing capabilities, thereby creating value for both parties². Secondly, by outsourcing and partnering, biotech firms gain access to global learning networks that facilitate technology transfer and industry-wide innovation without incurring M&A integration costs and premiums. Lastly, through strategic outsourcing, fixed costs become variable and the organizational model is more flexible and responsive to the market, eliminating the need to coordinate vast global operations and employees.

How to grow: Deploy resources more effectively
Managers of small biotech firms are certainly aware of the disadvantages they face in terms of scale production, access to capital, as well as limited human and technological resources. Nevertheless, economists have found the persistence of small-firm predominance striking—constant across almost every industry, across time, and across developed nations. One economist postulated, "Virtually no other economic phenomenon has persisted as consistently as the skewed asymmetric firm size distribution [favoring small firms]."³ Successful managers leverage the ability for small firms to compete by creatively employing factor inputs. For instance, smaller firms can avoid labor rigidities and therefore can become more competitive through workforce relations. Additionally, such firms are typically more "flat" and can therefore avoid the costly management hierarchy needed in larger firms. Lastly, small companies can implement more flexible production and new product development methods—they effectively pursue critical strategies of timely process and product innovation.

How to grow: Manage for innovation
Navigating growth in today’s competitive environment requires sophisticated management practices that many start-up biotech firms lack. Particularly for companies moving from late discovery to commercial development, the need to adopt more disciplined management is paramount.

One study has found a striking bottom-line differential between those firms with strong management and those without. Mardis, Aibel, and Associates, a biotechnology management consulting firm, demonstrated a 20 percentage point gap in the average annual growth rate in market value between public biotechnology companies that make use of best management practices and those that do not⁴. Looking at total valuation over ten years, the analysis of North American biotech firms found that the firms in the top half of the sample, in terms of effective management practices, outperformed those in the bottom half by more than a four-to-one margin, on average. For instance, the impact for a biotech firm with a market capitalization of $200M, over ten years, translates into a value gap of over $2B between well and poorly managed firms. However, they found that only 5% of biotech companies have adopted the full range of practices defined as constituting operational excellence. Specifically, their study stresses the importance of five key management practices in the biotech sector:

1. Structuring the business around cross-functional processes and programs;

2. Use of budgeting as a strategic tool, not a perfunctory exercise;

3. Rewarding managers and teams for setting and then achieving aggressive objectives;

4. Establishing a well-understood process for shutting down ineffective programs; and

5. Treating management as a professional discipline, not a part-time job.

More generally, economic research has shown that increasing competitive pressure via new firm entry is particularly prevalent in sectors where small firms tend to have the innovation advantage, such as in biotechnology. Yet such research also shows that these industries tend to be more turbulent, making it more difficult to survive. For this reason, it is imperative for small firms and start-ups to implement management structures that promote factors found to increase the probability of long term success. Across small businesses, four themes in management consistently appear to create an environment that spurs successful growth:

Specifically, researchers surveyed small, newly established enterprises and tested the impact of the four themes above by identifying nine activities that promoted growth sustainability: (1) clear enterprise vision; (2) full delegation of authority and democratic leadership system; (3) a system for encouraging employee suggestions; (4) implementation of education and training; (5) implementation of employee stock options; (6) an R&D system and undertaking R&D activity; (7) attaching importance to employee career planning; (8) internal management through an intranet system; and (9) online marketing. ‘Innovative actions’ resulted in the most impressive sustainable sales growth, while cultivation of an ‘innovative atmosphere’ and ‘capability to innovate’ within the organization had the greatest impact on profits.

More specifically to the biotech arena, different managerial skills are needed at different stages of company growth. Biotech companies tend to have strong leaders during the early stages of growth, but unfortunately do not often develop management structures needed for later stages. The task of evolving organizational and operational practices, especially in cases where the company is still led by an original "scientist-founder," can be a difficult, if critical, transformation⁶. Typical impediments to successful transformation include failing to plan adequately, failing to dedicate sufficient resources, inadequacies in communication, a lack of proactively addressing cultural resistance, and an inability to deal effectively with staffing issues.

The Mardis, Aibel, and Associates’ survey (mentioned above), which interviewed 200 biotech executives, revealed that managers became increasingly dissatisfied with their own performance as their company grew. Tellingly, the executives reported that tracking and measuring performance, building integrated performance management systems, creating cost-efficient repeatable processes, having world-class IT, and finding good outsourcing supplies were the activities that received the least management attention. Yet these are the very activities found to foster innovation and create competitive advantage. Indeed, a shortfall of experienced managers with a biotechnology background has begun to be recognized. Business schools are responding, such as the University of Buffalo, which recently launched a concentration in biotech management courses at the graduate level⁷. The hope is that a new generation of leadership, trained to develop and implement proven management techniques, will help promising biotech firms bridge the chasm between capital-intensive product development and profit-intensive product commercialization.

The pressures to grow are real and intense for many small and medium-sized firms. However, the underlying motivation for growth—firm survival—is often not served through growth-focused strategies. Instead, small biotech firms can leverage competitive advantages available to them, specifically because they are small, such as more market-focused products, strategic flexibility, and specialized competencies. Most importantly, if firms can implement managers and management systems that focus on innovation and entrepreneurship rather than unqualified growth, the propensity for long-term success is secured.

1. Kenneth Preston. Managing Growing Companies course taught at New York University, Stern School of Business, 2004

Several developing countries now have well-developed biotechnology programs; they are approaching the leading edge of biotechnology applications and have significant research capacity, according to a new FAO assessment on the status of research and application of crop biotechnologies in developing countries.

Based on a review of the information in the FAO database on Biotechnology in Developing Countries (FAO-BioDeC), which covers both genetically modified (GM) crops and non-GM biotechnologies, the assessment suggests that developing countries will soon have new GM crops available such as virus-resistant papaya, sweet potato and cassava, as well as rice tolerant to abiotic stresses (salinity and drought).

Focus on food security
Most of the GMOs commercialized so far in developing countries have been acquired from developed countries and focus on a limited number of traits (mainly herbicide tolerance and insect pest resistance) and crops (commodities such as cotton, soybean, and maize).

However, the FAO assessment reveals that several developing countries have been conducting research on a wider range of crops, such as banana, cassava, cowpea, plantain, rice and sorghum, and on traits relevant for food security, such as abiotic stress tolerance and quality.

Argentina, Brazil, China, Cuba, Egypt, India, Mexico, and South Africa have taken the lead. A second group of countries has medium-scale agricultural biotechnology programs, usually in a few key areas. Other developing nations have relatively limited research capacity, according to the FAO report.

"We hope that research activities in developing countries will increasingly focus on issues important for food security," said Andrea Sonnino, from FAO’s Research and Technology Development Service.

Noticeable gaps
There are, however, some noticeable gaps in research. For example, no research is reported in the field of nematode resistance despite the considerable losses caused by these plant parasites. Another fundamental but neglected research problem concerns post-harvest losses.

The study also notes that biosafety capacity building is needed to enable many countries in Africa, Eastern Europe, Latin America, and the Near East to benefit fully from GMO technology.

Regarding non-GM biotechnologies, many are being used on a commercial scale but only a few studies have been carried out to assess their socio-economic impacts. The report highlights that this is an area needing urgent attention as it is likely to help guide research and technology policies and investments towards wider and efficient utilization of all biotechnologies.

FAO-BioDeC
Launched in 2003 as an online searchable database, FAO-BioDeC currently has about 2,000 entries from 71 developing countries, including countries with economies in transition.

It is regularly updated and has recently been expanded to include extensive data from the forestry sector and some initial data on livestock.

The assessment presents a first analysis of the information contained in the database as of 31 August 2004.