[2006-08-04]
South Africa's Biotech industry
SA’s fledgling biotechnology industry is choking at every step of the value chain, from laboratory bench to factory gate. A handful of first class scientists vie for limited government funds, few of them have the expertise to commercialise their bright ideas, and domestic private capital has yet to be convinced that there is money to be made in the sector. Unless these problems are tackled, SA’s hopes of developing drugs for diseases neglected by multinational companies, or launching a novel genetically engineered crop geared towards local conditions remain thin, say critics.

"India and China are forging ahead, but SA remains a very small player," says Wieland Gevers, former head of the SA Academy of Sciences.

SA was isolated during apartheid, and its government was intent on making the country self-sufficient in fields like defence and energy. SA has established strengths in brewing and agriculture biotechnology, but was a relatively late starter in developing health-related biotechnology applications.

Government scaled back its research and development (R&D) expenditure sharply in the early nineties, and only began to increase funding again after 1997. SA is now making steady progress towards government’s target of reaching 1% of GDP by 2008-09; the country spent about R10,1bn or 0,81% of GDP on R&D in 2003/2004, up from R7,5bn or 0,76% of GDP in 2001/2002, according to the Human Sciences Research Council (HSRC). More than half the R&D expenditure is in the private sector, a pattern close to that prevailing in the European Union.

Today SA is one of the few African nations to have developed a national biotechnology strategy, and it has a relatively well-developed and growing R&D infrastructure. Government has identified biotechnology as a potential contributor to national priorities such as better health care, food security, job creation and environmental protection. R&D expenditure in the sector, however, remains small — a mere R260m in 2003-04 according to the HSRC, of which 20% is spent by industry.

The cornerstone of SA’s biotechnology strategy, adopted in 2001, has been the establishment of three Biotechnology Regional Innovation Centres (Brics) and the PlantBio national centre for plant biotechnology. Their aim is to channel public funds into biotechnology projects with commercial potential, and facilitate links between the scientific community, industry players and private capital. The hope is that they will eventually attract foreign investment, but so far interest has been scant.

The strategy also set up the National Bioinformatics Network to improve local capacity for carrying out the highly specialized computing needed for modern biological research, and established a Public Understanding of Biotechnology programme to address public concerns about biotechnology, particularly cloning and genetic engineering. South African farmers grow genetically modified maize, soy and cotton on a commercial scale, and local researchers are working on genetically engineered strains of these crops better suited to local conditions. Scientists are also exploring the potential of genetically modified sugar cane, melon, strawberries, grapes, potatoes, millet, apples, tomatoes, sorghum and wheat, according to research by the Washington-based International Food Policy Research Institute.

SA is playing a leading role on the continent in developing an effective HIV vaccine through the South African AIDS Vaccine Initiative, launched in 1999 as a public-private partnership to co-ordinate research, development and testing candidate vaccines. Two vaccine trials are currently underway, and several candidate vaccines are being evaluated by scientists at the University of Cape Town.

Other promising health-related initiatives include the Centre of Excellence for Biomedical TB Research co-hosted by the Universities of Stellenbosch and the Witwatersrand. The scientists, led by Prof Valerie Mizrahi have made considerable headway in understanding the mechanisms underlying drug resistance. And in February, government announced that it was putting R11m into the SA Malaria Initiative, a new venture that aims to foster collaboration between local malaria scientists and their counterparts in Africa and further afield.

Government also has a host of programmes designed to support scientific research, innovation, and commercialisation that are not specifically aimed at biotechnology, such as the National Research Foundation, the Technology and Human Resources for Industry Programme, the Innovation Fund, and the Godisa incubators.

The most recent audit of SA’s nascent biotechnology industry, commissioned by the department of science and technology. (DST) in 2003, found 47 companies that defined their core business as biotech activities, primarily in human health (39%) and support services (13%). Most of these firms are based in Gauteng (41%) and the Western Cape (37%). None of these companies are listed on the stock exchange, less than half employ more than 20 people, and three quarters make less than R10m per annum.

DST’s audit found several positive factors supporting the local biotechnology industry, including "world class researchers and institutions"; rich indigenous biodiversity; a genetically diverse local human population; a relatively low cost base for research; product development and manufacturing; a sound regulatory environment; and a world class banking system.

That goes some way to explaining why SA leads the continent in adopting genetically engineered crops, and produces more research articles on genetics and microbiology than any other African country, says Anastassious Pouris, director of the Institute for Technological Innovation at the University of Pretoria. Nevertheless, intellectual property transfer in the biotech field has so far been "slow and inefficient", says the DST review.

"We have good academic researchers, but weak capacity to translate that into products and services," agrees David Walwyn, research manager at the Council for Scientific and Industrial Research (CSIR).

"Why? Because we have a very small biotechnology industry, and it’s industry that does this best"

There has been no independent assessment of the BRICS, but critics like Walwyn feel they have made slow progress. Government so far has little to show for the R450m it has pumped into the three regional innovation centres, he says.

"There are some success stories among the BRICS, but they are not block busters," he says.

The Gauteng BRIC Biopad is widely regarded as having made the greatest strides in supporting local technology development. Some of its successes include:
- Commissioning a waste-water processing plant in Springs based on patented technology developed by Rhodes University that uses bacteria to simultaneously treat sewage and clean and neutralize acidic mine water.
- Developing a range of probiotic products that boost the survival of ornamental fish, primarily for export markets
- Launching a blue cheese flavourant developed by the CSIR and Pretoria University from fungi
- Developing a new method for extracting the active ingredient in aloe sap (aloesin), which is used in cosmetics.

The science and technology department’s head of biotechnology, Ben Durham, concedes that government investment in biotechnology has yet to have the desired results.
"We want science to translate into a broader social response, to make a difference to people’s lives, and that’s not yet happening," he says.
The BRICS are "cherry-picking" low-risk projects due to their limited funds, he says. Although the BRICS try to leverage private sector funds in addition to the money from government, their efforts have to date been only moderately successful.

"We should be taking much bigger risks," says Durham, arguing that SA has the capacity to spend much larger research budgets.

Despite the pockets of excellent scientific research at universities and science councils, biotechnology research in SA has yet to reach critical mass. Critics say this is partly because biotechnology policies have naïvely assumed there is an adequate pool of skilled researchers steadily generating new knowledge, when this is not in fact the case.

"There are just a handful of internationally recognized genome scientists in SA," says Prof Winston Hide, director of the SA National Bioinformatics Institute at the University Western Cape. Few local researchers regularly publish in the world’s top peer review research journals such as Nature and Science, he says, and academic staff at universities have seen their research hours steadily eroded in recent years as teaching and administrative workloads climbed to accommodate greater student bodies. A recent (unpublished) survey by Pouris among 350 academics found they spend on average just 12% of their time on research, although the HSRC painted a less gloomy picture in its recent R&D survey which found local academics spent close to a quarter of their time on research.

SA’s fundamental handicap is that it has a small science system in relation to its population of 46,9 million people. The problem is exacerbated by an education system weakened by decades of apartheid-era neglect.

Woefully few high school-leavers meet the most basic requirements for pursuing science-based university studies — a matric pass in higher grade mathematics. Last year just 5,2% of matric students passed maths higher grade (26 383 students), an insignificant change on the previous year’s showing of 5,1% (24 143 students). A shortage of skilled teachers is largely to blame. The education department’s most recent teacher survey found 27 000 were teaching senior school maths (grades 10, 11 and 12), but only two thirds of them were qualified to do so. Maths is not presently compulsory for matric, and only 60% of students take the subject; that is set to change in coming years, and government is going to be under severe pressure to find teachers to take on the task.

Government is acutely aware of the problem, and as President Thabo Mbeki stressed in his state of the nation address in February, the state has set itself the target of doubling the number of maths and science high school graduates to 50 000 by 2008 to. Key initiatives include a special focus on 529 schools, and re-equipping and financing the Further Education and Training Colleges.

But without adequate numbers of properly qualified teachers that target may be little more than a pipe dream. Pan African Capital’s CE Dr Iraj Abedian, one of SA’s most influential economists, recently told the Financial Mail that he has been trying to persuade government to import maths and science teachers (since it is not possible to grow them on home turf without sufficient skills to begin with) but to no avail. Skills production is the foundation of higher economic growth, but efforts to bring in new blood have been stymied by SA’s biggest teacher union Sadtu, which is fiercely opposed to importing teachers.

Few science and maths graduates remain at university to pursue research careers, particularly black students who often come from poor families in desperate need of income, notes Gevers.
"Research is a very uncertain life, and many students are lured into the private sector by better salaries," he says.
But even the private sector battles to find the skills it needs. DST’s 2003 audit found 50% of the companies it surveyed (compared to 81% of research institutions) had experienced shortages in human resources; scientists with masters and doctoral qualifications were in particularly short supply.

The net result is that few international patents are filed, the academic workforce is greying, and the publication output of universities has stagnated at around 3500 publications per year, according to US based research organisation Thomson Scientific (formerly Thomson ISI).

The US patent office records a mere 112 patents filed by SA during 2003 — less than the number filed by the state of Utah. Even worse, SA’s patent filing record has hovered around this level for the past decade. When SA’s first democratic government took power in 1994, countries like Brazil and India were producing a fraction of the patents filed by SA, but within a decade that situation changed radically and India has now overtaken SA - it filed 341 patents in 2003.

SA’s publication record is equally depressing. Between 1987 and 2000, South Africa’s global share of publications, as recorded by the US-based Institute for Scientific Information, dropped more than 25% from 0.67% to 0.49% — the lowest in two decades. Although SA contributes only a handful of publications to internationally peer-reviewed journals, many of them can be found in the most highly cited journals, and they have a high relative impact compared to other developing countries, according to a recent report in Science-Metrix.
Even so SA can boast little in the way of "discovery science", says Gevers. True, SA was the first African country to sequence a genome (the heartwater parasite), and clone a cow, but most local research efforts focus on describing known problems rather than deepening our understanding of the mechanisms of science, he argues. Much of the local health-related research is descriptive, he says, with the notable exception of the TB centre of excellence.
Durham says government is acutely aware of these problems.
"Our concern has always been the depth of skills behind the existing areas of expertise," he says, noting that the science and technology department has funded six centres of excellence, two of which are biotechnology related — the TB centre, and the Centre of Excellence in Tree Health Biotechnology at the Forestry and Agriculture Biotechnology Institute.
Government also plans to establish 210 new academic research positions over the next four years, each with funding of up to R2,5 million. These research chairs are intended to free successful academics from the burden of teaching and administration, says Durham. The initiative also hopes to encourage more young black scientists and women to stick with public sector research.
In a further bid to boost numbers, government announced measures to ease the entry of foreign specialists in February. Quotas of professionals in specific categories, including a host of specialist scientists, will be able to apply for work permits without having first secured a permanent job. The development is a significant departure from a system that usually requires proof that no South African could have filled the post.
The science and technology’s department’s audit revealed SA’s “bio-economy” to be very small. Even using a broad definition that included companies conducting biotechnology activities in addition to their core business, the study found only 106 firms involved in bio-business in 2002, with a combined annual turnover of a mere R300m.
One of the major impediments to the growth of the local biotechnology industry is the chasm between high quality, high impact scientific research and commercialisation
“People here are simply not confident enough, not aware enough, and not directed enough turn their work into something that is marketable,” says Gievers.

Compounding local scientists’ lack of skills in securing intellectual property rights, is the lack of national policy to guide universities on how to manage patents, royalties and licences. The result is an uneven spread of capability and interest in commercialising research among local scientists, and a plethora of approaches to managing patents, trademarks, and licensing agreements. However, the science and technology department has developed an intellectual property policy, which has been approved by cabinet subject to the results of a process of public consultation.

Although government has instituted a raft of programmes to support innovation, such as the trade and industry department’s Technology and Human Resources for Industry Programme, and the science and technology department’s Innovation Fund there is little private equity capital to support enthusiastic entrepreneurs. To date there has been only venture capital fund dedicated to investing in biotechnology, Bioventures, which is now fully invested. Since 2001, it has assessed more than 300 ventures, and put R52m in eight start up companies. The fund’s management companies, Java Capital Holdings and Real Africa Holdings, have no plans to start a new fund until Bioventures starts showing the kind of returns that will attract fresh money — typically seven to 10 years in this sector. Although the fund’s success will not be clear for some time, its manager Heather Sherwin says it has already created jobs and helped retain skills in SA. She is considering a range of options, including listing some of the companies on AltX, the Johannesburg stock exchange’s bourse for smaller firms, but worries that local investors may be too risk-averse to take stakes in these companies.

Part of the reason SA does not have more biotech venture capital funds is that SA has few people with the right mix of investment skills, high-level biotechnology experience, and relevant networks, she says. That skills shortage also hamstrings the companies supported by the Brics, notes Cape Biotech Mark Fyvie.

Raising money for venture capital in SA is also difficult, says Sherwin, because institutional investors shy away from funding start-ups, let alone high tech start-ups. Biotech start-ups usually need several rounds of funding because the nature of their business means they take much longer than businesses in other sectors to start generating revenue. Critics say it often takes so long to get funding from government sources that many small businesses go under while trying.

Biopad CEO Butana Mboniswa is more optimistic. He says government’s investment in biotechnology has kick-started the industry, and banks are beginning to see the sector’s potential. “What they need to do is create instruments that are sensitive to the risks associated with biotechnology,” he says.

Sherwin argues that SA’s biotechnology strategy needs to be expanded to promote the country to the global investment community, because foreign venture capitalists are simply not interested in putting money into South African start-ups. They believe the local biotech market is too small to warrant an investment, she says.

"Most US companies don’t even know that there is a biotech sector in SA," she says.

SA has the capacity to offer low cost, high quality research and development to multinational companies, but it is losing out to India and China, she warns.

Although few biotechnology start-ups rely on debt capital to meet ongoing product development needs, the cost of capital in developing countries, including SA is also a barrier to the biotechnology sector’s growth, says Walwyn, who recently completed a comparative study on the industry. The costs involved in developing new products, such as pharmaceuticals are very high, but he suggests government could do more to help start-ups by sponsoring venture funds that invest in early stage commercialisation.

Part of SA’s problem is that it is government that is trying to drive the bio-economy, unlike the Asian tigers which have seen government interest in biotech stirred by industry’s initial activity. But South African industry won’t get involved unless government provides appropriate incentives, argues Pouris. It remains to be seen what impact the declaration of a tax credit system for private sector R&D, announced in the 2006 Budget, will have for biotechnology. The science system, small as it is, cannot double research capacity overnight.

Government is at last doing the right thing, providing tax incentives, grants, easing immigration barriers, and paying attention to schooling. SA’s small science system has laid the foundations for the careers of four Nobel laureates. The question is, when will the next one emerge?

Roger Trythall



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