Turning Science into Business

At the Zañartu Technology Park in a residential area near Santiago’s National Stadium, young men and women in lab coats and facemasks are hunched over test tubes and petri dishes, working on new treatments for health problems like cancer and diabetes.

Around 200 researchers and postdoctoral students from Chile and the United States work at Zañartu, which is run by Chile’s Life Sciences Foundation that nurtures promising biotechnology start-ups.

The Foundation, created 15 years ago by world-renowned Chilean biochemist Pablo Valenzuela with colleagues Bernardita Méndez and Mario Rosemblatt, is funded mainly through public grants, but it also does research on behalf of local universities and US companies. 

Most of the research is focused on supporting export industries such as aquaculture, mining, forestry and agriculture. The idea, however, is that a few of the start-ups supported by the Foundation will make discoveries that allow them to move into international markets.

But that remains, for now, just a dream. The Foundation has spawned a few companies like Andes Biotechnology, which has achieved breakthroughs in cancer treatment, but none have made the leap to the lucrative US market.

Valenzuela, a former academic at the University of California, San Francisco, who co-founded the firm Chiron – now part of Novartis – that developed a vaccine for Hepatitis B, knows what it takes to succeed in the industry but he has yet to replicate that success in Chile.

“Chile remains a small and irrelevant player in biotechnology,” he says.

Despite the quality of research at Valenzuela’s Foundation and other research centers around the country, few Chilean firms have leveraged discoveries into technology exports. One exception is Crystal Lagoons, which exports a technology to keep large lagoons clean, but this is an isolated case.

Globally, the biotechnology industry has rebounded from the 2008 financial crisis. Companies in Canada, Europe and the United States raised US$25 billion in 2010 – equaling the average for the four years before the crisis, according to Ernst & Young’s 2011 Global Biotechnology Report.

Around 81% of this was raised in the United States, much of which is concentrated in the states of California and Massachusetts where, not by coincidence, many of the world’s top universities are located.

“Biotechnology needs new discoveries that come out of the big universities,” says Valenzuela. “We have very little of this in Chile.”

Another problem is the size of its market. Unlike Brazil, the region’s leader in biotechnology, Chile does not have a large market for companies to sell new products.

Then there is the issue of money. Many research programs usually fail before one discovery allows a company to break even. As a result, average investment in a biotechnology company globally is around US$200 million. But coming up with this amount is difficult in Chile.

Comparative advantages

Despite its disadvantages, no one is denying Chile’s biotechnology potential. US-based life sciences investment firm Burrill & Company’s 2011 industry report predicts Chile is positioned to become a “springboard for biotechnology companies” looking to invest in Latin America and the world.

Given its inverse growing season to North America and varied geography, Chile has all the ingredients to become a biotechnology hub. This also helps explain why multinationals like Pfizer, BASF, Bayer and Roche have a presence here.

Chile’s long coastline and sunny climate offer ideal conditions to grow algae and seaweed to produce biofuels, which could reduce the country’s dependence on imported hydrocarbons.

Some progress has already been made in this area. In March, national airline LAN operated the first flight in Latin America – from Santiago to Concepción – fueled by second-generation biofuels produced in partnership with local fuels distributor Copec.

But perhaps Chile’s biggest advantage is its human capital. Its scientists are recognized worldwide for their calibre and, unlike other emerging economies, it does not suffer from a brain drain problem – Chileans who study abroad usually come home.

“A new generation of scientists has returned to Chile, bringing with them a new approach and way of doing things,” says Felipe Camposano, president of the Chilean Association of Biotechnology Companies (ASEMBIO) and general partner at venture capital fund Austral Capital. 

Some of them now lead research centers like the Life Sciences Foundation. But finding skilled people is only part of the equation. For Chile to grow in biotechnology, especially in the promising biorenewables and health areas, it needs to invest more in research.

Falling short in R&D

Chile’s investment in research and development – the cornerstone of the biotechnology industry – is embarrassingly low for a country aiming to become developed this decade.

At barely 0.4% of GDP in 2010, or around US$900 million, this is well below the average of 2.3% invested by OECD countries, according to figures from the Economy Ministry. Per capita, the United States invests 20 times more than Chile in R&D.

“Chile has fewer researchers than Seattle,” laments Valenzuela.

The government launched tax incentives last year designed to double investment in R&D by 2014, but private sector spending still accounts for less than half of total investment.

This is partly due to the country’s natural resource-based economy. Forestry, mining and agriculture companies have little incentive to invest in innovation, especially when prices for commodities are high, notes ASEMBIO’s Camposano.

Most research and development spending in the United States comes from a few technology companies, like Google, based in Silicon Valley. “We need one or two companies doing this in Chile,” says Camposano.

It is, however, a Catch-22 situation since creating a biotech multinational, like California-based Bayer, takes huge investment in research – and, often, a dose of good fortune. That’s where public support is crucial.

Investing in science

In the last decade, Chile’s government, in conjunction with local universities, has made an effort to support research by increasing funding for the National Commission for Scientific and Technological Research (CONICYT) and the Export Development Agency (CORFO).

“We are starting to see good results from public investment in biotechnology over the last seven years,” says Camposano.

CONICYT’s Scientific and Technological Development Fund (FONDEF), worth some US$30 million in 2012, seeks to strengthen ties between universities and businesses while promoting projects that have practical applications outside the laboratory.

Its grants – which are awarded competitively – can only finance up to 70% of a project’s total cost, while the university or research institute must put up at least 15% as well as obtaining a minimum 15% from a firm or other outside backer.

Nearly half of the 54 projects approved by FONDEF in 2011 had some biotechnology component and most of these were in the natural resources sector, says FONDEF’s director, Gonzalo Herrera.

Funding is also available through the Basal Financing Program for Scientific and Technological Centers of Excellence, which was created in 2006 by the National Innovation Council for Competitiveness (CNIC). To date, 13 centers have benefitted including the Life Sciences Foundation.

But the funding available from public sources is still insufficient, says Herrera, who notes that with more resources FONDEF could finance a third of the projects that apply, versus 20% currently.

Even so, this is not the main bottleneck in the industry, he suggests. Many projects that receive subsidies come up with good ideas but most languish for years or – as in the case of salmon vaccines – are sold to foreign firms at an early stage only for Chile to buy them back later.

The reason, says Herrera, is that Chilean universities do not understand how to market their discoveries internationally.

“We have good research in Chile but there are some weak links in the chain in terms of business development and financing,” he says.

Chile Biotech

Chile’s venture capital industry has taken off in the last few years. Today, a handful of local funds, including Aurus Bios, Copec-UC and Austral Capital, together invest about US$20 million annually. Aside from Brazil, this is the most in Latin America, but it is still a fraction of US investment.

Putting things in perspective, venture capital in northern California alone is worth US$1.8 billion annually, followed by Massachusetts with US$1.4 billion. However, partly thanks to Chile’s close commercial ties with the United States, more US venture capitalists are becoming aware of Chile’s biotechnology potential.

Last December, Chile signed an agreement with Massachusetts that includes the exchange of human capital and knowhow in the biotechnology area. Through this agreement, Chile has been invited to take part in the world’s largest biotechnology fair, the BIO International Convention, to be held in Boston this June.

ASEMBIO, in partnership with the government’s trade promotion agency ProChile, will participate in the fair as part of a project launched last year to promote the brand Chile Biotech in the United States. AmCham will also lead a business mission to Boston including member companies.

“We have enough cases in Chile to show we are doing interesting biotechnology, we have good human capital and research, but this is unknown in the U.S.,” says ASEMBIO’s Camposano.

The idea is that exposure in the US market will attract venture capital and companies interested in doing research in Chile, while enabling Chilean firms to learn about their competition.

“Biotechnology has to be international from the very beginning,” says Camposano. “It’s critical for Chile to participate in the global landscape.”

Short cut via California

Pablo Valenzuela agrees that the United States is key to the long-term development of biotechnology in Chile.

“When you are in Chile’s situation, you have to do something creative,” he says.

The solution, he suggests, is to create a “short cut” by catalyzing productive relationships between Chilean researchers and US companies to facilitate the exchange of people, ideas and investment possibilities.

The Science and Friendship program, created by Valenzuela’s Foundation a decade ago, is part of this strategy. The program has so far brought over 170 US doctoral students to Chile, partly by luring them with the country’s natural attractions.

“We don’t have Nobel Prize Winners to attract scientists, but we have natural beauty,” says Valenzuela.

When the students return they spread the good word, which has led to professors, venture capitalists and now US firms following in their footsteps, says Valenzuela.

The US biomedical firm Medivation, for example, operates a lab at the Foundation and California-based Bio Architecture Lab (BAL) is doing cutting-edge biofuels research in Chile.

“This shows we can do good research here, but the idea is to start our own companies,” says Valenzuela. “To transform science into something that has a greater impact on the economy we need entrepreneurship.”

Appetite for innovation

Part of the solution is connecting research centers, entrepreneurs and government institutions, which is where the non-profit technology transfer institute Fundación Chile aims to make a difference.

Increasing the agri-food sector’s competitiveness and productivity is important given the growing global population and recent food price increases, says Andrés Barros, manager of food products and biotechnology at Fundación Chile.

“Chile has the advantage of large areas of land in the north with high levels of solar radiation, which creates optimal conditions for cultivating microalgae with interesting nutritional properties,” says Barros.

In general, however, it is a challenge to get companies in Chile’s food industry to invest in innovation. Some, like Nestlé, have created research programs, but it is a struggle to get firms involved in the research and development process, says Barros.

“The real challenge is making developments in food biotechnology economically sustainable,” he says.

Then there are the regulatory obstacles. A ban on the commercialization of genetically-modified crops – currently seeds can be produced in Chile for export only – is an obstacle for entrepreneurs, says Miguel Sánchez, director of the industry association ChileBio which represents US companies Dow AgroSciences, Monsanto, Pioneer and Syngenta.

Even if the law is changed, which may not happen for years, the cost of obtaining approval for new food products in export markets is an impediment to innovation, says Sánchez.

“We need regulations that facilitate this process,” he says.

Another challenge for companies is managing their intellectual property once they have made a discovery. In this regard, Chilean firms need to take better advantage of the Patent Cooperation Treaty, which Chile joined in 2009, to obtain patents in export markets and benefit from licensing their discoveries, says FONDEF’s Herrera.

Realistically, Chile’s hopes of becoming a biotechnology platform for the region may be optimistic given its current level of investment. Chile can’t afford to spend billions of dollars on science given its more pressing priorities – health and education to name two – but, as Valenzuela points out, money is not everything.

Capitalizing on Chile’s advantages, including its human capital, network of free trade agreements and relationship with the United States, requires political will and cooperation between universities, companies and government agencies.

Of course, serendipity plays an important role in science – you never know where the next solution to global challenges like healthcare, energy, water scarcity or food security could come from – but Chile can create the conditions to increase the chances it will happen here.

“A lot of the conditions are created by having the will and resources,” says Felipe Camposano. “You never know where the next solution will come from.”

Julian Dowling is Editor of bUSiness CHILE