I ~C_ 31r1t C _Tj BRITISH·AMERICAN TOBACCO COMPANY LTD A member olthe B~A~T Indstri* Gmup 2od rehruary 1988 RegjsttredOmfc: POBox~Bt Wcruninsa:aou~r AlHlDgT ;dlillb~rJI loodooSBIP~]E T~Lphon~:ol·a~ rut tcbx: lq9J sxrrole Dick van dec Bergh, isq~, lateraatrix Group, 4 Cromwell Place, South knsington, tondon~ Sw7 uJ Dear Dick, ~Prlburfnees Report - Biotechnology Section Although by no means yet complete, I am enclosing a copy of a modified form of your bfotechnologp scction· Thfs will indicate to you the kind of areas where we see a need for either clarification or for an alteration in ap~roach~ I have asked Graham Read, who has been largely responsible with me for these modifications, to agree with Hike Fore the "fiaal" version to be available for you by early next veck~ important points which I mould draw to your attention where we differ from your overall strategic conclusions are:- 1~ we consider that the impact of biotechnologg will be as important for the processor Is for the consumer tone example is the high solids tomato which processes very efffefcncll)~ 2, we see the possibility of biotechnorogg creating a high quality sector within the conventional fruit end vegetable produce scctot~ would have very significant financial nlua~ thus, such conventional products cannot be ignored and, indeed, nag offer more realistic research targets than the highly specialised ilcm~~ 31 we retain the belief that there will be opportunities for exporting genetic materials from the developing world to the developed vo~rd~ we have given sole attention to the organisationat issues in the accompanying d#umelt but a nuch fuller one is in preparation and should be available for discussion along with the final version of the biatschnology ICCI~OD~ if you have any probleas, please contact Craham Read in this office~ with kind regards, yours sincerely, (Ila~ ~ A~l. Itard O e~c~ n~ Norsvotthyl Esg ~, W C,A~ Read, Esq~~~l~d i, Ldonh'wnbnt~tl GMn:#hirullrlondon SITI Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 ·· II-H BIMECHHOIOCY · IBPIIWIORS FOR STRAT~CY Sunoarr The nature of the assignment has led to the implications for biotechnology being derived from the market and industry research. The key conclusion is that credibility in agribusiness, especiallv in Japan, is considerably enhanced by being seen to be in biotcchnolo~y~ this demonstrates, above all, long·t~rm commitment to the lactor~ The following is no more than a ''uish list" from the market on improvements which could result from biotcchnology: product durabilitr longer shelf·lifl; hardier produce for transportation; natural fruits no chemicals, no additives, no colour maintenance; - taste (adapted by market) sugar content (more or less); taste (lighter for Japan, stronger for rSa); perfect fruit (especially for Japan) consistent sire, shape, colour, syPmetry, processing requircmentl~ These are in addition to a range of discase resistant qualities, requirements relating to phyto-sanitarv needs, plant productivity; plant sturdiness and extended growing season. Taking the state of the development of biaeechnololly into account, the priorities are likelr to be agronomic (pest, disease- and herbicidc-resistant strains) propagation technologyl accelerated plant breeding for plant attribute selection, post-harvest physialaly modification (sugar content, tute, colour and speed of ripening) and specific genetically engineered products designed to offer consumer/processor benefit. a biotcehnolol~ capabilitv is extremely important in giving credibility in the Japanese market. BATCo agribusiness operations art likely to gain recognition more quickly if the biotcchnology activity either has a profile or a presence in kpln, Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 ·1· If the 4ribusincss strategy is accepted, the direction of research and the existing biotech JV companies will need to be reorienttd. Measures will also need to he taken to Insure that the laboratories in the supplier countries deliver to meet the reguirements of the metropolitan markets. The markets for plant genetic materials in all metropolitan markets, with the exception of the Middle fast, are locally served currently. The opportunity to Export purely genetic materials to these markets is minimal. The market opportunity for genetically-improved products and produce ho~rv~r is substantial. ~inallyl if biotechnology becomes final product market-driven and BbTCo exploits its strengths in extension services, any higher cost of plant materials becomes less important, BATCo Fill be controlling both the inputs to growers and their outputs; the market far materials will he captive. (oust overcome ownership problem of contact growing from perenial crops) Introduction The terms of reference of this assignment required that the research and strategy work show the implications for biotechnology in agribusiness, with the focus on priorities for biotechnology research. In meeting these terms of reference, we must emphasise a number of points up·front, These are: (1) The industry, as opposed to product, research in the metropolitan markets has concentrated on down-stream activities, especially importers, distributors, retailers and proeessors~ Those we intcrvieved r:ere in these downstream activities, rather than growers or suppliers of inputs to growers. (2) None of the IntcrHatrix team is technically gwlified in bietcclnologv, The comments on the feasibility of providing the solutions for the "vish listR fDI product improvements are based solely on the assessment of BITCo specialists and Or~ H, Fore of the Advanced Technolog!' Centre, Cambridge. Ce have not attempted to double·check these views. Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 (3) the product market research was designed to identify "bill bet" oppor tuni ties ~ In other words, we were to exclude identifying snell, esoteric opportunities such as the proverbial "blue bpnao~"~ It the same time, the opportunities we have identified are in so-called niche product areas · such IS troPocial fruits (~.I~ mango) and upPar~Lt vegetables (c.B~ baby corn, ~sparaeus), Ir'e are not yet in a position to assess whether, or to uhat extent, these product areas present a suffieirntly large volume to justify high levels of investment in research. [see later · application is broader than niche markets] ~sribusiness and tolpmittment to BiotechnoloBy the fact that BdiCa is investing in biotechnology can be vised as a very important attribute in demonstrating its commitment in agribusiness. Since biotechnolgoy is a long-term activity. involvement demonstrates a long·ten commitment to the food business, If nothing else, this will demonstrate BAfCo as being a reliable and serious playcr~ In other vords, it should facilitate market entry. This kind of credibility is particularly important in Japan. BATCo's ability to develop relationships with important players in the distribution chain and processing should be strongly enhanced, if it can play the biatech card, got least, it should be easier to get a Japanese partner also to lake long-term investments in the Parkct, If BUCo decides to penetrate the japanese food market, it will be advised to have some kind of biorechnologY presence in Japan. There ate good reasons for suggesting a laboratory could be appropriate. it the very least, vorld·vide biatecLologp activites should be tlprerented~ Ve are of the ~ie~ that involvement in biotechnolloy could also be an important attribute in the OSa, at least in proving B~Co as a strong collaborator among the more professional players. Biotcehnoldlr "k'ish lilt" Durinll the course of the research, a number of potentially important applications for biotech emerged, Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 ·0· There relate to: - satisfying phyto-sanitart regulations; · post·harvtst phyliologr, modification and control: - product durability in transport and storage; - reduced additives/chemicals (use of or residue)l · product flexibility; - taste and flavour selection, adaptation and wdificltionl - the "perfcct" fruit, - processing qualities for improved margin and or consumer beafit~ These are in addition to plant productiritv and plant sturdiness, eh~~o·Sanit~r~lImPort Regulations The three main metropolitan markets all here my strict and re!ativelv similar phyto-lanitary regulations for imported fresh produce, These regulations restrict the importation of fresh produce from areas where specified transmissible pests or diseases are prevalcnt~ The regulations also restrict imported product (0) grown using certain fertilisers or pesticides deemed hormfull contains residues exceeding threshold levels and (b) inadequately handled or stored post-harvest, I~II~ not properly cleaned, Biotechnolo8r offers solutions to help countries meet the phrto-sanitatv repulat ions ~ Oevelopment of disease tolerant plants will lead to lover levels of use of ~groehepicail and corresponding reductions in residue levels in produce. The application of the relevant technologies Fill have impact in the medium-term to Icnter terp i.e~ i·10 year range. Here promising in the shorter-term is the application of diagnostic test methods for the presence of diseases, Biotechnology can provide the means for importers to prove to the health authorities of the imparting countries that the produce is either disease·free and additionally could provide analytical evidence of residues to satisfy the additive standards of there countries, This Fill lean, however, that the authorities accept the validity of the tests as well as of the quality control of those carrying out the tclts~ Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 _·_ _I~CI ·i- brt·l~rr~_~lioloa It is apparent th~t ilpP]icltions rcl~tinl to po~t-h~rrc~t physiology offer the potentill for significlnt product end produce ilprov~~snt, post-harvest ph!siology is e general tern describing the Itntticllly prl·dctlrrinld events involved in fruit ripening, e process thlt is intiletelv rellted to fruit dcvcloplcnl even before norul ~rvc~tinl. These events inflllcnce the slee end forl of fruits, their finncsl, colour, including e range of t~rtl gullities. In lbility to control end nodilr there events is emerging [ron lolecullr reselrch studies, the findings of which will h~~e generJl Ipplielbilit~ to 111 fleshv fruit~~ In Jddition to the hrold lppliclbilit!. of port·hlrvest phyriololy reselrch, studies ire under invcJri~~tion to enable highly focused lodificltion of individull events within these proccslrr~ We understand thrt it will tlke j·i l'eers to develop the initill collercial Ipplicltionr in pott-h~rvlrt phrsiologv. Product &rlbil~ Product firiness end Physical shippingltrjnsport gullitiel heve been identified eI priorities for lsrket nltdr~ Product durabilitr is 1 function of the ripening period, Irsocilted fruit softening end intrinsic properties of the fruit. Ilterint the speed of ripening is ilportlnt both to ~llow tr~dcrl to tile parket ssles to alximise gualitf ~nd price end reduce wssteegt in storege end Jhllf'lifl. ft is with ripening that the econolic rllue of biotechnology cln he c1eIr1Y delonstrlled; the timing for potentill cerctei~l ~pplie~tion is covered under the generll topic of pdst-hervcst phyaiolalr, Hlrdiness is ClibPDF - v~~fastio.soni ·6· particularly relevant to transportation and storage, Pastt~ge can be high due to bruising, ve understand tbst the process by which hardiness is influenced by the intrinsic properties of the fruit is not well understood and an ability to control this specifically is not vithin the scope of biotechnology currently, However, opportunities exist Within nature to select and propagate cultivars Pith the lost appropriate properties which could include the use of focused breeding using applied molecular biological tlfhnologicl~ Indeed, physical solutions, r,g, ilnproved packaging and handling, are likely to provide ouch more cost-effective alternatives to ensure the integrity of the fruit or ve~etsble~ Reduc ed ~ add i t ive s/cheli~l I Current consumer trends point strongly towards increasing demand for natural foods 1.8t reduced additives and organic growing, In as much as the major requirement for the application of agrcchemicals is derived from a plant's susceptibility to pests and diseases any bio~echnolog~ based agronomie improvement will serve to reduce the current need, Considerable research and product development effort is focused on developing broad-based strategies for achieving plant resistance and tolerance, Commercial products of this type will emerge in the medium-term, product Flexibili We believe that the ability to switch or upgrade products will be important as "niche" or specially products become commodities. Only in this way can BIITCo retain its ParginJ~ The assistance which biotechnology could provide is to have the laboratories to work continuously to develop improved and different ntietics of fruits or vegetables in production. Of course, we cannot judge whether this kind of activity will be economic. Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 ·7· Taste AdaPtation Taste adaptation, especially given the ~ncrlc~n desire for stronger flavours and the Japanese for lighter, could provide B~TCo with major potentiai~ The bioteehnology answer is covered under "Post·harvrst Physio[ogy" above. The "perfect" fruit The perfect fruit or vegetable is an important goal in all biotech Work in agribusiness. Hoaver, it will be many decades before science reaches this level of precision, Today, the limit of knovledle is to create a uniform siae of fruit. Processing qualities [to be agreed and expanded] Orranisation of Biotcchoolon Facilities The current organisation of BATCo's bioleehnololr facilities ma)' not be appropriate if the priorities, os outlined above, In accepted and implemented. If a strategy of developing a market driven agribusiness is adopted, it will characterise and define areas of crop interest in the short medium and long·term, Selection of products and produce of interest Will by definition determine the range, seasonal rquiraLnts and projected volumes ~ These parameters will in turn identify areas of the World that can provide seasonal and climatic conditions prescribed by these commercial criteria. It is anticipated that each prisar)' grooing region Will be supported by an appropriately scaled bioteet~ based venture capable of providing plant breeding, Selection and trillling expertise and an ability to provide both conventional and sophisticated plant preparation facilitics~ the ventures would be largely product development and production orientated, Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 .g. It will be a pre're9uisite Of the agribusiness development plan that the Group vill require direct access to, and control of, fundamental research progrlRcr focused to its n#dJ~ The colpllrrcillisltion of the resulting technologies and developmental products would be the r~lponrlbilltv of the local ventures, The technical sophistication of the local csture would be appropriate to interface with ccntnlly directed and co·ordinat~d research and technologies. ~rkets.fo~ nenetic~Pat~rials Fe were asked to identify opportunities for "bis bet" e~eor:l from BATCo operating companies to the major metropolitan arkets, Irrespective of how we define "big bet", the opportunity to export purely genetic materials to Europe, USd or Japan currently is minimal. These markets are locally served, with imports being negligible or non·elis~an~~ [Isn't there a large International trade in the transacted seed markets?] The ~iddle East may prove an uceetion~ however, ellen here the market for purely genetic material is much smaller than gcvticsl!r improved product. SlralcnP~atFriallGe~nel_sP sc have investigated the availability or obtainability of germp!asm, (the basic genetic material to which conventional and sophiltica~~d technologies can be applied to the development of products a~d produce) we have identified tin Section E), as opportunities. se understand that this issue is being addressed by BAT and it is envisaged that germplasm will be potentially accessed from three sources, though its technology partners, by JV relationships with third-party seed companies and or through direct ownership by Bb, E~nn~ic Considerations At this stage, two aspects of economics nod to be assessed · the products and the control of sale of genetic material. Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111 -9- Ue suggest that the prime qribusiwss opportunities for BdICo are in speciality or upnarket fruits and vegetables whether fresh or processed. Conversely, and withfew specific opportunities, there seems to be fev agribusiness opportunities in the commodity fruits and v~lctablcs even though the latter accounts for 60·70t of the total fresh ~cd processed markets, Hovertt, the application of biotechnology provides a potential basis for differentiating these commodity materials either in terms of direct consumer benefits or through margin differentiation in a process operation. l;hile the application of biPtechnology to staple produce ml~ be economically evident, ue cannot judge whether the same is, or will be, true for mangoes, baby corn or aubergine, as eluples, Hovevcr, because the range of identified biotechnologiel have a broad generic application across a spectrum of possible crops, it would seem reasonable to assume that the costs for individual crop development would be rclj~iael~ loc. There is slays a valid concern whether farmers will pay the premium price for genetically improved planting material, seeds or transplants, This concern will he greater in developing countries, Out recommendations to BACo stress the value of the farmer extension services and the prime Jeans to ensure that local grocers meet international quality standards. If the agribusiness ventures are managed in a way that B~Co provides the input to the growers, as well as distributes the final produce, the issue of price becomes irrelevant. BATCo will control the application of genetically improved material through the growing chain. II the latter is the ease, the economics of biotechnology are dependent entirely on the success or otherwise of the agribusincss operations and is integral to its 2 February 1988 Clit; PDF -!::!!::!!::!.f3 StlC.i: 0111