Merck-INBIO Plant Agreement (MERCK)



          CASE NUMBER:          47 
          CASE MNEMONIC:      MERCK
          CASE NAME:          Merck-INBIO Agreement

A.        IDENTIFICATION
1.        The Issue
     In October, 1991, the Costa Rican Asociacion Instituto
Nacional de Biodiversidad (INBio), a private, non-profit,
scientific organization of Costa Rica, and Merck, a U.S.
multi-national pharmaceutical corporation, signed a two year
agreement.  In the agreement, INBio would supply Merck with samples
among the plants, insects and microorganisms collected from Costa
Rica's protected forests.  Merck then would have the right to use
these samples to create new pharmaceutical products.  Merck, in
turn, is one of the world's largest exporters of pharmaceutical
products.  Thus, the case involves issues of both goods and
services trade, along with questions of intellectual property
rights and bio-diversity.
2.        Description
     The underlying motivations for the MERCK agreement were
twofold: first, INBio, in its capacity as a private, non-profit,
conservation organization was interested in collaborating with
companies in the private industry to create mechanisms that would
preserve Costa Rica's biological resources.  This would be
accomplished through economically viable methods as alternatives to
deforestation.  Second, InBio would provide Merck, the world's
largest pharmaceutical company with plant, insect and environmental
samples to further its research and development efforts.
     Biological resources are diminishing at rates faster than
scientists can identify new species.  Biological resources, or
"bio-diversity" is generally used as an umbrella term to describe
all those species of plants, animals and microorganisms, and the
ecosystems and ecological processes of which they are part.  Bio-
diversity can be divided into two parts: (1) genetic diversity, or
the sum total of all genetic information found in plants, animals
and microorganisms on the Earth; and (2) species diversity, which
is the variety of living organisms found on the earth (believed to
number between 5 to 30 million).   Of the known species, only 1.4
million have been cataloged and little is known about ecosystem
diversity, which describes the variety of habitats, biotic
communities, and ecological processes found in the biosphere.
     Deforestation is the principal cause of rising extinction
rates over the past forty years on an order of magnitude four to
five times the historical rate.  Increasingly, international trade
has increased deforestation through the diffusion of technology. 
Increases in environmental problems are the result of expanding
populations and human activities, particularly in regions along the
tropical temperate zones where 90 percent of biological resources
are found.  Loss of a genetically distinct population within a
given species not only impacts diversity, but also prevents the
realization of any potential benefit to humans.  By the time the
loss is recognized, it is often too late.  
     There are two economic reasons for increased rates of bio-
diversity loss.  The first reason is the incompatibility of
short-term economic gain with sustainable development.  For many
developing countries, the need to gain profits through logging
outweigh the benefits of leaving them intact.  The net result is
increased deforestation without regard to the loss of biological
resources.  Second, environmental costs have traditionally been
considered externalities to classical economists.  That is to say
that the environment is considered a market externality where no
economic loss or gain is accrued to those who use natural
resources.  Thus, environment resources are considered free.  One
reason for this is the absence of formal ownership of natural
resources.
     Partly due to the Merck/INBio agreement, the Costa Rican
National Assembly is developing a Wildlife Conservation Law that
will assign the responsibility of negotiating agreements with
multinational corporations who wish to use its natural resources
the government.  The law would, among other things, declare all
plant and animal species a natural patrimony, thus placing them in
the public domain.  Access to Costa Rica's genetic material would
be ensured to foreign pharmaceutical companies and biotechnology
firms.  Protection of their intellectual property rights and
profits would be provided as long as the firms agree to binding,
mutually agreed upon contracts.
     The agreement would not have been possible if not for the
unique qualities of both INBio and the Costa Rican government and
their dedication to preserving biodiversity.  The Costa Rican
government has a long history of democratic rule which provided a
degree of certainty for Merck officials.  Because of its geographic
diversity, the country has coastal areas on both the Atlantic (via
the Caribbean Sea) and Pacific Oceans and is extremely mountainous,
thereby offering ecosystems representative of vast regions of the
tropical Western Hemisphere.  
     INBio has a well trained staff specializing in natural
resource preservation.  It has undertaken inventories and
catalogues of Costa Rica's biological diversity and has developed
a database of species names, conservation status, distribution, and
potential commercial use of over 80 percent of Costa Rica's plants
species.  In addition, INBio has trained more than 30 Costa Ricans
in parataxonomy.
     At the Biodiversity Convention of the Earth Summit held in Rio
de Janeiro, Brazil, the dichotomy between levels of economic
development was the fundamental problem negotiators faced in the
rounds leading up to the Summit.  The need to reconcile the
indisputable right to development to exploit their natural
resources was weighed against the justifiable needs of the global
community to preserve biological species after years of
unsustainable growth (see BIODIV
case).
     Negotiated separately from Agenda 21 and the Forestry
Convention, the Biodiversity Convention was finalized at a
conference in Nairobi, Kenya.  Perhaps due to its hasty conclusion
the treaty is intrinsically flawed, but it is also likely that
developing countries' increasingly strident demands for increased
financial compensation and access to technology exacerbated the
discussions.  Nevertheless, the treaty was initially signed by 16
countries, but momentum brought the final number to 162.  The only
country not to sign at the time was the United States.  U.S.
disagreements over the treaty centered on four core articles of the
agreement: Article 15 -- Access to Genetic Resources; Article 16 --
Access to and Transfer of Technology; Article 20 -- Financial
Resources, and Article 21 -- Financial Mechanisms.  Of the four
articles, 15 and 16 were the most objectionable to the Bush
Administration.  Each article governs the control that nations will
have over the results of their biotechnological research.  The
articles call on countries to share in a fair and equitable way the
results of research.
     International environmental agreements invariably carry an
inordinate freight of ideology, and the Biodiversity Convention was
by no means different in that respect.  That was until Merck
coordinated a meeting with Genetech, a leading biotechnology
company, and three environmental organizations -- the World
Resources Institute (WRI), the World Wildlife Fund (WWF) and the
Environmental and Energy Study Institute -- to resolve objections
raised by the Bush Administration over intellectual property right
protection.
     The Working Group on Biodiversity, as it referred to itself,
fashioned an interpretive statement that essentially stated that
language in the Biodiversity Convention did not allow for the
expropriation or violation of intellectual property of U.S.
pharmaceutical or biotechnology companies.  After agreeing to the
language of the interpretive statement, the Working Group forwarded
the statement to the Clinton Administration where it is under
review by the Department of State, the U.S. Trade Representative
and other relevant agencies.  Following minor adjustments, the was
sent to the Senate for ratification.
3.        Related Cases
     Keyword Clusters         
     (1): Trade Product            = PHARMaceutical
     (2): Bio-geography            = TROPical
     (3): Environmental Problem    = Bio-Diversity [BIODV]
4.        Draft Author:  Duaine Priestley and Steve Pearson 
B.        LEGAL Filters
5.        Discourse and Status:  AGReement and COMplete
     It is an agreement of each party's obligations, exclusivity of
arrangements, confidentiality of information, inventions and
patents, payments in terms of royalties, indemnities and specific
clauses to the effective length of the agreement and its
termination.  INBio wasto sign a similar agreement with two
European pharmaceutical companies before the end of 1992.
6.        Forum and Scope:  Non-Government Organization
          [NGO] and NGO
     The forum for this agreement is a legal contract between a
U.S. pharmaceutical company and a private, non-profit, scientific
organization.  Presumably, the parties have agreed to which
countries' domestic laws will apply in the event of a disagreement
over specific clauses of the agreement.  
7.        Decision Breadth: 1 (Costa Rica)
     The U.S. Congress has an interest.  One Congressional bill was
introduced to encourage investment by U.S. pharmaceutical companies
to conserve bio-diversity in Latin America.
8.        Legal Standing: NGO
     "The National Biodiversity Institute (INBio) is a non-profit
and private Costa Rican organization dedicated to the conservation
of this wild land bio-diversity through facilitating its
nondestructive intellectual and economic uses by national and
international society."
C.        GEOGRAPHIC Filters
9.        Geographic Locations
a.   Geographic Domain : North America [NAMER]
b.   Geographic Site   : Southern North American [SNAMER]
c.   Geographic Impact : Costa Rica [COSTA]
     In the small Central American nation of Costa Rica (about the
same size as West Virginia), about 28 percent of the forest was
lost between 1966 and 1989.  Costa Rica contains almost as many
terrestrial species as all of North America, or about 4 percent of
the world's terrestrial species (which translates to a total of
500,000 species, of which insects and spiders may account for
300,000).  Species are being reduced at a rate of half a percent
each year due to deforestation.  Fortunately, these trends are
being reversed.  The Costa Rican Government has designated 27
percent of the country as conservation areas (see COSTBEEF case).
10.       Sub-National Factors:  NO
11.       Type of Habitat: TROPical
D.        TRADE Filters
12.       Type of Measure:  ADMINistrative
     INBio is required to establish facilities for the purpose of
collecting samples, agrees to hire and train staff, and will
maintain appropriate financial records pertaining to the project.
13.       Direct vs. Indirect Impacts: INDirect
     While not considered either a trade measure or an
environmental regulation, the agreement can serve as a model for
future innovative programs to facilitate biological resource
conservation.  Because of intellectual property rights involved in
the case, it is a direct impact.
14.       Relation of Trade Measure to Resource Impact
     a.  Directly Related     : YES  Intellectual Property [IPR]
     b.  Indirectly Related   : YES  PHARMaceuticals
     c.  Not Related          : NO
     d.  Process Related      : YES  HABITat Loss
15.       Trade Product Identification:  PHARMaceuticals
     If and when the search yields a commercially viable product,
Merck will pay INBio up to 10 percent on royalties.  According
to an INBio spokesperson, a two-percent royalty on 20 products
could yield more money than the Costa Rican Government now gets
from exports.  The Ministry of Natural Resources will receive
half of all the royalties paid out as well as 10 percent of Merck's
"prospecting fee."  The Ministry has already received the first
installment of Merck's fee to INBio, which is being used to support
a marine park at Coco Island.  In addition, Merck has donated
$180,000 in equipment to INBio for chemical extraction and is
helping to train Costa Rican scientists and field collectors (known
as parataxonomists) in species identification and collection. 
Thirty-one parataxonomists presently comb Costa Rica's forests,
gathering up to 5,000 insects and 50 plant specimens each month.
16.       Economic Data
     The world's largest pharmaceutical companies in terms of sales
(in billions of dollars in 1992) are as follows (see Table III-
47-1).
                   [Table III-47-1 about here]
17.  Impact of Measure on Trade Competitiveness:  LOW
     Merck paid one million dollars to INBio for the right to
analyze an agreed-upon number of indigenous plant and animal
samples.  Merck (it is believed) will pay INBio between one to
three percent royalty for any product developed through the
agreement.  Ten percent of the initial one million dollars and
fifty percent of any royalty will be invested in biodiversity
conservation through Costa Rica's Ministry of Natural Resources. 
The remainder of the royalties will be used to preserve the
environment at the discretion of INBio's board of directors.
18.       Industry Sector:  PHARMaceutical
19.       Exporter and Importer: Costa Rica [COSTA] and USA
     World trade in pharmaceuticals is approximately $40 billion,
of which two-thirds comes from the United States.  For comparison,
Costa Rican world exports in 1992 amounted to about $0.9 billion.
E.        ENVIRONMENT Filters
20.       Environmental Problem Type:  Bio-diversity [BIODV]
     The problem includes the resource depletion categories,
biodiversity, species loss, and resource conservation.  Costa Rica,
as indicated earlier, has a diverse geographical landscape which
facilitates a rich diversity of biological resources.  Scientists
estimate that Costa Rica has between 5 to 7 percent of the world's
biological diversity and has more biological resources per hectare
than any other country.  Furthermore, scientists estimate that
Costa Rica has 12,000 species of plants of which 80 percent have
been documented, and over 300,000 species of insects, of which only
20 percent have been cataloged.  INBio has cataloged a biological
inventory of an estimated 500,000 species over its ten year
history.
21.       Name, Type, and Diversity of Species 
     Name:          MANY
     Type:          MANY
     Diversity:     7,074 higher plants per
                    10,000 km/sq (Costa Rica)
22.       Resource Impact and Effect: LOW and REGULatory
     Other pharmaceutical companies, and other developing countries
-- including Mexico, Indonesia, and Kenya -- are studying the
Merck-INBio agreement as a preliminary step to setting up their own
deals.  Many of the experts familiar with the Merck-INBio
agreement, however, emphasize that Costa Rica is uniquely
positioned to take advantage of the pact because of its stable
democratic government and its commitment to preserving bio-
diversity.
23.       Urgency and Lifespan: LONG and 100s of years 
24.       Substitutes:  Bio-degradable [BIODG] products          
     The natural environment holds rich potential as a research
base for biotechnology and pharmaceutical companies.  Companies
should be seriously interested in the preservation of biodiversity
since unique chemicals that exist in the wild may not be replicable
in the laboratory.  It has been estimated that one-quarter of all
medicinal prescriptions in the United States are based on plants,
microbes, or synthetic chemicals derived from plants and microbes. 
Drugs derived from natural resources include penicillin (from a
mold), taxol (a cancer drug from yew tree bark), streptomycin
(antibiotic from soil sample), vinblastine and vincristine (wonder
drugs for childhood lymphocytic leukemia derived from the rosy
periwinkle).  The exploitation of the rosy periwinkle stands out as
an example of how bio-chemical discoveries have typically been
handled in the past.  The identification of the rosy periwinkle's
beneficial chemical attributes netted the drug industry millions of
dollars but did nothing for the source country of Madagascar.  
VI.       OTHER Factors
25.       Culture:  NO   
     An ethnobotanical approach is more sensitive to working with
indigenous people, as it uses the knowledge of traditional
shamanistic medicine to discover plants with medicinal potential.
26.       Trans-Border:  YES
     Costa Rica's forests are part of a larger Central American
eco-system.
27.       Rights:  YES
     The project has the avowed purpose to involve local people in
the project and assist in the human rights of the local peoples.
28.       Relevant Literature
"Biodiversity: Protections Provided in International Pacts Seen
     As Best Framework for 'Bioprospecting.'" BNA
     International Environment Daily (June 30, 1993), 3.
Blum, Elissa. "Making Biodiversity Conservation Profitable: A
     Case Study of the Merck/INBio Agreement."  Environment
     35/4 (May 1993), 16-20 and 38-44.
Convention on Biological Diversity.  United Nations Environment 
     Programme.  United Nations Doc. Na.92-7807: 9-12.
Gardner, Richard N.  Negotiating Survival: Four Priorities After 
     Rio.  Council on Foreign Relations Press, New York, 1992.
GATT Focus 98 (April 1993): 1-4.
"If Biological Diversity Has A Price, Who Sets It and Who 
     Should Benefit?."  Nature 359 (October 15, 1992).
Joyce, Christopher. "Western Medicine Men Return to the Field:
     Tropical Forest Loss and Fast Lab Techniques are
     Propelling the Search for Therapeutic Phytochemicals."
     BioScience 42/6 (June 1992), 399-403.
McNeely, Jeffery A., et al.  Conserving the World's Biological 
     Diversity.  The World Bank, World Resources Institute,
     International Union for Conservation of Nature and
     Natural Resources, Conservation International and the
     World Wildlife Fund: Gland, Switzerland and Washington,
     DC, 1990. 
"New Measure Would Cover Extraction of Genetic Resources from 
     Rain Forest." BNA International Environmental Daily (July
     21, 1992).
Public Affairs Department, Merck & Company, Inc.  "The Merck
     Story: Serving Society." May 1993.
Roberts, Leslie.  "Chemical Prospecting: Hope for Vanishing 
     Ecosystems?"  Science 256 (May 22, 1992), 1142-3.
Report from the Instito Nacional de Biodiversidad (INBio).
     December, 1992.
Sheppard Jr., Nathaniel.  "Costa Rica Makes Conservation Pay
     Country to Benefit From Research Using Its Resources."
     Chicago Tribune (August 12, 1993), 1.
"The Biodiversity Treaty; Pandora's Box or Fair Deal?" 
     Science 256 (June 19, 1992): 1624.
Thernstrom, Sam.  "Jungle Fever: Lost Wonder Drugs of the
     Rainforest."  The New Republic 208 (April 19, 1993), 12+.

          


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