Impact of the Nagoya Protocol on the Global Economy

Impact of the Nagoya Protocol on the Global Economy

September 2013

! Execu&ve Summary

! What is the Nagoya Protocol?

! How will the Nagoya Protocol be implemented/executed?

! What are the benefits of the Nagoya Protocol?

! Who will be impacted?

! What is the current status?

! What are the key ques&ons to consider?

Objective and Contents

The Nagoya Protocol will become a treaty if 50 countries ra9fy it; as of September 4, 2013, 92 countries signed the treaty and 19 ra9fied it

If implemented the Nagoya Protocol will have serious implica9ons on the pharmaceu9cal, cosme9cs, and food and beverage industries from a sourcing perspec9ve

In this report, The Smart Cube analyzes the impact and outlook of the Nagoya Protocol

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Definitions and Abbreviations:

Term Defini*on

Gene&c Resource §  Gene&c resources can be obtained from plants, animals, and micro-‐organisms, and they can be u&lized for both commercial (to develop specialty enzymes, small molecules, crop protec&on, drug development, etc.) and non-‐commercial uses (taxonomic research, ecosystem analysis, etc.)

Biological Diversity §  Biological diversity is the degree of varia&on of life forms within the given ecosystem (planet earth); biodiversity is a measure of the health of ecosystems through various indicators

CBD §  Conven&on of Biological Diversity, with the assistance of United Na&ons was the first step, that led to the crea&on of the Nagoya Protocol

§  This conven&on was first opened at the Earth Summit in Rio de Janeiro on June 5, 1992, and entered into force on December 29, 1993

§  The three main objec&ves of this conven&on include the following: ―  Conserva&on of biological diversity

―  Sustainable use of its components

―  Fair and equitable sharing of benefits arising from gene&c resources

Ra&fica&on of the Nagoya Protocol

§  Official adop&on and approval of the Nagoya Protocol

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Fair and equitable sharing of benefits arising from u5liza5on of gene5c natural resources, thereby contribu5ng to the conserva5on and sustainable use of biodiversity is the key objec5ve of Nagoya Protocol

If a company from Denmark (user) discovered a plant in the Solomon Islands (provider) that could lead to a final product sold across different regions, that company would be obliged to share profits arising with the country (provider – Solomon Islands) or alterna9vely, it will be obliged to share the technology/exper9se, etc., with the country (provider – Solomon Islands)

Organiza5ons/individual bodies (users) consuming gene5c resources (from the provider country) would be required to share a por5on of their profit with the provider, aEer the ra5fica5on of the Nagoya Protocol (by the provider country)

Medium Low Low-‐Medium Medium-‐High High Degree of Impact:

Source: Conven&on on Biological Diversity; Reuters

S.No Industries that Could Get Impacted Strategic Impact Supply Chain and Opera*onal Impact

1 Pharmaceu&cal Industry and Health Care Segments

2 Fast Moving Consumer Goods (FMCG)/Consumer Packaged Goods (CPG)

3 Agricultural Products

4 Chemicals

5 Hor&culture

6 Non Commercial Research

Impact on Various Industries

The Nagoya Protocol aims at conserving biological diversity and ensuring the sustainable use of its components through a fair and an equitable sharing model of genetic resources

The Nagoya Protocol

Hypothe*cal Scenario

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What is the Nagoya Protocol?


Importance:

§  A legal framework and transparency will be created for both the providers and users of gene&c resources through the following: ―  Establishing a unified system for allowing access to gene&c resources and stopping illegal interna&onal trade and natural exploita&on

―  By crea&ng a fair and equitable sharing model wherein both the provider and the user acquire the benefits

§  The Nagoya Protocol focuses on gene&c resources that are covered by the Conven&on of Biological Diversity and on benefits occurring from their u&liza&on

§  This Protocol was adopted on October 29, 2010, in Nagoya, Japan, and it will be implemented 90 days afer the 50th country’s ra&fica&on

Current Status:

§  As of September 4, 2013, Cambodia, El Salvador, Guinea-‐Bissau, Honduras, Ireland, Kenya, Lebanon, and Nigeria were the latest countries to sign the Nagoya Protocol on Access and Benefit-‐sharing model across the globe ―  Other countries that have signed this treaty include the European Union, Japan, India, Australia, Indonesia, Mexico, Argen&na, Brazil, and South

Africa; this brings the total number of signatories to 92

―  However, countries, such as China, Canada, Israel, Russia, USA, UAE, Malaysia, and Singapore, have not yet signed the treaty

§  Only about 19 signatories (including India, Mexico, South Africa, Jordan etc.) have ra&fied it

Overview

Evolu*on

Forma&on of Ad Hoc Working Group

by UN

Forma&on of CBD (Conven&on on

Biological Diversity)

1989 Time Period (Year)

1992

Evolu*on of CBD to Nagoya Protocol

Forma&on of Nagoya Protocol

2010

§  The forma&on of the Conven&on of Biological Diversity in 1992, was the first stepping stone that led to the forma&on of Nagoya Protocol in 2010

Panel of Experts on Access and Benefit-‐Sharing Formed

2001

World Summit on Sustainable Development

2002

Forma&on of Legal and Technical Experts for ABS

2008-‐2009

The Nagoya Protocol provides a transparent legal framework for the “fair and equitable sharing of benefits” arising out of the utilization of genetic resources

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How will the Nagoya Protocol be monitored?


Provider (Country)

Gene9c Resources

User

Benefits Monetary Benefits

Non Monetary Benefits

Both the par5es (the user and the provider) designate checkpoints to monitor the compliance of gene5c resources, and the informa5on obtained is submiGed to relevant authori5es, the provider party, and the ABS Clearing-‐House Mechanism

Prior Informed Consent (PIC) and Mutually Agreed Terms (MAT) are fixed between the user and the provider and

needs to be followed throughout

Gene9c resources can be obtained from plants, animals, and micro-‐organisms, and they can be u9lized for both commercial (to develop specialty enzymes, small molecules, crop protec9on, drug development, etc.) and non-‐commercial uses (taxonomic research,

ecosystem analysis, etc.)

End Users

End users can be companies, universi9es, and researchers that

u9lize gene9c/biological resources in their

product development

AZer the implementa9on of the Nagoya Protocol, benefits have to be shared with the provider

Monitored by the Following Elements

Government Bodies Access and Benefit Sharing Cons&tuents

Other Relevant Authori&es within the Provider Country

The Nagoya Protocol Cons*tuents

This etiquette will be strictly monitored by various relevant authorities of the provider (country) and Access and Benefit Sharing (ABS) constituents

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What are the benefits?


Benefits listed under the protocol include both monetary and non-‐monetary benefits to the providing party as follows:

Monetary Benefits:

§  These benefits include a por&on of the total revenue obtained from the sales of the final product by the user from the source (within that country/region) to the providing party

Non Monetary Benefits:

§  These are not monetary benefits but rather other benefits that arise out of processes (research and development)

§  This can be ini&ated through the following means from the user to the provider:

―  Transfer of technology and exper&se

―  Infrastructure set up

―  Other joint ini&a&ves, which include joint research and training

Benefits

The Nagoya Protocol will create greater legal certainty and transparency for both the provider and the user of gene5c resources by establishing condi5ons for access to gene5c resources and ensuring benefit-‐sharing mechanisms

The provider (country) of genetic resources is obliged to receive either monetary or non-monetary benefits from the end-user within a legal and transparent framework

“I also call on all par9es to the Conven9on on Biological Diversity who have not already done so, to ra9fy the Nagoya Protocol on Access to Gene9c Resources and the Fair and Equitable Sharing of Benefits Arising from their u9liza9on, and therefore help us all to

work toward the future we want.” – Ban-‐Ki-‐moon, Secretary-‐General , United Na*ons (June 2013)

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Who will be impacted?


Impact on Various Industries Upon Nagoya Protocol Implementa*on1

U*liza*

on of G

ene*

c Re

sources

Impact on Revenues High Low

Low

High Pharmaceu5cal and Health Care

FMCG/CPG (including Beauty

Care)

Agricultural Products

Chemicals

Non Commercial Research

Hor5culture

Exploita5on of natural resources and small-‐scale players (farmers) will decrease, and key cons5tuents (suppliers) within the supply chain are likely to obtain higher benefits with the implementa5on of the Nagoya Protocol

Companies in the pharmaceu5cal industry, FMCG/CPG, and agricultural space are likely to get impacted to a greater extent and will be forced to evaluate their long term sourcing strategies, new product launches, brand posi5oning etc.

Notes: 1) This quadrant has been built based on TSC’s understanding of various industry porlolios

A myriad of industries globally are likely to get affected, driven by a revenue/benefit sharing mechanism

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What would be the level of impact?


The following are the most likely impacts that will be observed across a spectrum of industries (which consume gene&c resources) globally afer the implementa&on of this protocol:

§  Increase in the input costs for product development: ―  The total input costs will likely increase driven by a regulated industry, and companies will no longer have the power to influence small players (suppliers)

―  For example, a large mul&na&onal company can force or leverage connec&ons to influence a small farmer to sell his/her gene&c plants at a low price; however, with the implementa&on of the protocol, farmers will demand a premium/minimum price for their plants with the help of various authori&es

§  Decline in opera*ng margins: ―  With organiza&ons required to provide monetary and non-‐monetary benefits to the provider country, the opera&ng margins of companies will likely be impacted

§  Increase in the market price of products (developed from gene*c sources): ―  With shrinking opera&ng margins, companies will be forced to increase market prices to sustain higher profits

§  Impact of The Nagoya Protocol on new product development: ―  Companies falling under the Nagoya Protocol will also be forced to devise new strategies for sourcing gene&c products or developing alterna&ve synthe&c products for new

product launches

§  Increase in the *melines involved for product development: ―  The supply chain is likely to become more regulated and &me spent in sourcing gene&c resources is likely to increase; this is largely driven by the various documenta&ons and

approvals required to source the product

―  This is likely to increase the total &me required for product development

§  Problem with respect to ownership of patents: ―  With the rules and regula&ons set by various bodies including Conven&on of Biological Diversity, patent ownership could become a serious threat

―  Also, a problem of mul&ple patent ownership could arise, driven by a benefit-‐sharing mechanism

Poten*al Impact Across Industries

Companies will have to start evalua5ng alterna5ve sourcing strategies for gene5c materials, to ensure that it does not fall within the framework of The Nagoya Protocol and assess the implica5ons on new product development costs and strategies surrounding it

Decline in operating margins, increase in input, and product development costs would be the major impacts

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Importance of Gene*c Biodiversity on the Pharmaceu*cal Industry:

§  Natural resources have con&nued to play a cri&cal role in the discovery and development of new drugs; these resources offer valuable poten&al for new chemical substances and ac&ve ingredients development

§  Over 1981–2006, 1,814 chemical compounds were discovered and developed for a spectrum of applica&ons ―  More than 52% of the total chemical molecules developed between 1981 and 2006 were derived using natural resources, and approximately 65% of the drugs developed for the

treatment of cancer (during 1940–2006) were derived from natural resources

§  Rain forests have also been an important source in drug development for various pharmaceu&cal companies

―  Experts and industry professionals across the supply chain state that less than 1% of the world’s tropical forest plants have been tested for pharmaceu&cal proper&es, while more than 47% of the total drugs developed to date have come from various natural resources

§  With the implementa&on of the Nagoya Protocol, the en&re pharmaceu&cal supply chain will be impacted

Notes: 1) The data labels highlighted in red circles are products, which contain gene&c deriva&ves

How will the pharmaceutical industry be impacted?

Chemical En**es Developed/Discovered (%, 1981–2006)1

All Available Drugs Developed/Discovered for Cancer Treatment (%, 1940–2006)1

Global pharmaceu5cal companies derive more than $20 billion in annual sales from drugs

developed through various natural resources

Legend:

TSD: Total synthe&c drug PTSD: Made by total synthesis, but the biological

molecule is obtained from a natural resource

V: Vaccine TSD-‐NP: Total synthe&c drug, with a small amount of

natural products

PTSD-‐NP: Par&ally synthe&c drug with natural product presence

B: Biological product NP: Natural product ND: Derived from a natural product and is usually

a semi synthe&c modifica&on

100% = 1,184 100% = 175

The pharmaceutical industry will be the most affected as genetic resources play a prominent role in the discovery and development of new drugs

TSD 30%

ND 23%

B 14%

TSD-‐NP 10%

PTSD-‐NP 10%

NP 5%

PTSD 4%

V 4%

ND 28%

TSD 24%

NP 14%

PTSD 11%

B 10%

TSD-‐NP 8%

PTSD-‐NP 4%

V 1%

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What is the importance of genetic resources in the pharmaceutical industry’s supply chain?


Pharmaceu*cal Industry – Typical Supply Chain

§  More than 42% of the world’s 25 top selling drugs were derived from natural sources; experts and industry professionals state that natural resources s&ll play an important role in 2013 and beyond for the development of various drugs ―  For example, drugs, such as aspirin, were developed from willow bark, while drugs, such as taxols and pacliaxel, were derived from yew trees

§  Pharmaceu&cal companies could face various reputa&onal risks if they are sourcing ac&ve ingredients from a species (of plants/animals) that is overexploited (which could poten&ally lead to their ex&nc&on)

§  To overcome this drawback, pharmaceu&cal companies are likely to increase investment in manufacturing a suitable alterna&ve in a synthe&c manner ―  For example, drugs, such as artesunate, are derived from wormwood

§  Pharmaceu&cal companies con&nue relying on various natural resources, such as land, water and crops, for manufacturing drugs

§  Sourcing quality water has always been an area of concern for a majority of pharmaceu&cal companies; water is needed in the right quan&ty and quality for manufacturing finished products

§  Natural disasters, such as earthquake, floods, and heavy rainfall, can also disrupt the en&re pharmaceu&cal supply chain

Pharmaceu*cal Industry – Dependence on Biodiversity

§  A majority of pharmaceu&cal companies rely on various products derived from natural sources, such as &mber, for packaging their final products

§  With increasing concerns over deforesta&on, pharmaceu&cal companies could be forced to find other alterna&ves for packaging products

§  Pharmaceu&cal companies will also be forced to evaluate other ar&ficial/synthe&c compounds as an alterna&ve op&on to gene&c sources; however, with more than 80% of the compounds (of human/animal waste) tending to remain medically ac&ve, pharmaceu&cal companies will have to conduct addi&onal research before finding a suitable replacement for gene&c sources and manage the product lifecycle

Every constituent in the supply chain of the pharmaceutical industry is either directly or indirectly dependent on natural resources for product development

Drug Discovery

Drug Development

Drug Manufacturing

Process

Packaging

Sales, Distribu*on & Product

Management

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Which part of the pharmaceutical firm’s supply chain is likely to get affected?


TSC Observa*on

§  Pharmaceu&cal companies will need to work closely with various local communi&es and government organiza&ons to u&lize natural resources to discover new drugs

§  Due to the various rules and regula&ons laid down by the Nagoya Protocol, companies might spend more &me and effort in discovering new drugs

§  The Access and Benefit Sharing Mechanism enforced by the Nagoya Protocol will increase product development costs and complicate the en&re drug manufacturing process ―  The increase in product development costs will be largely due to a highly regulated supply chain, and companies will be

required to pay a material por&on of their revenues

―  Also, companies will likely end up execu&ng joint patents with a local community (provider)

―  With a more regulated supply chain, &me spent in the approval process, commercial produc&on, etc., will increase, forcing pharmaceu&cal companies to evaluate alterna&ve means to develop products synthe&cally; this could increase research and development costs, thereby shrinking opera&ng margins

§  Pharmaceu&cal companies will likely evaluate various ar&ficial products for packaging their drugs; with an increasing concern for deforesta&on, various alterna&ve products (man-‐made) are likely to be developed for packaging

§  If the Nagoya Protocol is ra&fied, pharmaceu&cal companies will be obliged to share a por&on of their annual revenue obtained from that par&cular product with the local community (provider)

§  This could impact opera&ng margins and force these companies to increase the market price of products to sustain their margins

Impact

Drug Discovery

Drug Development

Drug Manufacturing

Process

Packaging

Sales, Distribu*on & Product

Management

Pharmaceu*cal Industry – Typical Supply Chain

Pharmaceu*cal Industry’s Supply Chain – Impact of Nagoya Protocol

If the Nagoya Protocol is ratified, pharmaceutical firms will need to closely manage and monitor activities and costs during the product development phase in their supply chain


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Impact of the Nagoya Protocol Across Other Industries

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What are the other industries that are likely to get impacted by the Nagoya Protocol?


Industry Type

§  Major FMCG/CPG products that u&lize natural ingredients for manufacturing purposes can be categorized as follows: ―  Household items – cosme&cs, shampoos, soaps, detergents, etc.

―  Food and beverages

―  Hygienic products – &ssue paper, healthcare creams/lo&ons etc.

Impact on Household Items:

§  In developed regions, such as North America and Europe, natural ingredients are likely to account for more than 5% of the overall cosme&cs market, while in developing regions, such as India and China, they are likely to account for less than 5% of the total market ―  The natural cosme&c industry in developed regions, such as North America and Europe, is likely to grow at more than 10% y-‐o-‐y,

driven by an increasing downstream demand in the near future

―  Consumers have started moving towards organic products, which is likely to propel demand for natural ingredients; with the ra&fica&on of the Nagoya Protocol, companies (especially in the cosme&cs industry) are likely to face a decline in revenues driven by an Access and Benefit Sharing mechanism

Impact on Food and Beverages:

§  With increasing health awareness across the globe, various food and beverage companies have started focusing on developing organic fruits and vegetables for a variety of food-‐oriented applica&ons ―  For example, various beverage companies have been focused on developing natural sweetener alterna&ves to sugar using

various organic methods

§  With the implementa&on of the Nagoya Protocol, companies are likely to face a decline in revenues and an increase in product development costs for accessing gene&c resources

FMCG/CPG Industry

Impact TSC Observa*on

Other industries that are likely to be impacted after the ratification of Nagoya Protocol include FMCG/CPG, agriculture, chemicals, and horticulture


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Impact of the Nagoya Protocol Across Other Industries

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What are the other industries that are likely to get impacted by the Nagoya Protocol?


Industry Type

Cosme*cs and Beauty Care Industry

Impact TSC Observa*on

The cosmetics and beauty care industry faces severe implications with respect to the Nagoya Protocol

§  The beauty and personal care products industry is also likely to be severely impacted by the Nagoya Protocol

§  According to a survey conducted by Union for Ethical Bio Trade in 2011 among respondents in France, Germany, the UK, the US, and Brazil, consumers generally lack trust in cosme&c and personal care industry

§  According to the same survey, 88% of the respondents stated that they wanted to know more about the sourcing policies of cosme&c companies; 84% of the responddents stated that they would boycor the products of a company if it did not respect environment or ethical trading prac&ces

§  The cosme&c industry has also arracted nega&ve media coverage with respect to biodiversity and sourcing prac&ces

Hor5cultural companies and organiza5ons engaged in non-‐commercial research are also likely to get impacted by increased regula5ons across the supply chain

Companies engaged in the agricultural product (vegetable oils) space and paper industry are also likely to face challenges aEer the ra5fica5on of the Nagoya Protocol


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Which regions are likely to garner benefits due to the execution of the Nagoya Protocol?


Global Biodiversity Landscape1 Regions Likely to Gain From the Implementa*on of Nagoya Protocol

Americas Europe Asia Pacific Africa

Brazil Italy Australia South Africa

Venezuela Spain Indonesia Angola

Colombia Greece Malaysia Democra&c Republic of Congo

Ecuador Papua New Guinea

Tanzania

Peru Thailand Kenya

Central America

India Ethiopia

Mexico China Cameroon

United States of America

South Korea Cote d’Ivoire

Guinea

Sierra Leone

§  Countries in La&n America and South East Asia possess a large amount of gene&c resources such as plants, insects, and certain microorganisms

§  These countries are likely to benefit from the “fair and equitable sharing of benefits” implied via the Nagoya Protocol

South America

North America

Africa

Europe

Asia

Australia

Low-‐Medium Medium Low Medium-‐High High Biodiversity:

Notes: 1) The biodiversity landscape has been plored based Conven&on of Biological Diversity’s’ classifica&on

Latin America, South East Asia, and Australia are likely to garner substantial benefits, driven by the presence of a large genetic resource pool

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What is the current status?

Ra&fied Signed

Nagoya Protocol–Treaty Progress as of September 20131

§  A significant number of developed and developing na&ons have signed the Nagoya Protocol ―  92 countries have signed the protocol; however, only a-‐

fifh have ra&fied it

§  The US (one of the largest users of natural resources) has not signed this protocol yet

§  The European Union signed the protocol in June 2011, however, it is yet to ra&fy it ―  If all members of the EU ra&fy the Nagoya Protocol, it will

be short of only 5 ra&fica&ons before becoming a law

§  Most of the signatories are ‘provider’ countries, while few ‘user’ countries have signed it

§  The Nagoya Protocol also includes a strong plan to protect biodiversity on the global scale ―  Na&ons have agreed to make 17% of the globe's land area

and 10% of coastal and marine areas into protected regions, as opposed to the current levels of 13% and 1%, respec&vely

―  Also, organiza&ons within these countries are required to set up biodiversity indicators to measure the company’s impact on the ecosystem

92 countries across the globe have signed the Nagoya Protocol to date, and it is likely to come into effect within 90 days of the 50th ratification

Source: Conven&on on Biological Diversity

“With the ra9fica9ons by Comoros, Mongolia and the Syrian Arab Republic, it is clear that the momentum is building to bring into force the Nagoya Protocol ahead of COP 12 in South Korea, so the first mee9ng of the Par9es to the Nagoya Protocol can take place in October 2014.” – Braulio Ferreira de Souza Dias, Execu*ve Secretary, Conven*on on

Biological Diversity (June 2013)

Notes: 1) Those countries, which have ra&fied the Nagoya Protocol have given their consent to be legally bound by the treaty, while being signatories does not entail such legal implica&on

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However, a host of issues remain to be resolved with the present state of the Nagoya Protocol

§  Although the protocol is likely to become a law aEer the ra5fica5on by the 50th country, no clear 5melines have been set to date

§  The significance of the impact on the downstream segments is not clear as a majority of the countries are yet to ra5fy the protocol

§  The US, one of the largest consumers of natural ingredients, has also not made its stand clear with respect to this protocol

§  The exact amount of revenue that should be shared with the provider (country) by the user has not been set, and this is likely to create further uncertainty in the ra5fica5on process; also, there are no set biodiversity indicators that can measure the company’s impact on the ecosystem

§  The scale of impact on the opera5ng margins of companies consuming gene5c resources will depend on a company’s annual consump5on ra5o and also on a host of other factors such as geographical presence and the Nagoya Protocol ra5fica5on

§  In developing countries in the regions of South and South East Asia, companies will have to tackle various issues, such as corrup5on and local poli5cs, to reach the local communi5es as the respec5ve country’s government officials will play a key role in the regula5ons

Open Ended Issues

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‘Your Checklist’ for the companies you are involved with/invested in:

§  Are you aware of The Nagoya Protocol?

§  What are the implica5ons on margins of your business if the protocol is implemented?

§  What is the dependence on gene5c resources as raw materials to develop your final product(s)?

§  Are your trade customers speaking about this protocol and its implica5ons?

§  Are you keeping a track of the various developments under the CBD and Nagoya Protocol? Will this protocol impact new product launches in the next 1-‐2 years?

§  Are you reviewing the laws of countries that act as a source for gene5c products? Has your country signed and ra5fied The Nagoya Protocol?

Here are a list of queries that senior execu5ves and decision makers across the supply chain should reflect regarding the impact of The Nagoya Protocol on your business:

Contact our strategy team to take this forward and know about our various offerings in this space! [email protected]

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Economy & Finance

Impact of the Nagoya Protocol on the Global Economy