This is a presentation done based on potentials of pharmaceutical prospecting to finance biodiversity conservation.

1. Prospects of Pharmaceutical Prospecting
to Conserve Forest Biodiversity
in Sri Lanka

2. CONCLUSION OF PREVIOUS PRESENTATION
FAILURE
CORRECTED
LAND THAT
COULD BE
CONSERVED
FOREST (HA)
AS % OF TOTAL
GOVERNMENT 851 16
LOCAL MARKET 22 0.4
GLOBAL MARKET 4414 83
Therefore GEM should be promoted ...

3. HOW TO PROMOTE GEM ?
• Carbon trade (CDM etc.)
• GEF (BD and C)
• Pharmaceutical prospecting
• Eco tourism
• Trade on organic products
•Nature for debt swap
•etc ….

4. Economic Foundation of Pharmaceutical Prospecting
Total Economic Value of Biodiversity
1. Use value
Direct use
Destructive
Non-destructive
Indirect use
2. Option value
The possibility use in the future
Pharmaceutical
Agricultural
3. Bequest value
4. Existence value

5. Process of Pharmaceutical Prospecting: Plants to Pills
Search of biodiversity for useful chemicals and genes for
commercial use in medicine

6. Commercial Process of Pharmaceutical Prospecting
Protected
area Collectors
Drug
Co.
(R&D)
Drug Co.
(Production)
Hospitals
Etc.
ReturnsReturns
??????
ContractsContracts PatentsPatents Sales
•Commercial Value
•Property rights
•Contractual arrangements
•Equitable benefit sharing
Source : Aylward,1993

7. Objective of the Study
Examine the potential of pharmaceutical prospecting
to finance the conservation of forest biodiversity in Sri Lanka

8. Economics of Pharmaceutical Prospecting and
Biodiversity Conservation
3500 ft
5000 ft
Paddy
Mixed
Tea
Cardamom
Agriculture Forest
>

9. Hypothesis of the Study
The WTP for pharmaceutical prospecting (WTPpp) could
generate revenue higher than agricultural land use.
WTP pp > R ag
Empirical challenge is in estimating WTP pp

10. Analytical Methods
1.Review of past studies
2. Empirical case study in Knuckles forest in Sri Lanka

11. Review of Past Studies
i. Valuation of total use value of biodiversity as
medicines.
ii. Valuation of average option use value of biodiversity
in pharmaceutical prospecting.
iii. Valuation of the WTP for the option value of the
marginal species in pharmaceutical prospecting
without use of prior information in the research
process.
iv. Valuation of the WTP for option value of the marginal site in
pharmaceutical prospecting with use of prior information in the

12. I. Valuation of total use value of biodiversity as
medicines
Puroshothamon (1995) annual sales value of pharmaceuticals exceed 200 billion
US$ and over 25% of the drugs sold in the developed countries and 75% in the
developing countries are based on chemicals made by organisms.
Principe (1989) and Aylward et.al. (1993) value per untested species in
pharmaceutical prospecting range from $23.7 and $44.0 million
Balick and Mendelsohn (1992) revenues earned by harvesting
medicinal plants from rainforests ranged from US$ 16 to 61
ha/yr.

13. Gunathilake (1991) and Gunathilake et.al., (1993) estimated that VPF of the
Sinharaja and Knuckles forests in Sri Lanka earned 13 US$/ha/yr (988 Rs/ha/yr)
and 54 US$/ha/yr (4095 Rs/ha/yr) respectively, from collecting non-timber forest
products (of which medicinal plants is one).
Bogahawatte (ud) has estimated a cash income of 67 Rs/yr/household (0.88
US$/yr/household) obtained by VPF in the wet zone of Sri Lanka by harvesting
medicinal plants.

14. ii. Valuation of option use value of biodiversity in
pharmaceutical prospecting
Pearce and Moran (1994) 0.01 to 21.00 US$/ha/yr (0.76 to 1596 Rs/ha/yr).
Thushantha and Kotagama (1995), Kotagama (1996) Sinharaja forest of Sri
Lanka as 77.00 US$/ha/yr (5900 Rs/ha/yr).
Kararaluvinne (2001) Knuckles forest of Sri Lanka as 19.67 US$/ha/yr (1495
Rs/ha/yr).

15. iii. Valuation of the WTP for the option value of the
marginal species in pharmaceutical prospecting
without use of prior information in the research
process
Simpson et.al. (1995) estimated the maximum WTP (at 10% discount factor and
time ranging from present to infinity) for pharmaceutical prospecting of forest in
the south-western Sri Lanka as 16.84 US$/ha (1263 Rs./ha).
Again pharmaceutical prospecting is found not able to provide incentives to
conserve forest biodiversity.

16. iv. Valuation of WTP for the option value of
marginal site in pharmaceutical prospecting with
use of prior information in the research process.
Rausser and Small (2000) considering 18 sites (the same as those considered by
Simpson et.al., 1996) and using the information on the density of endemic
species as prior information, estimated the
present value of WTP of pharmaceutical prospecting in south-western
Sri Lanka is 7463 US$/ha (567188 Rs/ha), which is the
world’s second highest among the estimates.

17. Role of Traditional Knowledge
in Pharmaceutical Prospecting
The higher (440 times) WTP estimated by Rausser and Small
(2000) is attributed to information rent, in this case density of
endemic species.
If additional information of TKB were considered the value
would have increased further.

18. Test of hypothesis based on literature
If WTP estimated by Rausser and Small (2000) of 7463 US$/ha
is spread over 10 years at a 10% interest rate the value is US $ 1214 US$/ ha/yr
(92264 Rs/ha/yr)
if spread over 100 years it is 746 US$/ha/yr (56696 Rs/ha/yr).
A major commercial crop cultivated in the southern area of Sri Lanka and is
encroaching forests is tea.

19. Role of Transaction Cost
Transaction cost of institutionalising pharmaceutical
prospecting has not been included
Transactions costs are not known, an upper bound:
Sri Lankan forest resource administrative cost is 746
Rs/ha/yr.
If this cost is added to the opportunity cost of land of
forests in Sri Lanka it is 563 US$/ha/yr (42814
Rs/ha/yr).
Given the WTP for pharmaceutical prospecting as 746
US$/ha/yras estimated by Rausser and Small (2000), it is
not only possible to compensate the VPF not to

20. Comparison of revealed WTP and Estimated WTP
Considering a time span of 100 years and the WTP for pharmaceutical
prospecting, the total value that south-western region could obtain is 70,000 ha x
746 US$/ha/yr = 52.2 million US$/yr (397 million Rs/yr).
The World Bank project on Conservation of Medicinal Plants has spent only Rs.
2 million in year 2000,
The Asian Development Bank funded participatory forestry project in Sri Lanka
has spent only Rs. 33.4 million in year 2000.

21. Variance Between Research and Reality
Simpson (1995) in observing the over-enthusiasm shown
by the public on pharmaceutical prospecting despite the
low estimated WTP for pharmaceutical prospecting
noted that:
“If observation is at variance with economic logic, it would
hardly be the first time.”
This may now be rephrased in relation to Rausser and
Small’s (2000) high estimate of WTP for pharmaceutical
prospecting as:
“If observation is at variance with economic logic, it would
hardly be the second time.”

22. MV Vs AV
Rausser and Small (1998) in an article on ‘bio-prospecting
with patent races’ claim that:
“… when the buyers of genetic resources options are also
competitors in patent races, sellers can extract all the
surplus associated with their holdings. Under reasonable
conditions, the ex ante return to genetic resources assets
will then be determined, not by their marginal contribution
to surplus, but by their average contribution. The result
implies that several bio-economic studies reporting large
average species values provide credible estimates of the
strength of market incentives for biodiversity
conservation.”

23. Observations based on Review of Past Studies
WTP values range from “pennies in the lower end, 21
US$/ha in the mid to 9000 US$/ha in the higher end. Based
on the most recent estimates that are “visibly big” it is clear
that pharmaceutical prospecting alone could finance the
conservation of forest biodiversity.
Barret and Lybbert (2000) suggests, whether
pharmaceutical prospecting could generate revenue to
conserve biodiversity conservation by tipping the benefit
cost scales on land use in favour of conservation is a context
specific, empirical question.

24. Case (Knuckles) Specific Analysis: Method
WTP: Pearce and Moran (1994)
Vmp (L) = {NR* p* r* a* Vi/n}/ A
Vmp(L) potential revenue that could be generated from pharmaceutical prospecting per
hectare per year;
NR number of plant species at risk of extinction:
P probability of discovering a drug from a plant;
r royalty rate on pharmaceutical prospecting;
a probability of appropriating revenue generated from
pharmaceutical prospecting;

25. Number of plant species at risk of extinction (NR)
space (endemic) and time (threatened) scarcity
used the identified number of endemic woody plants as
the scarcity indicator of plants in the Knuckles forest area
Woody plant species diversity within the Knuckles forest
Classification Number
Families 67
Genera 183
Species 288
Rare species 12
Endemic species 85
Rare and endemic species 3
Nationally threatened species 11
Globally threatened species 25

26. Probability of success of inventing a plant based drug
(p)
Pearce and Moran (1994): 0.001 to 0.0001, as revealed
by experts of pharmaceutical companies.
1986 to 1995 the National Cancer Institute of USA:
about 0.01 had showed some positive activity.
The increase in pharmaceutical prospecting values does
not have a straight-line relationship with probability of
success of research.
Simpson et. al (1996) probability of success that could give the
highest value of the marginal species as 0.000012.

27. Traditional Knowledge and Probability of Success of Research
Sri Lanka has high biodiversity and high base of TKB
About 35% of the Sri Lankan population, depends on traditional systems of
medical care.
About 250 species of plants are commonly used in traditional medicine of
which 50 species are heavily used

28. Quantifying Impact of Traditional Knowledge on P
Proxies could be considered.
Sri Lanka 7456 plant species of which 3360 flowering plants have been identified and
1414 plant species are used for medicinal purposes (of which 250 are commonly used
and 50 heavily used)
Hence to the base of number of flowering plants identified, 0.42 of the plants are used
for medicinal purposes and 0.07 commonly used and 0.01 heavily used.

29. The royalty rate (r)
Vogel (1996) as high as 0.15, as with intellectual property with
monopoly control.
royalty would be meagre, given the emerging price war among
supplying countries. royalty could drop down to low as 0.02.
In practice, it is reported that Monsanto Company has
negotiated bio-prospecting contracts with International Co-
operative Biodiversity Group for access to samples with royalties
as low as 0.02 on net sales.
Pearce and Moran (1994) has used a royalty rate of 0.05 based on
the observation that existing royalty rates in general range
between 0.05 to 0.20 and that a low figure is applicable for
pharmaceutical prospecting.

30. The probability of appropriating pharmaceutical
prospecting values (a)
“Agreements on benefit sharing are the exception rather than the
rule and rarely do developing countries receive any sharing of
the benefit from commercial exploitation. A recent example is a
Sri Lankan plants, Salacia reticulata, Salacia prinoides,
Patent no: JP 11029472, 2 February 1999
US 5691386A 25 November 1977
Banning the export of the plant material from Sri Lanka!!!
Pearce and Moran (1994) suggests that the appropriation rate
could be low as 0.1 in developing countries.

31. Average annual value of plant based drugs (V)
I. market value of plants traded for medicinal purposes
II. market value of drugs of which the source material has been
plants
III. statistical value of life of lives saved using plant based drugs
Pearce and Moran (1994) has suggested the range US $ 0.39 to
7.00 billion as the annual value of a plant based drug.

32. Analysis on Knuckles Forest
If WTP/AG > 1 then accept hypothesis that pharmaceutical
prospecting could conserve biodiversity
N = 85, V/n = 3.7 m $/yr, A = 1600 ha
Basis p r a WTPpp WTP/AG
1.Global
average
0.0005 0.05 0.1 49 0.08
2. p on
patents
0.008 0.05 0.1 785 1.4
3. p break
even
0.006 0.05 0.1 588 1.0
4. r max 0.0005 0.15 0.1 147 0.26
5. a max 0.0005 0.05 1.0 490 0.88

33. Conclusions
Potential exists for pharmaceutical prospecting to
generate revenue to conserve forest biodiversity in
Sri Lanka
Potential could improve due to not only the
availability of high biodiversity but also due to the
high availability of TKB.
Sri Lanka should attempt to formally appropriate
the benefits from pharmaceutical prospecting,
dispelling bio-piracy.

34. The process of establishing legislation and
institutions on property rights on appropriating and
sharing of benefits from pharmaceutical prospecting
should be expedited.
Pharmaceutical prospecting is a highly socially and
politically sensitive and contentious issue.
Hence broad and transparent public consultation is
essential to decide whether Sri Lanka should engage
in pharmaceutical prospecting, with whom, how and
when etc.