The biotech industry, after a decade of incubation, is now taking its first commercial steps.

Scientists using new abilities to rearrange genes, fuse cells and harness enzymes have created the first in an expected outpouring of products from biotechnology. The products now available include human insulin, amino acids used to make low-calorie sweeteners and an enzyme-based drain cleaner. Products being developed or tested include human growth hormone, genetically engineered pesticides and new strains of tobacco.

This miraculous new technology, just now moving from laboratories to industrial plants, is the unforeseen creation of the federal government.

"We fathered the industry," says Thomas E. Malone, deputy director of the National Institutes of Health. "We are part and parcel of it."

Although universities, venture capitalists, scientists and entrepreneurs all have played key roles in the industry's development, the critical factor has been 30 years of growing federal support for basic biomedical research, led by the NIH, experts on all sides agree.

NIH created the knowledge and personnel base, actively worked to transfer technology from the laboratory to the market and invented a quasi-regulatory oversight system that encouraged research. Together, these three essential elements added up to an industrial policy that enabled the biotechnology business to emerge.

The presence of NIH in Bethesda has helped spawn more than 200 companies in the Washington area that use the new techniques of genetic engineering to produce products or provide research services and supplies.

Several hundred new U.S. firms, reflecting a capital investment of more than $1.9 billion, are now employing biotechnology, according to a report by the U.S. Department of Commerce. The worldwide market for their products could range from $40 billion to $100 billion by the year 2000, the report said.

The United States is the world leader in most areas of biotechnology, with more companies, products, scientists and government support than anywhere else. But biotechnology has been targeted in other industrialized countries as a vital growth industry, and formidable foreign companies are working to close the gap with their American competitors.

The industry's take-off comes at a time when NIH's growth has leveled off. NIH Director Dr. James B. Wyngaarden observes that the "explosive growth" of NIH's past is over and that the agency has entered "a new, steady state." It is not clear how well the U.S. lead will hold up, according to an appraisal by the Congressional Office of Technology Assessment.

Just as NIH's role was the key to the birth of biotechnology, the industry's future will depend in large part on the future impact of federal government policies in areas ranging from regulation to funding of basic research, according to industry leaders and scientific experts. NIH's Financial Support

During a recent visit to the United States, French President Francois Mitterrand stopped to tour California's Silicon Valley, where he hoped to learn more about the ingenuity and entrepreneurial drive that gave birth to so many companies there.

Over lunch, Mitterrand listened as Thomas Perkins, a partner in the venture capital fund that started Genentech Inc., extolled the virtues of the risk-taking investors who finance the entrepreneurs.

Perkins was cut off by Stanford University Professor Paul Berg, who won a Nobel Prize for work in genetic engineering. He asked, "Where were you guys in the '50s and '60s when all the funding had to be done in the basic science? Most of the discoveries that have fueled [the industry] were created back then."

Berg's point was that through research grants and contracts, with thousands of its own scientists and laboratories and a budget that reached $4.5 billion in fiscal 1984, NIH created the foundation of modern biotechnology.

NIH sponsored the research that yielded technical breakthroughs that are now the basic tools of the industry. NIH support also created a national wealth of highly trained biomedical scientists.

"I cannot imagine that, had there not been an NIH funding research, that there would have been a biotechnology industry," Berg said.

"Thirty-five years of government support for basic biomedical science. . . is absolutely the reason the United States was able to develop biotechnology and maintain a world lead," said David A. Jackson, senior vice president and scientific director of Genex Corp., whose doctoral and postdoctoral work with Berg was partly sponsored by NIH.

Today, NIH's 11 institutes and various programs constitute the world's largest biomedical research laboratory, with 2,000 laboratories and 3,000 scientists. About 80 percent of its budget, however, goes to support outside research at universities, hospitals and other research institutions. A Commitment to Basic Research

This support by NIH amounted to an industrial policy, although not as that term is customarily used by politicians and academics. NIH did not set out to create an industry capable of creating new products through gene splicing and cell fusion. Its mission has always been to improve the nation's health through biomedical research.

Since the 1950s, NIH funding has been motivated only by "an unabashed commitment to basic research," said William F. Raub, NIH deputy director for extramural research and training.

Rather than try to guide research along certain paths, NIH relies on the scientific community to generate ideas and pursue new lines of biomedical inquiry, said Raub, an 18-year veteran of NIH. "We don't know what we don't know . . . the primary drive is the imagination and ideas on the bench, which are then filtered by the decision-makers here, who act with a relatively light touch."

Scientists who received NIH support agree. "There was no specific prediction of when or what would be created," said Jackson, who worked on gene splicing at Stanford in the late 1960s and early 1970s. "One could really not have predicted in advance where the breakthroughs would come that would lead to recombinant DNA technology."

For example, restriction enzymes were "a scientific backwater" at one time, Jackson said, until it was discovered that they cut DNA molecules at specific sites. Then they turned out to be crucial to the development of gene splicing. "There was no way to predict restriction enzymes would be a key technology," he said.

"The basic principle is, fund people who are very competent and well-trained to look for new facts about life and biology," said Dr. Donald S. Fredrickson, director of NIH from 1975 to 1982, who spent 29 years at NIH.

The "war on cancer" in the 1970s accelerated the process by pumping an extra $100 million a year into biomedical research.

In 1971, President Richard M. Nixon committed the government to the campaign against cancer, pledging a blank check to finance the work of scientists and researchers.

"If $100 million is not enough, we will provide more money," Nixon said. "To the extent money is needed, it will be provided."

NIH's budget grew to $2.2 billion in fiscal 1972, a 32 percent increase from the year before, while the budget of NIH's largest unit, the National Cancer Institute, grew 62 percent to $379 million.

By fiscal year 1980, NIH's budget had reached $3.4 billion and NCI's had reached $999 million.

"There is no doubt that the cancer budget was the engine that was pulling the entire biomedical research budget," said Benno C. Schmidt, chairman of the President's Cancer Panel from 1972 to 1980.

The campaign "provided more money for scientists to go in those directions in cell biology which were just opening because of technical opportunity," Fredrickson said.

In October 1972, Jackson and Berg published the first paper describing the technique of inserting one gene into another cell. In 1973 and 1974, Stanley Cohen of Stanford University and Herbert Boyer of the University of California developed the classic method of recombining molecules of DNA, or deoxyribonucleic acid, the carrier of the genetic code. Promoting Commercialization --

NIH also has actively encouraged the commercialization of the scientific findings it financed.

From the start, NIH gave a high priority to transferring technology from the laboratory to public use as part of its mission to improve health. It later realized there would be economic benefits as well.

"Government supports research because it is in the national interest and essential to the welfare and security of the nation," NIH director Wyngaarden said in 1982. Government works to transfer technology "to ensure that the public good is served both through the appropriate application of research results and the development of economic well-being of the country," he added.

Since the 1960s, NIH has employed a patent policy designed to stimulate the translation of discoveries into marketable biomedical tools. The policy allows universities the first option to patent the fruits of NIH-funded research. The university can then license the discovery or invention to private companies with the ability to use it or market it commercially. The royalties are then used to support additional education and research at the university. In 1980, NIH's policy was turned into law affecting all federal departments sponsoring research by nonprofit institutions.

"The goal is to get the inventions that the government paid for out to the public as quickly as possible," said an NIH patent attorney. "We use patents as a means of attracting industry to put it on the market."

One of the most common tools of the biotech industry is the gene-splicing method patented by Cohen and Boyer. NIH actively supported the application to patent their method, which is now used by virtually all genetic engineering firms through licensing agreements.

In 1977, NIH established its Office of Medical Applications of Research, called OMAR, which actively encourages the commercialization of other discoveries.

If a university does not excercise the right to patent, or if an invention is the product of internal NIH research, OMAR may recommend it be patented. If the government does patent the invention, it will be licensed and the royalties given to the U.S. Treasury.

Former NIH director Fredrickson said he created OMAR to address congressional concerns about the "gap between the great tumbling out of knowledge and the translation of that knowledge into practical reality."

"There was considerable criticism from some quarters in Congress. . . questions about the responsibility of science to utilize the knowledge," Fredrickson said. "I agreed with some of their criticism."

NIH has also acted as the hub of communication in the national biomedical community, actively disseminating information about new research, findings and methods through sponsoring conferences, through the resources of the National Medical Library and through its peer-review system of awarding grants.

NIH depends on panels of distinguished scientists to review all grant applications and contract proposals "for scientific merit." Members of the panels include prominent university scientists, as well as representatives of fields such as law, education, public health and industry. The Leap From Lab to Market

Entrepreneurs, scientists and investors recognized the commercial potential of certain biomedical breakthroughs and in the mid-1970s began forming new biotech companies to exploit them.

Genentech, formed in 1976, was founded specifically to exploit the Cohen/Boyer patent for recombinant DNA technology. Its intital public stock offering in 1980 set a Wall Street record for the fastest rise in price per share -- $35 to $89 in 20 minutes.

The next year, 1981, more than 80 new biotechnology firms were formed, the OTA report said. Cetus Corp., a company established before 1976 and that moved quickly to use the new biotechnology, set a Wall Street record that year for the largest amount of money raised in an initial offering -- $115 million.

That was also the year E. I. du Pont de Nemours committed $120 million to research and development in the life sciences, leading the way for other corporate giants to enter the fray. Today, companies like Monsanto, Eli Lilly & Co., Exxon and General Foods are involved in biotech research, joint ventures and marketing.

Since the leap from lab to market, NIH and other arms of the federal government have also played a role nurturing the new industry. NIH has provided the contracts that help the small companies get started, the scientists that fuel the industry and the ongoing research that is considered the cutting edge of biomedical science.

NIH changed its rules in 1981 to allow companies to apply for research grants. So far, companies have only submitted about a dozen grant applications a year, out of the 20,000 a year reviewed by NIH, said Raub, the deputy director.

Traditionally, profit-seeking firms could only obtain NIH contracts, which are rigorously defined service or product agreements such as a clinical trial or substance test. Research grants traditionally went to nonprofit researchers such as university scientists, who submitted their own ideas and requested funding.

One key to the industry's emergence has been the government's decision in the mid-1970s not to regulate laboratory research -- a major political victory for NIH.

Concern about the possible hazards of working with recombinant DNA led to a request from scientists that NIH establish research safety standards.

The NIH Guidelines for Research Involving Recombinant DNA Molecules, first issued in 1976, included procedural requirements and prohibited certain classes of experiments.

Researchers receiving federal funds for working at federally funded institutions were required to adhere to the guidelines; companies were not legally obliged to follow the rules, but agreed to do so voluntarily.

During the 1977-78 congressional session, however, 16 different bills dealing with recombinant DNA were introduced, including several that would have made the NIH guidelines mandatory for private industry.

Fredrickson, then NIH director, intervened, persuading the White House to assemble a study committee representing all the regulatory agencies and science agencies, which he chaired. The committee "found that none of them [the agencies] had statutory authority to regulate in the lab," he said. "We said, let's try to do it through a voluntary system."

The congressional bills died, and industry was free to perform recombinant DNA research if it voluntarily followed the guidelines.

"It was a big victory for the people," not just industry, Fredrickson said. "They recognized that you cannot regulate science by statute."

As the products of biotechnology move from laboratory to market, however, a variety of government agencies are moving now to take responsibility for ensuring that they do not endanger the public's health and safety.

The U.S. Food and Drug Administration reviewed the first federally approved product of gene-splicing, human insulin, and the Environmental Protection Agency now is reviewing a proposal for a genetically engineered pesticide.

An interagency task force on biotechnology, under White House direction, has concluded that existing laws and agencies can handle the new products. But the agencies will need a panel of scientific experts to help them develop policy and make decisions, said Bernadine Bulkley, chair of the task force, at a House subcommittee hearing last week.

Industry hopes that the task force's findings, to be published in the Federal Register, will eliminate the uncertainty that has stalled research and development of some products.

Government policy-makers hope their decisions will encourage business while allaying popular concerns about the safety of genetic experimentation.

But while the industry may benefit from this federal policy effort, there is concern about the impact on biotechnology of federal budget pressures.

Although NIH's spending seems to be growing steadily, a different pattern emerges when the numbers are adjusted for inflation. In constant, inflation-adjusted dollars, NIH's total spending peaked in 1979 and declined 11 percent over the next three years.

Constant dollar spending increased in 1983 and 1984 to a level virtually even with the 1979 high.

In light of more limited resources, NIH's priorities will remain the pursuit of basic knowledge, reliance on investigator-initiated research and an effort "to assure a continuing supply of well-trained scientists," said NIH director Wyngaarden.

But there is concern the supply won't be large enough. "The biotech industry emerged out of a very strong base of academic support," said Genex Corp.'s Jackson. "The reason the industry is as healthy as it is today is because of the nation's science base, which must continue to be nurtured."