By Randall Osborne


For at least a year, investing in ag biotech which once seemed a safer bet than pharmaceuticals has called for a broad vision and thick skin, an ability to see beyond slow progress and public doubts.

But with the uproar in recent weeks over gene-altered corn in tacos, it's been especially important that backers of the sector have hard shells rather than soft.

Could the headlines about Aventis CropScience's StarLink corn set back ag biotech's progress even further than the more general, ongoing skirmish imported from Europe over genetically modified organisms (GMOs) in crops? You bet your guacamole, said Sano Shimoda, president of Bioscience Securities Inc.

"The ag biotech premium is gone," Shimoda told BioWorld Financial Watch. "Before Taco Bell, or taco shells, we said the concerns would continue to roll downhill, and we probably wouldn't bottom until 2001 or 2002. The question is, when does it begin to create a negative value driver?"

Kraft Foods recalled packages of taco shells labeled with the Taco Bell name after learning some had been made with Aventis' genetically engineered corn, which may cause allergic reactions and is not approved for humans.

Taco Bell said it would replace all shells in stores, and Aventis vowed to stop selling the corn even for animal feed, until the Environment Protection Agency gives its go-ahead. The Biotechnology Industry Organization (BIO) said the government should not allow commercial marketing of any grain crops not allowed in food.

"There's no conceivable way they could say anything else," Shimoda said. "It was the right judgment," he added, not because of certain dangers but because of the disastrously rippling public perception.

"It has nothing to do with science," he said.

But then, the market which "has given up on ag biotech," Shimoda said doesn't really concern itself much with science, either.

"You want growth and visibility, and you don't want to be worried about all this junk," he said. Aventis' stock (NYSE:AVE) closed on Monday, Sept. 18 the day the Washington Post reported the forbidden corn was being sold in taco shells at $70.75, down from $73.125 the previous Friday. But shares had recovered late last week, trading in the $78 range.

"The drug business is driving Aventis," Shimoda said. "The future of the company will be a function of that."

Aventis, the product of a merger between Hoechst AG and Rhone-Poulenc S.A., contributed all assets of its respective agricultural enterprises namely AgrEvo (formed as a joint venture between Hoechst and Schering AG) and Rhone Poulenc-Agro to form Aventis CropScience.

"In the scope of things, [the taco shell uproar] is not that significant," Shimoda said. But he called the public's perception of what happened "a mountain to climb for the industry" overall. "The ripple effects are like a tsunami," he said. "Taco shells are the earthquake."

The big players in ag biotech are DuPont & Co., Monsanto Corp., and the soon-to-be completed merger between Novartis AG and AstraZeneca plc into a new company called Syngenta.

"You're only talking about a select group of companies," Shimoda said, but all will be affected by bad news in the ag biotech zone.

"These companies are continuing to invest significant resources, and they're in it for the long-term gain," he said. "They're spending $300 million, $400 million, $500 million per year for research, [although] they know it's not going to be any kind of commercial product for five years to 10 years at a minimum."

Food, he said, "might be 'off the table' globally for a number of years because of these [controversies]. But we've always said the potential is much larger than food or feed. How do we use corn to create polymers to compete with hydrocarbons? And, if you look at the wealth of understanding of nutritional science, the characteristics of compounds in fruits and vegetables, we can go one step beyond, to medical compounds. The opportunities in food, nutrition are still there, but it's going to take longer for those things to take off."

Shimoda named Diversa Corp., which went public in February, raising $200 million, as a company potentially on the cutting edge. Diversa identifies and catalogues genetic material and develops novel enzymes and other biologically active compounds.

He also cited Genencor International Inc., which raised $126 million when it went public in July. The firm develops novel, biologically derived biomaterials for the health care, agriculture and industrial chemicals markets.

"The magic is genetically engineered enzymes to be able to use corn as a glucose, sugar or carbon source," Shimoda said. "Everybody has talked about insect resistance and herbicides. I would consider ag biotech [in terms of] how we re-engineer enzymes to create new products. All the companies are going to have to reprioritize, and the payoff is much less certain," he added.

As companies search for ways to add value and reduce cost, they will be exploring much broader horizons, Shimoda said, "things we don't even know."

"The whole idea of applying biotechnology to agriculture was to redesign products, using ag commodities as raw materials."

Much more than in other sectors of biotech, leaders in agricultural research are looking not only more widely but much farther down the road, Shimoda said, and investors must either adjust their own sights accordingly or stay out.

"Progress is never a straight line," he said. "Obviously, you'd rather not have some of these bumps in the road [such as the trouble with the taco shells], but that's the real world. It's rare you have a platform that can redefine an industry. And that's ag biotech."

Facing all the uncertainties in pharmaceutical efforts, biotech investors may be attracted to mutual funds and rightly so, Shimoda said.

"In the [general] biotech world, where many companies are based on narrow technology, the right way to play is through a mutual fund," he said. "There are more pure plays in ag biotech. The unfortunate thing is, a whole round of second-generation ag biotech companies have hit a brick wall. They're getting financing through large funds," merchant banks that are themselves largely funded by the major ag biotech firms.

The smart ag biotech investor will ignore taco shell "bumps in the road," buy a basket of the main stocks, and wait, Shimoda said.

"If you want to trade stocks, this isn't the thing for you," he said. "Put the shares away in the vault for three years."

He acknowledged that such a strategy "is not today's investor." Still, matching the investment style to the company's philosophy, while paying no heed to the whims of the market, is the best route, Shimoda said. Those who can't be as patient are better off with mutual funds.

"Most investors can gauge a two-year time frame," he said. "But, at a certain point, they want performance yesterday." *

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