By Jennifer Van Brunt
Agricultural giant Monsanto Co. (NYSE:MTC) seems to have finally ended its exorbitant biotech and seed company buying spree. Thanks in no small part to the dissolution of its plans to merge with pharmaceutical heavyweight American Home Products Corp. (NYSE:AHP) earlier this month, Monsanto, of St. Louis, is now looking to its own resources to pay for the nearly $6 billion in acquisitions that are still pending.
In May 1998, Monsanto committed $2.5 billion to acquire the nation's second-largest seed company, DeKalb Genetics Corp. (NYSE:DKB), of DeKalb, Ill.; the same month, it offered $1.9 billion for Delta & Pine Land Co. (NYSE:DLP), a leading cotton-seed breeding company located in Scott, Miss.; and in June 1998, it bid $1.4 billion to buy the international seed operations of closely held Cargill Inc., of Minneapolis.
Monsanto chairman and CEO Robert Shapiro assured Wall Street that he will accomplish this gargantuan task by selling off non-core assets — although he declined to identify them — and by raising up to $6 billion through debt and/or stock offerings. As well, Shapiro said Monsanto has secured an additional $2 billion line of credit from Citibank.
But while Monsanto may be taking a breather from its campaign to gobble up the seed industry, rival DuPont Co. (NYSE:DD), of Wilmington, Del., has just amassed a war chest that will allow it to take the lead in this clash of the titans. Late last week, DuPont spun off its oil and gas company, Conoco Inc., in the largest domestic initial public offering (IPO) in history. Conoco's IPO grossed slightly more than $4.4 billion through the sale of 191.5 million shares to the public at $23 each. Parent company DuPont, however, still holds 436.5 million shares of Class B Conoco stock, giving it indirect ownership of about 70 percent of the Houston-based company.
By divesting Conoco, DuPont has taken a giant leap toward its avowed goal of becoming a life sciences company concentrating on agricultural biotechnology and pharmaceuticals. In fact, analysts expect that DuPont will use the cash from the Conoco IPO to strengthen its armamentarium in life sciences, including acquisitions in biotechnology — a strategy that DuPont CEO Charles Holliday voiced clearly back in April, when the company bought Hybrinova SA, the hybrid wheat subsidiary of Paris-based Lafarge SA.
In essence, DuPont's refocusing efforts are not unlike those of Monsanto, which achieved its transformation from a diverse agrochemicals conglomerate to a life sciences business by spinning off its chemicals business into the freestanding, publicly traded company Solutia Inc. (NYSE:SOI) in August 1997.
Despite their enormous resources and insatiable appetites, Monsanto and DuPont are not the only agribusiness conglomerates left standing. There are one or two others; analysts generally elevate Swiss powerhouse Novartis AG and Pioneer Hi-Bred International Inc. to that status, as well.
The consolidation of power into the hands of so few has created a wave of apprehension among small farmers and public researchers, who fear that the giants will be able to control the direction of all future plant breeding and research as well as dictate to farmers which seeds they will be able to plant.
Indeed, in growing their own franchises, these agrigiants have wrought dramatic changes across many sectors of the economy. For instance, they have caused the demise of the first-generation agbiotech companies: Calgene Inc., Mycogen Corp., DNA Plant Technology Inc., Mogen International NV, Plant Genetic Systems International NV and Agracetus Inc. all have disappeared as freestanding entities. But the acquisitions were probably the saving grace for the majority of those firms, whose businesses never got the kind of support from Wall Street that would have allowed them to prosper.
And, far from stifling innovation at biotechnology firms, the agrigiants' agenda has created vast new business opportunities for biotech firms with research programs in genomics, proteomics, combinatorial chemistry, high-throughput screening and bioinformatics. Seizing on the power of these various technologies to unlock the secrets of the genome — be it animal or plant — the big ag companies have raced to line up biotech partners and collaborators. In fact, the agbiotech partnering landscape is totally different now than it was even two years ago. In 1996, there were 180 new research and development-based agreements signed between big pharmaceutical houses and biotech firms, but only three between agricultural companies and biotech outfits: Chiron Corp. (NASDAQ:CHIR), of Emeryville, Calif., struck a combinatorial chemistry deal with DowElanco (now Dow AgroSciences LLC); Human Genome Sciences Inc. (NASDAQ:HGSI), of Rockville, Md., inked a corn genome sequencing deal with Pioneer Hi-Bred; and Palo Alto, Calif.-based Incyte Pharamceuticals Inc. (NASDAQ:INCY) signed on Monsanto as a subscriber to its DNA sequence and gene expression databases.
In 1997, there were 226 new biotech-big pharma alliances and 14 more deals between biotech firms and agribusiness. The most often cited, of course, is Monsanto's $218 million commitment to a broad-based plant genomics collaboration with Millennium Pharmaceuticals Inc. (NASDAQ:MLNM). To speed the effort, Monsanto even created a wholly owned subsidiary, Cereon Genomics LLC, next door to Millennium's Cambridge, Mass., facility.
But by mid-October of this year, the agbiotech partnering fever was raging. To date, biotech companies have signed 25 new research alliances with big ag and another four with one another.
"Novartis, Monsanto and DuPont all have different business strategies, but all are well-focused on integrated life science strategies," commented Sano Shimoda, founder and president of BioSciences Securities Inc., a boutique brokerage and investment banking firm located in Orinda, Calif. "These three, more than any others, understand the business opportunities afforded by technologies for understanding traits and gene function."
Pioneer Leads The Charge
Even so, it was Pioneer Hi-Bred, of Des Moines, Iowa, that became the first big ag company to sign a genomics collaboration. In January 1996, it inked a five-year deal with Human Genome Sciences to sequence the corn genome. Since then, Pioneer (NYSE:PHB) has struck alliances with Kimeragen Inc., of Newtown, Pa., to use the biotech's gene enhancement technology (chimeraplasty) for the genetic improvement of corn; with CuraGen Inc. (NASDAQ:CRGN), of New Haven, Conn., to identify genes responsible for superior performance in seeds; and with Abingdon, U.K.-based Oxford GlycoSciences plc (LSE:OGS) to exploit Oxford's proteomics technology in the search for genes that will improve seed performance.
"The challenge is to discover the function of the genes that control important attributes in plants," explained Rick McConnell, Pioneer's senior vice president of research and product development. If one sequences DNA from plants that are enduring a particular stress (drought, for instance, which is a multigene trait) and compares that with plants under optimal conditions, it should be possible to see differences in the patterns of expressed DNA, he continued. Indeed, largely through its collaboration with Human Genome Sciences, Pioneer now has more than 200,000 expressed sequence tags from corn, which probably encompass about 80 percent of corn's 50,000 to 80,000 genes. Any rapidly growing database needs to be mined, however, and that's where proteomics comes into play, he said.
"Genomics adds another tool to plant breeding. We can start to actually sort genes and assimilate them into new patterns," McConnell said. The new biotech tools also make it theoretically possible to improve multigene traits — including yield, which may be controlled by as many as 100 separate genes, he said. But once researchers come up with an array of genes optimized for a particular set of conditions, another formidable challenge lies ahead. That is, to sort out the best inbred lines for commercialization. "That requires a tremendous amount of analytical and high-throughput capability, as well as real-time testing in the field," McConnell explained.
All the activity in agbiotech these days bodes well for established biotech companies, of course, but does it allow for a new generation of start-ups? According to BioSciences Securities' Shimoda, the answer is an overwhelming yes. "Agbio start-up companies are coming out of the woodwork," he said. "This is a new wave. But there's a difference [from the first-generation agbio firms]. Much of the funding for the start-ups is coming not from the venture capital community but from the major agribusiness conglomerates themselves. Monsanto, Pioneer, Novartis and DuPont are all spreading out money to lots of little companies with new technologies. It's a race to see who can be first."
San Francisco-based private merchant banking firm Burrill & Co. has seen a lot of business plans for agbio start-ups since it started its Agbio Capital Fund earlier this year. The company — together with partners AgrEvo GmbH, of Germany; Bayer Corp., the U.S. subsidiary of German pharmaceutical giant Bayer AG; Royal Bank Capital Corp., of Canada; and San Francisco-based Transamerica Corp. — has raised a total of $85 million for the fund, and hopes to pass the $100 million mark by Christmas. The money is slated to go toward financing agricultural spin-outs as well as start-ups. The limited partners get early access to technologies of specific interest, as well as the chance to form strategic alliances with the new firms.
"We've seen more than 200 companies since we launched the fund," explained CEO G. Steven Burrill. But, unlike the first-generation firms, the current crop may very well never go the public offering route, according to Burrill. "Don't expect to see 200 to 400 public agbiotech companies [in the future] . . . By and large, the first-generation agbio companies were not a successful financial model," he said. "It was a troubling investment scenario, and it may still be a troubling scenario." *