Sowing Seeds Of Success

Chemical-industry giants are shifting billions of dollars of resources to harvest new opportunities in life sciences.

Like a new land mass erupting from a volcanic sea, the industry of life science is solidifying on the business landscape, a convergence of chemistry, pharmaceuticals, biotechnology, agrobusiness, and nutrition. Characterized by a dramatic reshaping of giants such as Du Pont & Co., Hoechst AG, Dow Chemical Co., and Monsanto Co., this neophyte industry will continue to exploit the opportunities in these individual components. Importantly, it also will leverage the synergy and blurring of these sciences to create new value. This is particularly true in the area of crop sciences, where genetic manipulation of plant and seed promise exciting new products and consumer benefits. Like any nascent industry, life sciences is experiencing both growth spurts and growing pains. Companies are being ripped apart and recreated through divestitures and myriad acquisitions. New companies are forming from mergers of pieces of existing firms. Sleeper seed companies have become hot commodities acquired at multiple premiums. Venture-capital funds are blossoming to stimulate start-ups. Partnerships from grain processing to genetics are sprouting. "The challenge of participation in [life sciences] is that it requires the ability to manage a diverse, world-class research effort from a very strong technology base," says Gary Pfeiffer, CFO of Du Pont, Wilmington, Del. "The good news is that the opportunity for value creation is so enormous, there will be room for multiple solutions." In the new life-sciences order, a basic line appears to have been drawn:

  • Companies that are stripping themselves completely of any non-life-sciences diversions (Monsanto, Hoechst AG, Novartis AG, AstraZeneca PLC).
  • Those that -- while increasing their emphasis on life sciences -- have maintained significant chemical businesses (Du Pont, Dow, Bayer AG, BASF AG). Early on, in 1995, Ciba-Geigy and Sandoz merged the life-sciences businesses of each to form Basel, Switzerland-based Novartis, now a $22 billion industry leader. Monsanto first started selling off bits of its chemical interests, then divested them completely in 1997 as Solutia Inc., while investing $8 billion during the last two years in life-sciences firms. A new $20 billion life-sciences powerhouse was announced last December -- Aventis SA, to be headquartered in Strasbourg, France. It will result from a merger of Hoechst, shedding its industrial chemical businesses by spinning off Celanese AG, and Rhne-Poulenc SA, which is selling its 60% stake in Rhodia, its chemical spin-off. "Diversity and size are no longer our success formula," says Jrgen Dormann, CEO, Hoechst AG. "To increase shareholder value in a sustainable fashion we have to deploy resources in a more targeted way. Industrial chemicals and the biotech revolution require different strategies, resources, and competencies. Are there synergies between a life-sciences company and a chemical company? My feeling is no." Du Pont epitomizes the contrary, a multiple-business approach, having shuffled 16 diverse chemical units into six materials-oriented reporting segments and two life-sciences: agrochemicals and pharmaceuticals. CEO Charles Holliday estimates the life-sciences business will make up more than one-third of Du Pont earnings by 2003, compared with about 18% in 1998. And to further reinforce its emphasis on life sciences, Du Pont's board has approved an offer of a life-sciences tracking stock to be presented to shareholders in the first quarter of 2000. A tracking stock provides the opportunity to invest in just one aspect of a company's business without creating a separate, publicly traded company. Need for seed All the acquisition and business-reshaping activity has not come without a handsome price and some equilibration for all the major players. Virtually all life-sciences firms have invested heavily in seed companies, seeds being the platform for carrying agrobiotechnology to the farmer and to the dinner table. In 1998 alone St. Louis-based Monsanto spent more than $4 billion to acquire seed companies including DeKalb Genetics Corp. and Plant Breeding International Cambridge Ltd. Since its failed merger with American Home Products Corp. in October 1998, one objective of which was to avail itself of some of AHP's cash, Monsanto has been looking for other ways of paying for completed and pending purchases of these and other biotech concerns. Last November the company announced a restructuring plan to raise $5 billion and cut 2,500 jobs to raise money to pay down debts. Also, the approval of Monsanto's new blockbuster arthritis drug Celebrex last December could not have come at a better time. Touted as potentially the fastest-selling new drug in history, Celebrex, which relieves arthritis pain without gastric upset, could increase Monsanto earnings by 40% from 1999 to 2000, with sales estimated as high as $2 billion by 2002. Although Du Pont spent some $6 billion in two years in life-sciences acquisitions through 1998, notably a 20% share in Pioneer Hi-Bred International Inc. seed company, the sale of its Conoco oil business is positioning the company for even bigger moves. "The value Du Pont receives from the Conoco separation will expand our financial capability to make additional acquisitions or growth investments for the transformation of Du Pont into a company focused on agriculture and nutrition, biotechnology, and pharmaceuticals," says Pfeiffer. Just as the dust was settling from its in-progress Conoco sale, Du Pont announced a purchase of the remaining 80% of Pioneer for a nifty $7.7 billion and a buyout of Merck & Co. Inc.'s interest in Du Pont/Merck Pharmaceuticals for $2.6 billion. Du Pont also announced a restructuring in its crop-protection business, consolidating manufacturing, refocusing R&D, and cutting some 800 jobs for a pretax savings of $200 million. While shifting their foundations and acquiring seed companies, the major players also have turned to partnerships and other relationships to broaden their technology base, especially in the area of genetics. "Our strategy is to make selected acquisitions and alliances to gain market share and advanced technology, without paying the inflated premiums often associated with biotechnology investments," says William Stavropoulus, CEO of Midland, Mich.-based Dow. To wit, Dow set up a joint venture with Minneapolis-based Cargill, named Cargill Dow Polymers LLC, to produce polymers from biochemical feedstocks; a joint venture called Advanced AgriTraits LLC, a clearinghouse for companies that want to expand in biotech through alliances or licensing; and a three-year alliance with Biosource Technologies Inc., Vacaville, Calif., to apply genomics to create valuable traits in crops. The flood of acquisitions and partnering has left the landscape a bit bare of start-ups. In reaction, Burrill & Co., a San Francisco investment firm, has partnered with Bayer, among others, to form an $85 million venture-capital fund to address the shortage of small agrobiotech firms. John Buchanan, Burrill director of marketing, says the fund has helped create a number of start-ups including Paradigm Genetics, Third Wave Technologies Inc., and Pangea Systems Inc. Some of these now are run by managers and scientists attracted from the major life-sciences companies. Likewise, in 1998 Dow established a $40 million venture-capital fund to support life-sciences-related start-ups. "Our investment is in the broad life-sciences category, focusing on agrobiotech, industrial biotech, and human-health biotech," says Dennis Merens, director of corporate venture capital. "Dow is aggressively pursuing corporate venture-capital investing, and the life-sciences fund investment is one of six global investments we have made." Thought for food Just as scientists are working to sequence the human genome, life-sciences companies are now applying genetics and other techniques normally associated with pharmaceutical discovery -- high-throughput screening and combinatorial chemistry -- to study the genomes of plants. The big winners in life sciences could be those companies that successfully translate this genetic sequencing into what some refer to as transgenic crops, genetically manipulated seeds and plants that exhibit unique characteristics or traits. Monsanto says the global market for these is expected to grow from $500 million in 1996 to $6 billion in 2005 and $20 billion in 2010. The first generations of these plants exhibit properties such as resistance to disease, insects, or herbicides. For instance, crops of Monsanto's Roundup Ready soybeans can be sprayed with the company's Roundup herbicide to kill competing weeds without killing the soybeans, which are genetically manipulated to tolerate the herbicide. Already half of the 72-million-acre U.S. soybean crop is planted with herbicide-tolerant seeds. Driving the anticipated market explosion, however, will be second-generation plants with enhanced-value traits, such as improved nutritive value, reduced saturated-fat content, or increased vitamin levels. Cotton could be grown in colors. Trees could experience faster growth rates, with increased lumber yields and improved fiber quality. Plants such as tomatoes or soybeans could even be changed to contain small "biofactories" that would deliver doses of chemicals to fight cancer or heart disease. Manipulation of the genetic character of plants and seeds has some activists up in arms shouting, "Frankenstein foods." Others suggest that disease-resistant genes-transferred to humans and animals-could spawn antibiotic-resistant microbes. Although many people revere CEOs of ground-breaking companies, not all do. Monsanto's CEO Robert Shapiro found that out last year, catching a pie in the face from an environmentalist after a San Francisco speech. More significantly, in May the British Medical Assn. called for a moratorium on the commercial planting of genetically modified crops until there is more information on their long-term environmental effects. Monsanto spokesperson Jay Byrne counters, "These are the most tested, the most regulated products in the history of food. People have raised concerns over the environmental of these products, but we have a proven track record-validated with extensive study that has been peer reviewed and analyzed by independent researchers, government regulatory bodies, and international organizations-that confirms that these products are safe for the environment. In fact they provide numerous benefits, such as significant reductions in chemical-pesticide applications." In the U.S., for instance, planting of insect-resistant cotton has reduced the use of chemical insecticides by 2 million lb since 1996, reports the National Center for Food & Agricultural Policy, Washington.
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