Ag Biotech Firms Lag In Regaining Investors' Favor

The biotechnology industry has shown signs recently of recovering from the doldrums of the past year, which encompassed a wave of consolidations, layoffs, and a critical cash crunch. However, as some indications arise that biotech as a whole is starting to regain investor confidence, industry analysts say that the agricultural biotech sector seems to be lagging. Ag biotech observers, including scientists in both business and academia, agree that the industry's growth has been hampered by regulatory agencies that were slow to approve new products, by investor fears that the public would reject genetically engineered food, and by an overselling of its prospects during its early years. Most of these hurdles have been overcome, yet ag biotech has failed to return to Wall Street's good graces, a fact that mightily frustrates industry officials. Nevertheless, company executives expect ag biotech -- and job prospects for scientists in the industry -- to rebound strongly after just a few more painful years of stagnation. 'TIMING IS EVERYTHING:' Robert Fraley is "bullish on the longer term." "Timing is everything in all of this," says Robert Fraley, president of Ceregen, a new crop chemical and biotechnology unit of St. Louis-based chemical giant Monsanto Co. "The industry is going through consolidation. At the same time, you're seeing, after 15 years of investment, the development of products and also a dramatic reduction of risk as the regulatory systems have become clarified, not only in the U.S., but around the world. And I think that will lead to more venture capital investment ultimately, after the consolidations are in order. "So I think you're going to look at a period, maybe for the next few years, where things stay at a steady state, but I would be pretty bullish on the longer term." Fraley, who in 1982 was a prominent member of the Monsanto-based scientific team that first successfully introduced foreign genes into plant cells, notes, "We've done our own analysis, which says if you just take the current pipeline of products that are under development . . we estimate that the plant biotechnology industry will be a couple-billion-dollar industry by the year 2000, growing to $6 [billion] or $7 billion by the year 2005, just based on known products, and that's a pretty conservative frame." But not everyone is so sanguine about the industry's future. A leading -- and crucial -- source of skepticism is the investment community. Jim McCamant, publisher of the Ag Biotech Stock Letter, says: "From a stock standpoint the ag biotech area is not doing very well at all, and while it has participated in the decline in the broad medical biotech area, it has not started to recover much yet. There are just a few signs of stirring within the last month." SLOW RECOVERY: Industry watcher Jim McCamant observes that "from a stock standpoint the ag biotech area is not doing very well." Until investors return, ag biotech companies both large and small will be starved of the capital they need for research and development, which translates directly into lower scientific employment, industry observers say. John F. Wong, a Los Angeles-based biotech-industry analyst for the San Francisco investment banking firm Van Kasper and Co., comments that "things have been moving very slowly. There just hasn't been much competition, and competition is what compresses the time frame. It's been a tough sell. "The focus [of investors] hasn't really been on agriculture, which is really the larger market [compared with medical biotech], but the interest level just isn't there. None of [the ag biotech companies] have really been able to come through with major breakthroughs in terms of generating revenues. Calgene [Inc. of Davis, Calif.] was sort of the darling of the group. [Calgene's] Flavr Savr tomato has not been as successful as people thought it would be, but the technology is moving forward." LACK OF INTEREST: Biotech analyst John Wong notes that while the potential market for ag biotech is large, investors' focus "really hasn't been on agriculture." Some investors may be unhappy with the progress of the Flavr Savr, and that puzzles and frustrates Calgene officials, who point to good sales and widespread public acceptance since its introduction last year. The tomato contains a gene that delays softening and reduces spoilage, allowing supermarkets to sell full-flavored, vine-ripened tomatoes even in the winter months. The Flavr Savr made it through the Food and Drug Administration (FDA) consultation process in May 1994, was on store shelves by October 1994, and had reached 2,500 stores by June 1995. Calgene sold out its entire stock of the tomato, despite the Flavr Savr's premium prices -- up to three times the cost of typical supermarket tomatoes. "Wall Street thinks that once you've got an approval, well, go out and market as much as you can," complains Calgene spokeswoman Carolyn Hayworth. "But you've got a business to build before you can do that." Before unlimited amounts of the Flavr Savr can become available to the consumer, Calgene must put in place an infrastructure to grow, harvest, and distribute the tomato, she points out. One way Calgene is building its business is by combining forces with Monsanto, reflecting the current wave of industry partnerships, consolidations, and mergers. In June, the two companies signed a letter of intent for Calgene to sell a 49.9 percent share of itself to Monsanto in return for $30 million in cash, an $85 million line of credit, and Monsanto's 49 percent stake in Gargiulo L.P., a large produce company in Naples, Fla. "I think Calgene is going to be one of the few survivors as an independent biotechnology company in the field of agriculture," declares Vic C. Knauf, Calgene's vice president for research. "We've got a base of technology rights. We've got products on the market. With Monsanto as a minority but significant stockholder behind us, I think we've got the wherewithal to stick around for quite some time. "And there frankly aren't that many others enjoying a similar situation. The resources required to get the products on the market and profitable enough to sustain a small business aren't available to small companies anymore, not unless the capital markets change pretty radically on Wall Street." In addition to the Flavr Savr, Calgene is selling cotton seed that produces herbicide-resistant plants, allowing growers to use herbicides to kill weeds and not their cotton. It is also marketing canola oil engineered to produce 40 percent laurate, an important component of soaps and shampoos. In the pipeline are insect-resistant cotton as well as canola oil varieties containing high levels of myristate, stearate, medium-chain fatty acids, and medium-chain triglycerides, or lower levels of saturated fat. Analysts say that, along with Calgene, some of the more significant companies concentrating on ag biotech in the U.S. are Agracetus Inc. of Middleton, Wis.; Biosys Inc. (formerly Crop Genetics International) of Columbia, Md.; Oakland, Calif.-based DNA Plant Technology Inc.; Ecogen Inc. of Langhorne, Pa.; San Diego-based Mycogen Corp.; and Zeneca Plant Science Inc. of Wilmington, Del. But the biggest R&D investments in ag biotech have come from the chemical and pharmaceutical powerhouses, such as Monsanto and Kalamazoo, Mich.-based Upjohn Co. Ag biotech products that have already been released or are slated for release by the end of this year are bovine somatotropin (BST), which increases milk production in cows, from Monsanto; tomatoes with increased shelf life via inhibition of ethylene production, developed by DNA Plant Technology; and two versions of chymosin, an enzyme that curdles milk to make cheese, from Genencor International Inc. of Rochester, N.Y., and New York City-based Pfizer Inc. Brakes On The Industry But ag biotech hasn't developed as fast as insiders and analysts had hoped. "We went through a period, which may not have completely ended yet, in which the biggest problem has been the incredible slowness on the regulatory side," notes McCamant. The U.S. Department of Agriculture (USDA), FDA, and the Environmental Protection Agency (EPA) all have regulatory oversight in the ag biotech area. "The biggest example from a dollars-and-cents standpoint is BST, where it took the USDA almost forever to approve it, and where it still cannot be marketed in much of Europe. In the U.S., protests against the use of BST and calls for BST-derived milk to be labeled have largely died down, and now the hormone is in routine use in the dairy industry. "On the plant side," adds McCamant, "we've made some significant progress. The FDA took an awful long time'and it cost Calgene an awful lot of money -- to approve the Flavr Savr tomato, the first edible product to be identified as a biotech product. But they've since then approved other genetically modified food plants relatively quickly and without a lot of hassles." Calgene's Hayworth agrees: "The system is working beautifully now. We have no problem going through the consultation process with the FDA or the USDA or the EPA." With dozens of ag biotech products ready to be released within the next few years, the industry is hoping that investors will become convinced that the newly smoothed regulatory pathway will lead the way to growth and profits. But investors continue to worry that the public may be unwilling to accept genetically engineered food products, although industry fears of public protests over the Flavr Savr tomato have failed to materialize. Public perception "has not only had a braking effect, it's had a barrier-to-entry effect for companies that [may] want to enter this area," says Wong. "Investors are a little leery because of all the bad press." And they may also be wary after having fallen for some wild claims in the industry's past. In the beginning days, people were saying ridiculous things like, 'Oh yeah, now we can make nitrogen-fixing corn [which would require no fertilizer],'" says Michael Thomashow, a Michigan State University researcher who studies plant genes involved in tolerance to drought and freezing. "These were just wild, ridiculous claims, which may have led venture capitalists down the primrose path." Like other segments of the biotechnology industry, ag biotech has had difficulty attracting venture capital in recent years, and some R&D programs have been scaled back. Calgene, for example, reduced the number of scientists and support personnel in R&D and product development from 142 in fiscal year 1994 to 110 currently. If one thing is clear about ag biotech, it's that the industry is changing. Some research subjects that were once hot topics of discussion are now hardly mentioned, while new areas are coming to the fore. Herbicide resistance is an area in which active research seems to be slowing, but not because of disappointing results, according to Knauf. On the contrary, "it's exciting right now -- you're going to see a whole lot of herbicide-resistant crops on the market in the next two or three years. But as an area of active research it's cooling down." Other areas, however, are poised for prominence, Knauf points out. "I think one thing the consumer's going to see five years from now is that there's going to be flavor enhancements, not just in tomatoes, but melons, strawberries, and a lot of other fruits and vegetables that are going to benefit from the technology at a consumer taste-preference level." And, he adds, "If you look historically at plant breeding programs, almost all of the money, the effort, the hours of work, have been focused on disease resistance, since we lose so much of our crops to disease of one form or another. And now they're starting to clone the genes that breeders have been working with so laboriously over the years. Once you've cloned a few genes and you start understanding how the mechanisms work, you can get one step ahead of the pathogens." Fraley concurs: "There have been a lot of breakthroughs in the area of disease control in the last one or two years. I also think there's been a lot of basic understanding of the biochemical pathways in plants around carbon and nitrogen metabolism, which is going to allow basic and fundamental insight into crop yields." Fraley says that in order for a scientist to succeed in ag biotech these days, "one has to combine a great skill base in molecular biology with a fundamental understanding of other disciplines. And that can be everything from entomology to chemistry to food science. "But it's important that a person be really grounded in a strong discipline that relates to agriculture. Cloning a gene these days can be done in high schools, so the real trick is to have a fundamental insight into the fields that are impacted by biotechnology." Leonard N. Bloksberg, a postdoc in Thomashow's lab who is beginning a search for a permanent job in either industry or academia, recalls that at a recent meeting of the American Society for Horticultural Science, "I heard several people complaining that there are too many people who know nothing but molecular biology, and they can't get anybody to apply for more applied positions." And even in today's tight job market, Bloksberg is finding that there is work out there for scientists willing to broaden their horizons. "People in turf-grass research were complaining that there was nobody applying for their jobs," he observes. "There were several people complaining that there were not a lot of applicants in floriculture. Nobody seems to realize that this is a big industry. There's a lot of money in there. "The openings that are out there are either for people who are in combination fields or are on the slightly more applied side," he adds. "There are several positions available for people who are [trained in a] combination [of] molecular biology and traditional plant breeding. "Considering the feud that there has traditionally been between the two fields, each one trying to claim that the other is irrelevant, there are very few people who actually know both sides very well." "Literally every seed company in the world uses plant biotech," notes Fraley. "Every food company in the world is getting in tune. All of the crop chemical companies are involved. As the plant-biotech impact moves into some of these nontraditional sectors, I think you're bound to see a proliferation of opportunities." Robert Finn, a freelance science writer based in Long Beach, Calif., is online at finn@earthlink.net. (The Scientist, Vol:9, #18, pg.1, 8-9 , September 18, 1995) (Copyright © The Scientist, Inc.)

Ag Biotech Firms Lag In Regaining Investors' Favor

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