March 27 (Bloomberg) -- Mark Walton, head of the world's largest animal cloning company, sees his biotechnology lab in Austin, Texas, as the next frontier in food production.

Nine months ago, scientists at Walton's closely held ViaGen Inc. extracted genetic information from customers' prized cattle and transferred the DNA into bovine eggs to make embryos. Now, 75 miles away at the 300-acre Hillman Ranch in the town of Cameron, surrogate mother cows, carrying the embryos, are giving birth to calves that are clones of the clients' finest cattle.

This generation of test-tube bulls and cows may be the first whose elite genes end up in America's meat and milk. U.S. regulators are set to approve the cloning of animals for the food supply as early as this year. This action will open the way for food producers to use copies of genetically superior animals to make bigger, stronger herds and, perhaps, tastier products.

``ViaGen has this huge potential to be a really significant company in animal agriculture on a global basis,'' Walton says, sitting in an office, decorated with collages of cow photos, down the hall from the lab. He says the market for cloning in the U.S. alone could be at least $500 million a year.

Wary consumers and organic food suppliers have indicated they may spurn products from cloned animals no matter what regulators decide. ViaGen and competitors such as Cyagra Inc. of Elizabethtown, Pennsylvania, are working to gain public support.

Dean, Kraft Foods

Dean Foods Co. of Dallas, the biggest U.S. dairy distributor, has said the company won't use milk from cloned cows, even if the technology is approved, because of concerns of consumer backlash. Other major food companies, including Kraft Foods Inc. of Northfield, Illinois, say they will decide after regulators act.

``We'll evaluate the consumer benefits and acceptance in considering whether or not to use ingredients from cloned animals,'' said Claire Regan, a spokeswoman for Kraft, the world's second-largest food company, after Nestle SA.

Shares of Kraft fell 19 cents to $31.70 at 4 p.m. in New York Stock Exchange composite trading. Dean Foods shares fell $1.36, or 2.8 percent, to $46.95.

The public attaches ``horrific connotations'' to cloning even though ``it's just fine-tuning what people have done for thousands of years in breeding livestock,'' said Gregory Pence, a professor who teaches medical ethics at the University of Alabama at Birmingham. Artificial insemination is already used routinely on ranches, he said.

An eager proselytizer for cloning, Walton, a 53-year-old scientist with a background in plant genetics, says he has become used to the initial reaction he gets when people imagine cloned sirloin on their dinner plate: ``Oh, gross.''

Curly Tails

A tan-and-white three-week-old longhorn calf -- a cloned offspring -- gamboling around the Cameron ranch, brings a smile to Brian Bruner, ViaGen's director of animal operations. The calf and all 12 of its identical ``sisters'' share an uncommon trait: their tails curl when they run or become excited, Bruner says.

ViaGen's several hundred clients count on consistency, and they pay top dollar for it. One cattle clone costs $15,000, about 10 times the price of a typical two-year-old cow. ViaGen lowers the price by more than half for bulk orders.

The Hillman Ranch is one of four that ViaGen leases in Texas. This year, the company expects to clone almost a thousand cows, pigs and horses, up from 62 last year.

About 80 percent of the animals will go into the entertainment business as rodeo horses, bucking bulls and show cows. Cloning allows ranchers to replicate a prize-winning animal or replace one that is injured or aging.

Some of the livestock will go to ranchers betting that the U.S. Food and Drug Administration will soon lift a five-year voluntary moratorium on the sale of food from clones and their offspring.

Regulators' Plans

The FDA announced Dec. 28 that a four-year review of data showed milk and meat from cloned cows, pigs and goats posed no increased safety risks. Regulators have said they may make a decision to approve sales of cloned food later this year after reviewing public comments submitted by an April 2 deadline.

Members of the U.S. House and Senate and a state legislator in California have introduced bills to require special labeling on food from clones or their offspring. The FDA says that isn't necessary and would be difficult to enforce. The products are the same biologically as those from other livestock, agency scientists say.

Surveys show that many American consumers are reluctant to eat animals derived from biotechnology. A third of adults said they would never buy milk or meat from cloned animals even if the FDA determined it was safe, according to a poll released Dec. 14 by the Center for Food, Nutrition and Agriculture Policy at the University of Maryland in College Park.

`No Need'

``We just don't understand why we would want to take the risk here that this kind of technology represents,'' says George Siemon, chief executive officer of the LaFarge, Wisconsin-based Organic Valley cooperative, which includes more than 940 farms in 27 states.

Conventionally bred cows produce top-grade products so ``there's no need for cloning,'' he said.

More than 3,000 people have written to the FDA on the issue, with some saying that cloning is ``messing with God's hands'' and forcing animals to ``live painful, short lives.''

The Center for Food Safety, a consumer advocacy group in Washington, submitted a 32-page critique of the FDA's report that said the agency relied on incomplete evidence and misrepresented its findings.

Carbon-Copy Creatures

Cows groan and shuffle for position as a worker at Hillman Ranch offers protein pellets from a yellow bucket. A chocolate brown Beefmaster calf chases after its amber-colored, mixed-breed mother. The cattle are an array of breeds and colors because ViaGen transfers its cloned embryos into surrogates chosen solely by size and how much milk they can produce for their calves.

The ranch isn't an assembly line of carbon-copy creatures. At most, ViaGen has created 18 identical copies from one cow, not hundreds or thousands, says Bruner, a 38-year-old who grew up on a ranch.

ViaGen's work is so controversial that the company considered using some word other than ``clones'' to describe its animals until it found that hiding the term only sparked more suspicion among consumers, Walton said. The company decided to concentrate on educating the public, largely on the Internet.

One such lesson: Most milk or meat sold to the public would come from the conventionally bred offspring of clones because the costly replicated animals would be used mostly for breeding, Walton said.

``If you choose to believe that this is not a good technology for anybody to be using, that's great, that's your choice,'' Walton said. ``I just want you to be able to make that based on fact and science, not on science fiction.''

Dolly the Sheep

Cloning has been a matter of public fascination and ethical debate since Scottish scientists announced in 1997 that they had cloned a sheep named Dolly. Concerns about the safety of eating cloned animal products arose in part after Dolly was euthanized at an early age, suffering from an incurable lung disease.

The first start-ups attempting to make a business out of the technology went bankrupt or were bought out by competitors. ViaGen was founded in 2002. The next year, its parent company, closely held Exeter Life Sciences of Phoenix, bought the patents used to produce Dolly.

Exeter is a holding company created by billionaire John Sperling, best known as founder of the Phoenix-based Apollo Group Inc., which runs the University of Phoenix and other for-profit education programs. Sperling also started Genetic Savings & Clone, a company based in Sausalito, California, that helped make the world's first cloned domestic cats before going out of business last year for lack of demand.

No Profit

ViaGen has yet to make a profit, though Exeter is confident that will change once the FDA approves cloned food, says Exeter Chief Executive Officer Jonathan Thatcher. The cloning company may eventually be acquired by a larger biotech company, he says.

Walton joined ViaGen as president in July 2005 after more than two decades working with biotechnology in plants and farm crops. He says some scientists he talks with are surprised that the technology, long used to genetically modify rice, corn and soybeans, is being applied to animal cloning for food.

Cloning begins in ViaGen's Austin lab, typically when a client sends in a swatch of skin the size of a pencil eraser from the animal that is to be replicated. The process requires living cells. ViaGen has made clones from animal carcasses that were less than five days old and kept refrigerated.

Inserting DNA

Scientists grow copies of the cells in a lab dish, and then extract genetic material under a microscope with the help of digital cameras and fluorescent imaging. The DNA from the animal to be cloned is inserted into an egg whose nucleus has been removed.

The embryo that results is packed in a culture medium with a portable incubator to keep warm and is mailed overnight to the ranch, where it's implanted in its new mother.

There is a waiting list of clients seeking clones, Bruner says. ViaGen plans to triple its staff to 125 employees, expand its ranches and buy more surrogate mother cows to meet demand. The company also wants to get into the market for semen sales by breeding copies of its own favorite cattle and selling their genes to producers.

For a $1,500 fee, ViaGen says on its Web site that it will preserve the genes of pets in liquid nitrogen for future use, though the company has no plans to clone cats or dogs commercially.

Walton won't reveal ViaGen's revenue, although he predicts sales will grow 10-fold within five years. Its competitor, Cyagra, produces 60 to 70 cloned cows a year, according to spokesman Steve Mower, who declined to discuss his company's finances.

Robert, Randolph, Samson

ViaGen calves are identified by numbered tags pinned to their ears to indicate their cell lines. By the time they leave the Hillman Ranch, after one to seven months depending on the client's contract, ranch workers have usually picked more- affectionate names.

The young show cow tagged #182 is known as Allie. The trio of #206 Beefmaster ``brothers'' are Robert, Randolph and Samson.

Clients sometimes keep these names, which makes it easier for the ViaGen staff to check up on them after they are shipped to the company's customers.

Cloning could capture 10 percent of the U.S. dairy and beef markets and 50 percent of the pork market, Walton says. The pork market is less fragmented than the cattle business, Walton said, and ViaGen already has an agreement for ``genetic research'' with Smithfield Foods Inc. of Smithfield, Virginia, the world's largest pork processor.

Global Pressure

ViaGen also is anticipating international demand, Walton said, although the U.S. would be the first nation to approve cloned food. In December, the company opened its first office outside the U.S. in Querétaro, Mexico.

``Over the next 10 years, you'll see continued pressure globally for improvements and increases in productivity, and technology like cloning can have a significant role to play in solving those bigger problems,'' Walton says.

Cloning is unlikely to have such a dramatic effect on cattle producers because most of them already have isolated preferred genetic traits through breeding, says Morgan Paisley, an analyst at Alaron Trading Corp. in Chicago.

``It would complement what we've been doing, but we're pretty good at it already,'' Paisley says. ``It would be a nice finishing touch, but I don't think it's something that would revolutionize anything.''

To contact the reporter on this story: Catherine Larkin in Washington at clarkin4@bloomberg.net.

Last Updated: March 27, 2007 16:12 EDT