So Shall Monsanto Reap?

Its biotech bet must pay off big to pay off at all

For more than 15 years now, executives at Monsanto Co. have trumpeted the huge gains they expect to make--someday--in the potentially vast market for genetically engineered agricultural products. Defying skeptics from Wichita to Wall Street, the St. Louis-based chemical giant has outspent rivals such as DuPont, Ciba-Geigy, and Pioneer Hi-Bred International to develop biotech-altered seeds and pesticides aimed at reducing farmers' costs and enhancing crops.

Now, with its biotech research tab topping $1.5 billion, Monsanto is about to find out if its bet will pay off. Under new CEO Robert B. Shapiro, who succeeded longtime chief Richard J. Mahoney early last year, Monsanto is gearing up to snare the lion's share of what could be a $4 billion annual market for biotech-enhanced agricultural products. This spring, Monsanto rolls out its first products--from potatoes and cotton that grow without pesticides to altered tomatoes that ripen slowly. "There's no doubt that genetically modified crops are going to play an important part in this company's future," says Shapiro.

Wall Street is cheering their arrival. Buoyed by last year's strong performance--income rose 20%, to $739 million, on sales up 19%, to $9 billion--Monsanto's stock has doubled, to 158, in 12 months. The rise also stems from expectations that biotech products will finally add to the bottom line. "Monsanto's earnings driver in the coming years will be its agricultural biotech products," says Ian Rogers of Strong Capital Management, which owns 500,000 shares.

While that moment is at hand, some are quietly wondering whether Monsanto will ever grab enough market share to justify its huge expenditures. The company's costly and controversial first foray into genetically engineered products--BST, the hormone that increases cows' milk production--has disappointed. And as the long-awaited products leave the labs, rivals who wagered less on biotech are entering the market on the cheap by teaming with small biotech research houses. Although few doubt Monsanto will be a key player if the market takes off, analyst Sano M. Shimoda of BioScience Securities Inc. in Orinda, Calif., warns: "There is a real question of how big the potential is for biotech at Monsanto and whether it will fall short of their expectations."

SWEET MOVE. Certainly those hopes run high: Monsanto's biotech push is deeply rooted in its need for new products. In his 12 years at the top, Mahoney diversified Monsanto away from commodities. He bought drugmaker G.D. Searle, with its lucrative NutraSweet artificial sweetener, in 1985 and moved Monsanto into other less cyclical areas such as food ingredients and biotech. But Searle's pharmaceutical side has struggled: Although it brings in 19% of sales, it adds just 11% in earnings. And in 1992, the patent on aspartame, NutraSweet's main ingredient, expired. In 2000, Monsanto's U.S. patent on its top-selling product, an herbicide called Roundup, also ends. Roundup accounts for $1.5 billion, or 17%, of Monsanto's revenues and an estimated 40% of operating profits of $985 million, says analyst James Wilbur of Smith Barney Inc. Rival products are almost certain to force big price cuts.

That explains why Mahoney long ago placed a far heavier bet on biotech than many competitors. Now, it falls to Shapiro, who was running NutraSweet when Monsanto bought Searle, to make the move pay. By pouring funds into a broad array of products, analysts say, Monsanto aimed for a dominant market position when biotech finally started hitting the farms. It has concentrated on efforts to improve farmers' yields, developing products that increase the resistance of cotton, potato, and wheat crops to disease and bugs. It also developed genetically altered seeds that produce crops resistant to its Roundup weedkiller. Such "Roundup-ready" products should prolong the life of the profitable herbicide. "While other companies were merely putting their toes in the water, Monsanto dove straight in," says analyst Christopher H. Willis of Schroder Wertheim & Co.

But did Monsanto jump into the right end of the pool? Rival DuPont Co., by contrast, followed a less technologically demanding strategy of developing genetically engineered seeds that simply improve the nutritional value or traits of corn or soybeans, at a cost of just $15 million to $20 million each year. "We believe that long term, adding value to harvested crops will be more lucrative than lowering farmers' production costs," says Robert T. Giaquinta, DuPont's head of biotechnology business development.

FARM RESISTANCE. That may be the painful lesson Monsanto has learned with its first stab at a genetically engineered product. The company launched bovine somatotropin (BST), designed to boost milk production, with great fanfare in early 1994. But the drug--once touted by Mahoney as a $1 billion-a-year business--hasn't caught on. Monsanto has had difficulty persuading farmers to use the product, which requires complicated training. Continued consumer resistance has also hurt. Analysts estimate that BST is losing about $10 million annually. "I would be surprised if they're not out of that business by yearend," says Wilbur. Although Monsanto chief economist A. Nicholas Filippello declines comment on BST's future, he concedes results "have been less than we had hoped."

Industry sources expect the market for altered plants and seeds to hit less resistance. And Monsanto is moving aggressively to bolster its own biotech strengths with acquisitions. Last June, it announced plans to spend $30 million to acquire 49.9% of Calgene. The money-losing company, based in Davis, Calif., has struggled with efforts to introduce the Flavr Savr, a genetically engineered tomato. Monsanto will share its own similar technology; just as important, Calgene has a strong position in oilseeds. In January, Monsanto also inked a development deal with Ecogen Inc., based in Langhorne, Pa., which is known for its research into Bacillus thuringiensis, or so-called Bt, a naturally occurring microorganism that attacks bugs that eat cotton and other crops. And in February, Monsanto paid $180 million for 40% of Dekalb Genetics Corp., a $450 million seed and research company in De Kalb, Ill. Together, the deals should let Monsanto quickly introduce seeds with its insect- and pesticide-resistant technology.

But rivals are also forging ties with smaller biotech companies to develop their own genetically engineered products. A cross-licensing agreement between Ciba Seeds, a unit of Ciba-Geigy and Mycogen Corp., a San Diego-based maker of biological pesticides, will soon allow Ciba to roll out insect-resistant corn ahead of rivals. Over the past year, both seedmaker Pioneer Hi-Bred and DowElanco, a joint venture of Eli Lilly and Dow Chemical, have also set deals with Mycogen. And Agrevo, a joint venture of Hoechst and Schering-Plough, will soon roll out herbicide-tolerant rivals to Monsanto's Roundup-ready products.

Will the market have room for all? Monsanto's strengths will likely give it a large slice of the initial pie, and Shapiro says it will continue adding innovative products that build on the gains to farmers. But the crowd of entrants will make it far harder to achieve dominance, which could make the expected payoff much slower to arrive. One prominent Wall Street analyst recently asked Monsanto Chief Financial Officer Robert Hoffman when the company expected to recoup its investment in biotech. Hoffman's response: "I'm reluctant to calculate breakeven, for fear of what the answer would be." Even Shapiro concedes that it's too early to tell whether Monsanto will "capture the value" from its investments. "My best guess is that if we are successful in coming up with a stream of products, then we will be able to," he says. Monsanto's long-awaited biotech payoff appears to have arrived. The question now: Will it be big enough?

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