Fields Of Genes
Like any farmer, Rod Gangwish of Shelton, Neb., is a hard-nosed businessman, wary of latching on to what somebody says is the next big thing in agro tech. So when the first corn seeds genetically engineered to resist pests were released in 1997, Gangwish proceeded slowly. For a year, the third-generation farmer cultivated a small test plot on his 1,500-acre spread to find out whether the seed could, as advertised, repel a pest called the European corn borer without cutting his yield. Gangwish, like all farmers, had to make a calculation: The new seeds would cost more, but he would save on pesticides.
The 48-year-old farmer was won over. He defeated the corn borer and got a bit more yield out of the biotech corn. Pleased with the results, he began planting the seeds on one-third of his acreage last year. Now, as spring planting approaches the Great Plains, Gangwish is experimenting with a soybean designed to resist powerful weed-killing herbicides. "The current trends in biotechnology are the greatest thing since hybrid corn," he says.
Hybrid crops, along with increased use of fertilizers and irrigation, led to the so-called green revolution in the 1950s and 1960s in which crop yields soared and hundreds of millions of people were saved from starvation. Corn yields, for example, rose from 20 bushels per acre in 1920 to 120 bushels per acre today. Some researchers are worried, however, that further gains would be hard to come by.
But breakthroughs in genetics have made it possible to improve crops in ways conventional breeders couldn't have dreamed of. After years of research and a few broken promises, a second green revolution is at hand. The gene-splicing technology that has transformed health care is now being applied to plants, and the possibilities are endless. With conventional breeding, it takes seven to eight years to produce a new plant, which may be only marginally better than its predecessor. Genetic engineering allows researchers to insert virtually any gene into a plant and create a new crop--indeed, a whole new species--in nearly half the time. And virtually anything is possible.
Plants could be engineered to emit their own pesticides, to grow in dry or salty soil, and to produce food nutritionally superior to what's available today. Crops are being designed to produce new kinds of plastics as well as vaccines and foods that can ward off disease. This second revolution could have an impact on the entire economy, given the more than $800 billion a year Americans spend on food alone. Its importance was recognized by Federal Reserve Board Chairman Alan Greenspan, who said in a Mar. 16 speech: "I cannot stress too much the overwhelming importance of technical change" in farming.
"What's going on offers the promise of curing disease and growing more and better food on land in a more sustainable way," says Monsanto Chairman Robert B. Shapiro. "We're talking about three of the largest industries in the world--agriculture, food, and health--that now operate as separate businesses. But there are a set of changes that will lead to their integration."
The potential of the scientific advances is strikingly clear. But whether businesses can capitalize on this revolution is a more difficult question. Investors and businesses seeking profits in agriculture have been frustrated before. What's different this time, however, is that some of the world's biggest companies have bet their futures on the new technology. Old-line industrials such as DuPont, Monsanto, and Dow Chemical are doing a flurry of agro deals, scrambling to transform themselves. European drug companies such as Novartis and Hoechst, now merging with Rhone-Poulenc, are rushing in despite the doubts of their home consumers.
Their efforts have led to the creation of a new industry: life sciences (below). The first genetically engineered crops went on the market only five years ago, but this year 50% of all U.S. corn, soybean, and cotton acreage will be turned over to reengineered crops, estimates University of Missouri at Columbia economist Nicholas G. Kalaitzandonakes. Within five years, the market for genetically engineered agricultural and food products is expected to hit $20 billion, up from over $4 billion in 1999. By 2020, the market could hit $75 billion, according to Zeneca Group PLC. "It's pretty likely that by the early 2000s, virtually every [food] product will have some element of genetic engineering." says Charles S. Johnson, chairman of Pioneer Hi-Bred International Inc.
EUROPEAN OUTCRY. It's not just the corporate world that is hoping to cash in--plenty of entrepreneurs are waking up to the promise of agricultural biotech. The venture capital community, largely out of the agricultural sector since the early 1980s, is raising $750 million, estimates Bay City Capital LLC, one of the largest players. Bay City, which has received backing of $100 million from Chicago's savvy Pritzker family for two ag funds, is also managing the North American fund just announced by Gilde Investment Management of Utrecht, a unit of the Dutch farm lender Rabobank. Gilde plans five other similar-sized regional funds.
But if the potential rewards are enormous, the possible pitfalls are just as significant. A major backlash has already started in Europe, where fears of "Frankenstein foods" are at a fever pitch. Public skepticism about government regulators, combined with controversy over a study that seemed to claim that rats fed genetically modified potatoes suffered immune-system damage, has stoked outcries from Europeans.
Even if the new crops pass regulatory muster, it is still unclear when or how the life-sciences players will recoup the billions invested in developing products. "If you want to make insulin in a soybean, you can do it. Whether it makes economic sense is open to question," warns Pioneer's head of product development, James E. Miller.
But two powerful factors are outweighing the uncertainties. The first is demographics. Over the next 40 years, there may be as many as 50% more mouths to feed, experts predict. Hugh Grant, co-president of Monsanto's agriculture unit, figures farmers would have to produce 75% more food per acre under current conditions--hardly a prescription for a sustainable environment. At the same time, aging populations put increasing strains on medical systems, opening up possibilities for foodstuffs that actually improve health.
As world population and incomes continue to rise, major leaps in food productivity will be critical to sustaining economic growth in much of the developing world. "The equation doesn't work unless we get significantly more productivity from the land we have," says DuPont Chairman and CEO Charles O. Holliday Jr.
But plant biotechnology changes that equation. In 1984, researchers working with Monsanto were able to use a bacterium as a vehicle for inserting a new gene into a relative of the tobacco plant (illustration). The bacterium, called Agrobacterium tumefaciens, contains a mobile piece of DNA known as a plasmid that can be easily transferred from one organism to another. Scientists insert a piece of DNA with a desired trait--insect resistance, say--into the plasmid, and then allow the bacterium to infect a plant. The plasmid transfers the foreign DNA to the plant cell. The altered plant cell then replicates itself, and a new transgenic species is born.
The bioengineering of new species has led to a seismic shift in agriculture. One of the first commercial genetically engineered products was Calgene's Flavr Savr tomato, introduced in May, 1994, with a gene inserted to slow the ripening process so the tomato could stay on the vine longer. The tomato was a flop, in part because of its high cost. Two years later, though, scientists at Monsanto Co. engineered a hit: a soybean designed to withstand heavy dousings of Monsanto's blockbuster weed killer, Roundup. Roundup kills weeds by inhibiting the creation of an enzyme that is critical for plant growth, but it can stop crops dead in their tracks as well. Monsanto scientists introduced a gene that makes soybeans resistant to the herbicide so it can be freely applied to weeds without harming crops.
BUG-PROOF COTTON. In the past two years, the Roundup-resistant gene has been inserted into cotton and corn. The University of Missouri's Kalaitzandonakes figures the use of Roundup-resistant soybeans alone could save farmers as much as $1 billion a year in herbicide costs. At the same time, scientists at Monsanto and other companies have successfully inserted a pest-fighting gene from a bacterium found in soil called Bacillus thuringiensis into cotton and other crops. The gene creates a protein that is deadly to certain insects--reducing or eliminating the need for pesticides.
The success of these early bioengineered crops reshaped the industry. In the past three years, Monsanto has shucked its once-core chemical unit and paid $8 billion to buy up a number of big seed companies. Not to be outdone, on Mar. 15, archrival DuPont Co. bought the 80% it didn't already own of Pioneer Hi-Bred--the world's largest corn-seed developer and distributor--for $7.7 billion.
TWIN TRACKS. Underlying the life-sciences revolution is the notion that biotechnology, agriculture, food, and drugs are all converging. That's why giant chemical and pharmaceutical companies, such as DuPont, Monsanto, Zeneca Group, and Novartis, are now working to uncover the sequences and functions of genes in everything from humans to bacteria to plants.
In fact, the effort to understand the genes in plants mirrors much of the work being done to unlock the secrets of the human genome. Paradigm Genetics Inc., for example, run by Novartis veteran John Ryals, is trying to decipher the function of genes that make up two plants: rice and the weed Arabidopsis thaliana. These could then serve as the "laboratory mice" for plant genetic research. Ryals' group has developed a technique that blocks the action of a gene when it is exposed to a certain chemical or light. After the gene is blocked, tests are done to see how the plant functions without it. By analyzing the results, scientists can find out if a gene, say, leads to production of a protein critical to the survival of the weed. If so, blocking that protein could lead to a new herbicide.
In the search for useful genes, the big life-sciences companies are going into overdrive. Pioneer has sequenced three-fourths of the 80,000 genes in corn and should complete the job within five years. The startup Mendel Biotechnology Inc., in which Monsanto and Mexico's Empresas La Moderna--the world's largest fruit- and vegetable-seed developer--hold stakes, is trying to identify the 15% of all genes that control other genes, providing a key tool to manipulate traits. "It's a reasonable goal that we will know the function of all genes in plants within 10 years," predicts Mendel Chairman Chris S. Somerville.
Once the function of a gene is known, researchers want to be able to turn it on and off at will. Another startup, Sangamo BioSciences Inc. in Richmond, Calif., is trying to develop a "master key" to switch any gene on or off. The company is designing so-called transcription factors, the proteins that regulate genes. One potential use for these substances would be to control the timing of flowering and fruit-bearing.
All these advances could also yield a big payoff for consumers in the form of more nutritious foods. The next few years will see a flurry of corn- and soybean-oil products with heart-healthy oils, some of them processed into food additives or diet supplements. At Novartis' Agricultural Discovery Institute being set up in La Jolla, Calif., with an investment of $600 million over the next 10 years, scientists are working to reduce food allergies caused by proteins that aren't digested. If genes could be inserted to relax the tightly wound proteins, the theory goes, the body could chop them into productive amino acids. DNAP Holding Corp., the research arm of ELM, is trying to genetically alter bananas to ward off the highly damaging "black figatoka" rot. Further out, though, it has its eye on a bigger prize: inserting a gene to heighten the tomato's lycopene content. Lycopene is a naturally occurring chemical believed to be effective in preventing several types of cancer.
Given their industrial heritage, it's not surprising that Dow Chemical Co. and DuPont are pushing into another frontier--producing industrial fibers from transgenic corn and other crops and engineered bacteria. Perhaps more promising are efforts to use biotech to produce materials otherwise unavailable. For 40 years, DuPont has sought an economical way to make 3GT, a lab-produced polyester fabric five times more resilient than petrochemical-based polyester. Now they are engineering E. coli bacteria to make it. Commercial sales could start in three years.
SURPRISE DELIVERY. All these scientific advances will mean little if consumers reject transgenic plants. Protesters in Europe have torched Irish potato fields and dumped a truckload of genetically engineered soybeans on the steps of 10 Downing Street in London. A consortium of seven leading European supermarket chains in mid-March agreed to drop all private-label goods containing genetically modified products.
Even more worrisome to business executives and U.S. trade officials is a patchwork of inconsistent European Union regulations. The EU has approved U.S. imports of a herbicide-resistant soybean and four varieties of insect- or herbicide-resistant corn. But, because several varieties of still-unapproved U.S. corn varieties are mixed in with the approved commodities, Europe has blocked all shipments. "There has been a real reluctance on the part of officials to show any leadership on these issues," complains Timothy J. Galvin, the Agriculture Dept.'s administrator for foreign service.
SUPERWEEDS? Most scientists believe consumers' fears have little basis in fact. There's no evidence yet that any of the foods now on the market are unsafe. Most of the modifications encode for proteins that either don't end up in the food part of the plant or are digested like any other protein. Critics fret, however, that some people could be allergic to the added proteins.
There is greater concern, however, about the possible effect of transgenic crops on the environment. In the constant struggle between humans and nature, insect-resistant plants could lead to the appearance of even tougher insect pests. Genes to resist insects or pesticides might also find their way into wild species, leading to the creation of superweeds.
It doesn't help that the giant agrochemical firms, already living down a pollution-laden legacy, have become symbols for all that is wrong with Big Science and Big Business. "The reaction in Europe is a lot like the religious fundamentalists in other countries," snaps Novartis President Daniel Vasella. Whether the protests are well-founded, they are making farmers wary. David Lehs, who grows corn and soybeans in Independence, Iowa, is a believer in genetically engineered seeds. But he isn't willing to make a wholesale changeover until a basic question is answered: "Can we sell our crops in Europe or South America or Japan?" he asks.
In the U.S., meanwhile, there are mounting concerns about the concentration of power within agriculture. Regulators and food-policy officials already are drawing an analogy between Microsoft Corp.'s dominance in software operating systems and the life-sciences companies' control of seed technology. Agriculture Secretary Daniel R. Glickman wonders whether the companies should be forced to release genetic information about plants into the public domain. (An interview with Glickman is available at www.businessweek.com.) And there are worries that the life-sciences giants will be concerned only about the richest markets and wealthiest farmers while the developing world goes hungry. "There are very serious questions whether biotech advances will be to the public good," warns Ismail Serageldin, chairman of the World Bank's Consultative Group on International Agriculture Research.
As with so much on the futuristic edge of science, however, the biggest stumbling block may be the bottom line. Before the life-sciences companies cash in, new food-distribution methods and safeguards need to be put into place linking labs, farmers, grain handlers, and processors. Separating genetically engineered crops from nature's own is alone an enormous task--and a critical one should labeling regulations become widespread. Determining who along the chain extracts financial value is keeping the number-crunchers hard at work.
Wary of biotech's decades of over-promising and under-delivering new pharmaceuticals, a number of life-sciences executives are cautious about promising quick returns (box). DuPont has even decided to hold on for now to some slow-growing chemical and fiber businesses for the rich cash flow they generate, bucking the industry trend. Pioneer Chairman Johnson has long warned that many hurdles remain before the new research pays off. "It is a very difficult challenge," he says, "to identify what characteristics to put into a plant and to create a difference that someone will pay for."
Still, for the fledgling industry, there are encouraging signs that a strategic model is taking shape. Analysts and rivals suggest that one of the early shrewd moves is a new joint venture between Monsanto and giant grain processor Cargill Inc. to design and produce enhanced animal feed. The new company, called Renessen, is designed to draw upon Cargill's huge distribution capabilities and Monsanto's raw science.
Meantime, other links in the distribution chain are evolving. Archer Daniels Midland Co. has developed handling and separation technology that will enable it to contract with farmers this year to export 100 million bushels of specialty grains. Equipment makers Deere & Co. and Case Corp. are designing sensing devices to let farmers monitor protein and oil content, an increasingly important task as processors, food companies, and regulators require documentation of every component. "I can't think of any industry where bigger bets are being placed," says Case President Steven G. Lamb.
The stakes are only going to be higher. Competitors in the life-sciences industry are convinced they are poised to deliver long-promised healthier, safer, more productive crops. Now they just have to persuade the world's farmers and consumers to buy them.