Philadelphia Inquirer | October 5, 1999
Genetically modified crops represent a huge potential market, but present a bounty of questions. For investors, it's anything but a sure bet.
By Andrea Knox, INQUIRER STAFF WRITER
DuPont wants to be the world's food company, and so do Monsanto and Dow. All three are at the forefront of what they hope will be the next agricultural revolution: the use of gene-splicing - inserting a foreign gene into a plant's DNA - to create crops with useful new characteristics.
The revolution has already moved from the laboratory to the field. Soybeans genetically engineered to survive herbicide sprays are widely used by American farmers, as are corn and cotton whose added genes allow them to produce their own pest-killing toxins.
Plant designers are working on other crops with useful growing characteristics, such as drought resistance. Next will be plants with a nutritional kick, such as extra vitamins or lower levels of saturated fat. In a third stage, plants are expected to be genetically modified to contain vaccines or medications.
It seems that genetically modified plants can offer something for everyone from heart attack-prone Americans to the world's poor. Consensus estimate of market potential? Huge.
Does this mean that now is the time for investors to sink a few dollars in a company that's trying to hit the plant-gene jackpot?
Not necessarily. "I would be most comfortable with standing on the sideline at this point," says Tom Brakel, a securities analyst who follows Monsanto Co. for Mehta Partners in New York. "It's difficult to project what will happen."
For all its long-term promise, the plant-engineering business in the short term is in flux. A consumer backlash against genetically modified food is sweeping Europe, and there's no telling whether it will spread. Activist groups are trying to build opposition here on similar grounds, that there has not been enough testing to assure that the crops are safe for people and the environment.
At the same time, this year's U.S. agricultural surplus has been a drag on sales and profits in the agribusiness units of the six major developers of gene-altered seeds.
Most of those companies are known or rumored to be looking for ways to split agribusiness from their more profitable pharmaceutical operations, so that a company you invest in today might look quite different in just six months. Novartis recently said that "all options are open" for its agribusiness unit. AstraZeneca is looking at a split-up, according to Sergio Traversa of Mehta Partners.
In both cases, a spin-off to shareholders is more likely than a sale because low market valuations would prevent the units from being sold for what they are worth. One possible scenario, Traversa says, is that spun-off Novartis and AstraZeneca agribusiness units would combine.
Monsanto, too, is almost certainly looking at ways to separate its agricultural operations from its Searle pharmaceutical business, according to Mehta Partners' Brakel.
DuPont, which beefed up its agribusiness operations on Friday by completing its acquisition of seed company Pioneer Hi-Bred International, has said it will decide early next year whether to issue a tracking stock for its life science business, which includes both agriculture and pharmaceuticals.
Only three of the big six in this business are U.S. companies: DuPont, Monsanto and Dow Chemical. AstraZeneca, formed this year by the merger of Sweden's Astra and Britain's Zeneca, is traded as American Depositary Receipts on the New York Stock Exchange, as is Switzerland-based Novartis. AgrEvo, the agribusiness arm of Germany's Hoechst Schering, is not traded in the United States.
For all of these companies, the genetic modification of crops is still a small business, just fractions of agribusiness units that are themselves minor shares of a company's overall operations. No company at this stage can even identify the percentage of its sales from genetic modification.
From an investor's point of view, then, an investment in one of these companies is primarily an investment in either nonagricultural chemicals or pharmaceuticals.
Even after the purchase of Pioneer, agriculture and nutrition combined will provide only about 20 percent of DuPont's sales. Only 13 percent of Dow's sales come from its AgroSciences unit. Agribusiness accounts for only 17 percent of sales at AstraZeneca and 27 percent at Novartis. Monsanto is the most evenly split, at 47 percent agribusiness and 53 percent pharmaceuticals.
But the potential of genetic modification to either boost or bust company growth drives many analysts' recommendations. Christopher M. Crooks at Janney Montgomery Scott says that DuPont's recent focus on biotechnology is "a terrific strategic move" that will start to pay off between 2000 and 2005.
While some analysts worry that DuPont paid too much for Pioneer - $9.4 billion in all - James H. Wilbur of Salomon Smith Barney says "the potential for affecting the $500 billion U.S. food industry is sizable enough that if you get it right, it doesn't matter what you paid."
Crooks and Wilbur are among the many who believe that the opposition to genetically modified food will subside in a few years. A darker view comes from Deutsche Bank Alex. Brown, which in May said it expected the furor to drive down stock prices.
DuPont, which is banking its future on creating crops with added nutrition, believes that consumers will pay more for food made from such crops. But Deutsche Bank questioned whether higher prices could be imposed and wondered "when and if ag-biotech will pay off for DuPont."
The most visible player so far has been Monsanto, which has spent heavily to acquire seed companies and small companies with genetic modification expertise.
Monsanto boasts the first two agricultural blockbusters from genetic engineering - Posilac bovine growth hormone and Roundup Ready soybeans. The growth hormone, given to cows to boost milk production, is used in roughly 30 percent of U.S. herds. The soybeans, which account for half the U.S. crop this year, will survive spraying of Monsanto's Roundup weed-killer.
DuPont has said its focus will be on seeds genetically modified to produce foods with enhanced nutritional characteristics. The company calculates that the foods will have consumer appeal - unlike the current generation of modified seeds, seen by opponents as helping the farmer control pests and weeds at the potential expense of the consumer and the environment.
Dow's AgroSciences unit is taking a less costly tack, avoiding the seed-company purchases that have added to debt at Monsanto and DuPont. Instead, it is investing in research, aiming to discover genes with useful traits that it could license to companies.
Though Deutsche Bank questions DuPont's future in genetic modification, its analysts are enthusiastic about a small Delaware company that has created laboratory tests to confirm a successful gene transfer into a plant. Last year, Strategic Diagnostics Inc. of Newark earned a quarter of its $16 million in revenues from such testing.
This summer, Strategic Diagnostics began selling similar tests to grain buyers. The bigger opportunity, according to the company and analysts, will come when companies such as DuPont want to promote - and charge more for - foods with extra genetic punch. They will be looking for tests to prove that the foods have the advertised enhancements.
In August, Deutsche Bank called Strategic Diagnostics "a small company with huge opportunities" in both food testing and drug testing.
