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Life sciences mix has been integral to many firms
Newest independent company tops industry in 2000 sales

Newest company in close race
with industry leader

Related Stories
Aventis CropScience: Whole Or In Parts
[C&EN, March 26, 2001]

Bayer Intends To Stay The Course
[C&EN, March 26, 2001]

[C&EN, Feb. 12, 2001]

[C&EN, April 2, 2001]

Congress Examines Molecular Basis Of Life Sciences
[C&EN, Sep. 20, 1999]

Centenary Medal to Sykes
[C&EN, Apr. 2, 2001]
Related Companies
Eli Lilly & Co.

Abbott Laboratories






Dow Chemical







Lehman Brothers


UBS Warburg

Merrill Lynch

Cargill Dow


Rohm and Haas


Tweety, Browne Co.

BioScience Securities

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April 23, 2001
Volume 79, Number 17
CENEAR 79 17 pp. 25-36
ISSN 0009-2347
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Widely touted business strategy of the past decade has withered on the vine as companies now split their drug and agriculture operations


Oh, life sciences, we hardly knew ye. in less than a decade, life sciences companies appeared and are now all but gone. The combination of pharmaceuticals and agribusiness--often with a large dose of biotechnology--seemed like a good strategic fit. Similar R&D approaches and technology needs in drugs and agriculture were to be the synergistic links. However, the businesses have turned out to be more different than similar, especially in investors' minds.

7917bus1.ceAnalysts point to a "180-degree reversal in market sentiment toward the life sciences concept" between 1999 and 2000. Poorly performing agribusiness operations have made it attractive to let pharmaceuticals stand on their own, particularly when they can attain higher stock market valuations.

Rampant consolidation in agrochemicals and pharmaceuticals makes it difficult to compete with less than world-scale businesses. Troubles in the agricultural biotechnology area may add to the desire to put some distance between different business units. And many claim that the anticipated R&D synergies did not materialize.

"Life sciences companies"--maybe without the moniker, but with the requisite businesses--had existed for many years. Major drug firms--including Eli Lilly & Co., American Home Products (AHP), Abbott Laboratories, and Merck--had long held agricultural, and even some chemical, operations, along with their better known pharmaceuticals. But the life sciences label didn't come into vogue until 1993, when ICI split off its agrochemicals, drugs, and specialty chemicals units to create Zeneca.

Three years later, Sandoz and Ciba-Geigy split off their chemical operations and put the remaining drug and ag units together as the life sciences company Novartis. In 1997, Monsanto moved its chemical businesses into Solutia and became a life sciences company, fulfilling then-chief executive officer Robert Shapiro's vision.

"We're creating a new kind of company dedicated to meeting growing global needs for nutrition and health," he said at the time. "This will be a fast-moving, technology-driven, intensely competitive global business." Shapiro subsequently spent $6 billion or more on agbiotech and seed company acquisitions.

Starting in 1997, DuPont began a widely publicized life sciences buying spree to create a platform for growth. It spent $13.5 billion in cash and stock to buy seed producer Pioneer Hi-Bred, soy processor Protein Technologies, and Merck's 50% stake in DuPont Merck Pharmaceutical. Dow Chemical, meanwhile, was building up its agrochemical and agbiotech businesses. Hoechst and Rhône-Poulenc quickly followed suit by creating the chemical companies Celanese and Rhodia, respectively, and merging their remaining operations as Aventis in December 1999. A few years before, Hoechst had spent about $11 billion to build up its drugs and agriculture businesses, while Rhône-Poulenc spent about $7 billion on drug buys. Aventis was hailed as the "new world leader in life sciences, holding top position.

In a joint statement back then, Jürgen Dormann, Aventis chairman, and Jean-René Fourtou, vice chairman, said: "Aventis' positioning in life sciences will allow the company to take full advantage of the technological and business synergies between pharmaceuticals and agriculture. We believe that the fields of human health, crop science, and animal health operate today in a common innovation-driven environment."

Eleven months later, Aventis changed its mind, deciding to shed its agribusiness and animal health units and become a pharmaceutical producer. The Aventis CropScience split is still in the works (C&EN, March 26, page 21). Others in the industry have expressed interest in parts of the business, but expectations are that Aventis will try to sell it in its entirety. Recent rumors suggest that spinning it off as a stand-alone company is unlikely.

In March, Dormann told investors and analysts that divesting the ag business and focusing on pharmaceuticals offers a "much strengthened and solid platform for growth." Between 2001 and 2003, he wants to achieve annual earnings-per-share growth of 25 to 30%. Gone is the promise of R&D synergies between businesses, replaced, Dormann said, by "one key factor behind our success...creating a new common culture and identity."

  "OUR STRATEGY is clear. Now it's all about making it happen," he continued. "The success of Aventis as a pure pharma play will ultimately lead to higher levels of growth and value enhancement." Aventis' pharmaceutical sales rose 16% in 2000, while CropScience's were flat.

He still envisions a "promising future" for Aventis CropScience as well, due to its strong market position, its technology and product base, and its R&D resources. "By separating the pharma and ag businesses, both will gain strategic flexibility along with enhanced performance focus, transparency, and financial scope," he said.

Aventis isn't the only one to abandon the life sciences strategy, just the most recent. In late 1999, Novartis and AstraZeneca (formed after Zeneca merged with drug producer Astra) decided to combine their agricultural businesses. The new agribusiness company Syngenta entered the scene in late 2000 as the industry leader.

Heinz Imhof, Syngenta chairman, views life sciences companies as an evolutionary accident rather than an intended event. "A lot of these chemical groups had industrial chemicals that they sold off, then specialty chemicals. What was left was 'life sciences' as a consequence of shedding everything else," he explained in March at his company's first annual results press conference.

Syngenta CEO Michael Pragnell added that "life sciences was absolutely the right thing for the 1990s to handle the explosion in areas of investment and the need to build new markets and new technologies."

Although Imhof believes that there are some research synergies, as in genomics technologies, the idea was "perhaps overstated," he suggested. "We can be [involved] in life sciences without being in a pharmaceutical company. We can have relationships with them if we want. There is no need to be in the same group."

Change also came for Monsanto about two years after its life sciences transformation when it merged with drug producer Pharmacia & Upjohn. Monsanto had already failed in a merger attempt with AHP, which still had its American Cyanamid crop protection business. Monsanto became a subsidiary of the resulting Pharmacia, which has since sold off 15% of Monsanto's stock but kept all of the more desirable drug business. AHP eventually sold Cyanamid to BASF in July 2000.

Oddly enough, as most of the so-called life sciences firms began taking shape in the late 1990s, more traditional drug producers were already selling their agrochemical units to focus on pharmaceuticals. Besides AHP, Lilly sold its 40% stake in Dow Elanco to partner Dow Chemical in 1997. Merck sold specialty chemicals to Monsanto in 1995 and agrochemicals to Novartis in 1997. In early 2000, Abbott sold its pesticide business to Sumitomo Chemical.

Life sciences businesses were facing a variety of pressures. Divergent markets and outlooks made the two areas seem unrelated and a poor fit. Investors became more favorably inclined toward the drug businesses. And with the agriculture side still focused largely on more traditional chemical products, and just a few emerging biotech crops leveraging those, the two parts had not yet reached a common technological plane.

Back in mid-1999, Lehman Brothers analyst Sergey Vasnetsov concluded that the "life sciences strategy--synergy between agbiotech and pharma--is dead." Decisions since then by the players to split apart operations are a result of the idea moving out of favor, he now says, "and the pharmaceutical companies considering their ag chemical units as unwelcome distractions and the source of potential liabilities," as issues arose in agbiotech.

In the past six or so years, eight major drug industry mergers have occurred, often doubling the size of the resulting companies. In agrochemicals, the top 12 firms have consolidated into eight players in the past year alone. High research and product development costs, along with globalization pressures and needed economies of scale in marketing, are factors driving the consolidation in both sectors.

Almost every major company--in oil, commodity chemicals, specialty chemicals, or drugs--has at one time participated in the agrochemical area, Vasnetsov reports. For years, the business has been a very diverse, fairly profitable, and slow-growing market. It also remains a highly technical and intensely competitive market.

The agrochemical business has been hit hard with falling demand, due to the depressed state of the farm economy in the U.S. and elsewhere. A significant recovery in pricing and sales volumes is not anticipated in the near term, Vasnetsov says. With sales growth estimated at just a few percent per year, and much remaining industry fragmentation, he and other analysts expect more consolidation.

PHARMACEUTICAL SALES and earnings, in comparison, consistently show double-digit annual growth. The industry complains of high R&D costs and elevated investor expectations, along with product pricing and health care reimbursement issues. Yet it comes out far ahead of chemicals in stock market value. Unlike chemicals, expectations for drug sales and earnings growth are strong, and investors view the noncyclical nature of the industry very favorably.

According to figures cited by Bayer Chairman Manfred Schneider, pharmaceuticals enjoy a ratio of market capitalization to pretax earnings of 26.7. The multiple for chemicals is just 7.2. About seven years ago, the respective figures were much closer, both within the range of five to 10. Even with diversified chemical, polymer, and life sciences operations, Bayer, with a multiple of 7.9, is ranked much closer to chemicals than it is to drugs.

The same pressure to achieve higher multiples may have influenced others, regardless of the belief that R&D synergies would ultimately pay off. Novartis Chairman Daniel Vasella championed the life sciences strategy in the mid-90s. However, in late 1999, his company's board determined that "the benefits of concentrating on health care businesses outweigh the modest synergies between health care and agribusiness activities."

Vasella then told shareholders that it "has transpired that the synergies between pharma and agribusiness would remain marginal and that the advantages of an alliance could not offset the costs of complexity." The decision to focus on pharmaceuticals, he continued, "makes it possible to concentrate our activities on those areas that offer the greatest growth prospects, the best competitive positions, the maximum possible synergies, and an appropriate return."

It's now a widely promoted idea that drug and agricultural businesses will prosper apart and, as executives such as those at Novartis and AstraZeneca say, "deliver sustained growth in shareholder value." Until the emergence of Syngenta and Monsanto stock, there were no pure-play agribusiness companies for comparison with chemicals and pharmaceuticals. Now, analysts at UBS Warburg, for example, rate the agribusinesses about the same as Dow and DuPont.

  THE DISSOLUTION of life sciences companies hasn't necessarily brought about the desired boost in stock values that management and investors wanted to see. Since splitting off Syngenta in November 2000, Novartis and AstraZeneca share prices have gained just 1 or 2%.

Syngenta's debut below its offering price was less than stellar, valuing it at just more than half what Novartis and AstraZeneca had anticipated. As of early April, Syngenta's share price is up about 22% from its initial price, to about $10.50 per share. This is somewhat surprising since Syngenta's 2000 sales were up only 2%, while Novartis and AstraZeneca had increases of 15% and 8%, respectively.

AFTER A ROCKY START in October 2000 at $20 per share, which was the low end of its offering range, Monsanto's stock now trades near $36. Because Pharmacia holds an 85% stake in Monsanto and reports consolidated financial results, UBS Warburg analyst Andrew Cash finds it easier to value Pharmacia in pieces. He counts the Monsanto portion at about $6.00 to $7.00 per Pharmacia share and adds this to a drug business contribution for a total share value of $57 to $62. Pharmacia traded in this range until this year's stock market downturn and now is about $52.

Analysts expect Pharmacia--which has a goal of 20% earnings-per-share growth--will shed its remaining stake in Monsanto after March 2002 when it is no longer bound to hold at least 80%. Pharmacia's anticipated plans for a tax-free distribution of shares to drug investors, who may not want to hold agribusiness shares, may limit Monsanto's market value in the near term, says John Roberts, first vice president at Merrill Lynch. A similar negative reaction was reported when AstraZeneca and Novartis shareholders received shares in Syngenta.

"Monsanto's ag products is probably the last business that Pharmacia & Upjohn shareholders would have wanted to call their own," Cash said about what he calls the "bittersweet" deal to create Pharmacia. The desired acquisition target was the major analgesic Celebrex, sold by Monsanto's Searle drug unit. Economies of scale were justifiable drivers behind the merger, along with the view that Searle would perform better under drug company management, Cash believes.

Just as companies had jumped on the life sciences bandwagon, they began jumping off to various degrees. Drug industry consolidation was a factor behind BASF's recent decision to sell its small $2 billion business to Abbott. "We have thoroughly investigated all conceivable options ... and are now convinced that this business has greater chances for success with Abbott," BASF Chairman Jürgen Strube said when he announced the sale late last year.

Until the drug sale, BASF was considered among possible holdouts for a diversified strategy that included a life sciences emphasis. "There are only a very few companies that still believe in the life sciences concept," Strube told C&EN recently, remarking that "those that originally founded the concept were the first to wave good-bye." Although synergies originally were seen in research, these "are not that important after all or do not have an offsetting effect in view of the different requirements in marketing," he added.

BASF's overall strategy focuses instead on "Verbund," or integration. Its $4 billion purchase of Cyanamid doubled the size of its crop protection business and gave it a more competitive size. Because of the ongoing agribusiness consolidation, Strube says BASF still wants to reinforce agribusiness operations. The company has been very active in setting up biotech ventures, including industrially or chemically directed ones for vitamin synthesis, lysine production, and modified starch R&D, as well as in plant genomics.

Likewise, DuPont's strategy is to focus on "integrated science." In a mid-March speech, DuPont CEO Charles O. (Chad) Holliday Jr. told business executives that "the synergy among classical chemical technologies, the new biology, information science, and emerging fields in electronics and nanotechnology together offers the most opportunity for meeting human needs and creating wealth for our shareholders in a sustainable manner."

Holliday indicated that DuPont's purchase of Pioneer Hi-Bred was "a major step in an overall strategy to integrate biology into our science and technology base." He also called biotechnology an "incredibly promising and powerful scientific tool" and "critical enabling technology." DuPont continues to showcase its bio-based Sorona polymer--to be commercialized in 2003--and pledges to make 25% of its products from renewable materials by 2010.

In 1998, in the midst of its life sciences buying spree, DuPont aligned its businesses into cash-generating foundation businesses, differentiated growth businesses, and its "long-term growth engine," life sciences.

About a year later, it announced more plans to build its life sciences portfolio through a major drug alliance and to issue a life sciences tracking stock that would allow investors to value the business differently from the rest of DuPont. It set a goal of generating about a third of its sales and earnings from life sciences business by 2002.

It's unlikely that DuPont will meet the life sciences sales and earnings goal. It has abandoned the tracking stock idea, and the firm's attempts to find a pharmaceutical partner failed. Some analysts believe that DuPont's $1.5 billion drug unit lacks the critical mass to be competitive. Not surprisingly, DuPont announced late last year after a six-month review that "the full value of DuPont Pharmaceuticals can be best realized outside DuPont."

Newest independent company tops industry in 2000 sales
Aventis CropScience
Dow AgroSciencesa,b
a Estimate. b Includes planned acquisition of Rohm and Haas's agrochemical business. SOURCE: Company results, Merrill Lynch

DuPont is "struggling with its life sciences strategy," Merrill Lynch's Roberts comments. Other analysts and investors claim to be confused about the company's portfolio strategy. DuPont's poor stock performance reflects this--its stock had hit a high of about $83 per share in mid-1998 and today is down about 46%, trading near $45 per share. Some industry observers suggest that investors may have underestimated the time it would take for the life sciences strategy to pay off.

Biotechnology was called a "key platform" to accelerate Dow Chemical's growth in late 1998 by then-CEO William S. Stavropoulos. However, Dow hasn't fit the life sciences mold since it sold its drug business to Hoechst back in 1995. Dow has been building its agrosciences division through chemical, agbiotech, and seed acquisitions and joint ventures. It also keeps its hands in drugs through alliances, largely with biotech firms, for manufacturing carbohydrate-based pharmaceuticals and nutraceuticals and for producing drugs in green plants.

ALONG WITH DuPont and BASF, Dow envisions further linkages among agriculture, biotech, chemicals, materials, and nutrition. Its Cargill Dow joint venture is commercializing polylactic acid polymers made from renewable raw materials. Dow has a university research alliance to develop plant oils as raw materials for plastics, chemicals, and industrial products.

Its acquisition of Collaborative BioAlliance late last year expanded its capabilities in fermentation and other bioprocesses. A joint venture with Diversa is working toward commercializing enzymes for industrial and consumer applications.

These ventures signal Dow's growing commitment to industrial biotechnology, company executives say. The recently acquired Union Carbide businesses are at least as cyclical and differentiated as Dow's, says President and CEO Michael Parker. Therefore, Dow has been making acquisitions in performance areas--such as Rohm and Haas's agrochemicals unit, agbiotech firm Mycogen, and Cargill's seed business--for "dynamic balance," he adds.

Dow's significant biotech efforts are still new to the company, Parker told C&EN recently. "We're at the playing table. We may not have as big a pile as others, but we are participating." Agbiotech still is "a long-term play for value creation," he added, as are "bigger opportunities in biomaterials." He noted that Dow is "quite comfortable" with joint-venture activities, especially as a way to find new product and business opportunities for the longer term.

"Dow remains committed to at least a 50% interest in ag products, but is also interested in monetization and joint-venture options for part of this business," Merrill Lynch's Roberts says. Dow has said it expects its agrosciences business to grow at more than double the industry rate and has expressed interest in seeing the business publicly valued. The recent Rohm and Haas agrochemicals acquisition "strengthens the business in the event of a partial initial public stock offering or merger with another ag products company," he adds.

The shifting life sciences landscape and emergence of pure-play drug and agribusiness firms make many industry observers wonder whether BASF, after selling its drug unit, will spin off crop protection, and whether Bayer will give up its ag and drug operations.

In the near term, Bayer is expanding in life sciences, hoping to get board approval for $7 billion aimed at acquisitions and ventures. It recently spent about $920 million on smaller crop protection buys. To support drug discovery, it has set $1.3 billion in alliances with biotech firms.

  STILL DIVERSIFIED in chemicals, polymers, agriculture, and drugs, Bayer gets more than 60% of its profits from its life sciences operations. But analysts continue to rate the company like a chemical producer.

"We believe there is a good chance that a steadily improving performance will convince the capital market of the potential Bayer holds in its portfolio as a whole," Schneider said at the company's annual results presentation in late March. "We plan to achieve sales growth and operating margins on a par with those of our leading competitors in all four business segments. The capital market will reward us if we enhance the efficiency of our operations and prove that we are competitive in all of our businesses."

Bayer's management continues to be barraged with questions about its diversified strategy. "We are convinced of the logic behind our strategy," Schneider has answered. "We are sure that we would not enhance Bayer's value over the long term by splitting the company into separate entities, or by spinning off and then divesting parts of our current portfolio, as some people in the capital markets are demanding."

At its annual meeting this week, Bayer must respond to a shareholder request looking to do just that. Tweedy, Browne Co.--a New York City-based investment firm that holds just 0.1% of Bayer's stock--has proposed a three-way split (C&EN, March 26, page 21).

"We can see no convincing advantages for our business operations in the kind of restructuring that is being proposed," Schneider said in response. "Should opportunities arise for significant external growth in our life sciences activities, our existing corporate structure gives us scope for a swift response and does not limit us in any way. However, our strategic focus remains on our potential for organic growth."

Agrochemical producers, like Bayer, have turned to biotechnology as a route for new product development in a mature market. Intrinsic to the long-term strategy of companies like Monsanto, DuPont, Dow, and BASF are crops that offer nutritional, health, or medical benefits. Ironically, the end play for agribusiness may be back in health care, while pharmaceuticals are even starting to look at agriculturally related production in green plants or transgenic animals.

Newest company in close race
with industry leader
Pfizer $24.0
GlaxoSmithKline 23.5
Mercka 19.1
AstraZeneca 15.8
Aventis 14.6
Bristol-Myers Squibb 14.4
Pharmacia 12.6
Johnson & Johnson 12.0
Novartis 11.4
American Home Products 10.8
Roche 10.3
Eli Lillya 10.0
Bayer 9.1
Schering Plough 8.4
Abbott Laboratoriesa,b 6.2
a Estimate. b Includes acquisition of BASF's pharmaceutical operations this year.
Lehman Brothers' Vasnetsov is skeptical about the prospects for microchemical "plant in a plant" approaches in which crops are modified to produce vitamins or other chemicals. "The idea sounds very intriguing, but with very few exceptions, it is difficult to see it being commercially competitive with traditional chemical processes," he says. "The concept appears to be a very expensive and technically challenging way of making otherwise simple end products."

Vasnetsov is a bit more optimistic about nutraceuticals--foods or food ingredients that provide health or medical benefits. "Currently, it is a bit of both hope and hype," he says. "The nutraceutical area is still in its infancy. Over the next five to seven years, it could develop into a fast-growing, profitable, brand-name-based business. In the meantime, it requires significant long-term investment in research, marketing, and consumer education, as well as proactive legislation."

Others share this optimism and suggest that, while life sciences may not be a corporate strategic centerpiece, the idea has validity and will reemerge.

"The real execution of that strategy is in the integration of food, nutrition, and health. There are too many drivers that will force that linkage together," believes Sano M. Shimoda, president of BioScience Securities, a private investment bank. "Life sciences strategies will be back at some point in the intermediate to longer term, but they are going to be product marketplace driven, not technology driven.

"In the past, the strategy was driven by the potential synergies from a technology standpoint. The problem was that the ag businesses of these companies were not based on biotech, they were based on agrochemicals, which is a mature business," Shimoda explains. "The strategy has got to be product, not technology, driven, and the products aren't there yet."

Life sciences mix has been integral to many firms
Dow Chemicald
Abbott Laboratories
American Home Products
a Includes crop protection chemicals, seeds, and animal nutrition. b Plans to divest agribusiness and chemical operations. c Sold off drug operations in early 2001. d Acquiring more agricultural operations in 2001. e Plans to divest drug operations. f For last period of combined operations.

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