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The high cost of consolidation

Third in a series Who owns nature?

What all of us are witnessing during the infancy of the biotechnology industry is not unlike what happened with the space race in the 1960s, or the software boom of the 1980s. It's chaotic, full of promise, and the applications of the technology seem limited only by our imagination.

But it's also very, very expensive.

"Take Monsanto," says investment banker Sano Shimoda, president of BioScience Securities. "I don't know how much they spent before they put out that first bag of biotech seed, but $1 billion is probably realistic."

That billion-dollar bag of seed, however, is only the proverbial tip of the iceberg. Expenses in this burgeoning industry are not measured by research and development expenditures alone: They also have to include the staggering amounts spent on litigation. From patent office interferences to lawsuits and appeals, the industry is battling over who owns nature. And that money flowing to lawyers is having a significant influence on the biotechnology industry's formation.

"Litigation is a burden on smaller companies," says David Wheat, president of the Bowditch Group, a business consulting firm located in Boston. "If you go back through Mycogen's annual reports, for example, you'll see that litigation costs were significant and they affected the company's bottom line. But for a DuPont or a Monsanto, those costs are insignificant in the grand scheme of things."

What that means, of course, is that the battle over genetic ownership already is diluting competition. It's a deep-pockets battle that is forcing industry consolidation, and many players fear that only a handful of companies eventually could control the science of genetics. "To do research in this climate, you've got to have a big legal department," says Col Seccombe, CEO of Garst Seed, "because you know that if you discover a useful gene you'll be engaged in a series of interference hearings followed by court case after court case.

"I'll even say that this is the issue that is driving industry consolidation. Within 10 years we could have only three or four corporations that control the research and make the decisions on commercialization.

"As an industry, we need to pause for a reality check. It's time to ask the appropriate questions: Is this level of consolidation a good thing? Is this the best way to go about feeding the world? Is this in the best interest of farmers and consumers?"

Who holds the pieces? The forces that are creating this concentration are both technical and philosophical. David Wheat says the technology itself is a prime factor.

"To produce any biotech product," he says, "you have to have the germ plasm, the promoters, the markers - all these different things - and no company has all the pieces. That's why acquisitions are taking place; companies are choosing to buy a technology rather than pay royalties.

"Licensing is an option, but it's very complex. To license a traditional pesticide, for example, all you have to do is work out a deal with one company. But with biotech, you have to deal with a number of different companies. And today, because of pending patents, interferences and lawsuits, no one even knows who to license the pieces from."

According to Sano Shimoda, the philosophical side of the business is not nearly as complex. "It's a battle of the giants," he says, "and no giant wants to yell 'uncle' first. They all are trying to capture and control value, which is the very heart of intellectual property ownership.

"Right now, everyone holds some pieces but no one has a defining position. So litigation will continue until the courts define the issue. At this time, no one wants to give in. They want the weak to fold because the stakes are huge."

Winners and losers. Already, the shakeout is occurring, and deep pockets rule.

"What I've been saying for the past 15 years is that winners must have access to the market," Wheat says. "They have to have strong dealer networks and everything that goes along with that.

"So while the Calgenes and Mycogens of the world were technically creative, they just couldn't bring their products to market on their own. [Mycogen was acquired by Dow AgroSciences; Calgene was acquired by Monsanto.] In the long run, the moneymakers will be companies like DuPont, Novartis, Aventis and Monsanto, which were already in the business. They know how to sell their products, they have the network to do it, and their future does not depend on a single technology or patent. It's a matter of raw horsepower."

In addition to having viable sales and distribution networks, the winners also must have money and lots of it. Shimoda uses a train analogy to explain how money begets success.

"Look at the train's engine as old business that generates cash, while the caboose represents the research effort," he explains. "Roundup is Monsanto's engine. DuPont has a tremendous franchise of products at the head of its train. And Novartis is a monster in pharmaceuticals and chemicals. The engine has to feed the caboose, until ultimately, the caboose becomes the engine.

"This does mean that some companies will run out of money. And that's why there will be a small number of companies left at the end. Today, I'd say Monsanto, DuPont/Pioneer, Novartis, Aventis, Zeneca and Dow AgroSciences are strong. The top tier includes Novartis, DuPont/Pioneer and Monsanto. One other company might get there."

In Shimoda's assessment, the industry is simply experiencing growing pains, struggling for position and economic power. It's simply how business is done. And he believes that, when all the litigation is concluded and the victors emerge, the industry will likely be pared to less than a handful of major players.

"When the period of litigation and appeals ends, and the parties see who owns the pieces, I think those that have substantive positions will cross-license technologies with each other," Shimoda says. "Maybe three companies will have the big pieces and there will be technology sharing. The real test - commercially - will be to see if companies compete in some markets, and work together in others."

Certainly, that level of concentration can cause concern. "It's a chaotic situation," says William Bullock, vice president of the Institute for Biotechnology Information, "and you really do have to wonder if this is the way anyone intended for a new technology to come out. I mean one day two companies announce that litigation is continuing, and the next day they announce a collaboration.

"For the most part, the ag biotech industry is following the pharmaceutical industry - with one important exception. You have too many entrepreneurial start-up companies on the health care side, compared with a real lack of entrepreneurial start-ups in agriculture. That does affect the breadth of research.

"I also question how much of the research effort is directed at the public's interest, and how much of it is simply developing a technology because you can. I may be missing something here, but at the end of the day is anyone in the business asking what the consumer wants?"

For Col Seccombe, though, the pace of change means you must patent and litigate or perish. "Everyone is racing each other to get their name on some piece of technology," he says, "so that when the day of judgment comes, we'll all sit down and divide up the economic power of this whole deal. If I've got a few pieces, I stay in the game. It's that simple. But you do have to wonder if this is a sensible way to develop technology."

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