Life science companies (LSCs) combine under one roof diverse products such as seeds, agrochemicals, veterinary products and human medicine. The synergy in applying modern biotechnologies is heralded as providing competitive advantages. However, recently doubts have been raised, as markets have not rewarded the life science concept. Will the synergy be strong enough to compensate for the disadvantages of combining such diverse activities?

LSCs are firms that use their knowledge of living organisms to produce seeds and agrochemicals for plant production, veterinary products for animals, and diagnostic and therapeutic products for human health care. Some companies also include specialized food products in their portfolio, for example functional foods, which have human health enhancing qualities. Another category are nutraceuticals, food products that function as and therefore substitute pharmaceuticals.
LSCs have invested heavily in biotechnology research, as it is biotechnology that allows for the combined application of knowledge derived from the various life science disciplines, such as molecular biology, cell biology, genetics, embryology, biochemistry, botany, or ecology.
What makes it interesting for companies to combine activities in such diverse markets as plant production, animal husbandry and human health care? To analyse the benefits and limitations of such a life science concept, this article will focus on European transnational corporations. Although there are also American LSCs such as Monsanto (see box), with a full range of the products mentioned above, it is mainly European companies such as Novartis (Switzerland) and AstraZeneca (Sweden/UK) that intentionally pursue a broad life science strategy. Other examples of European LSCs are the German companies BASF and Bayer, and Aventis, the product of the forthcoming merger of Hoechst (Germany) and Rhône-Poulenc (France).
All these LSCs compete in the same market. Although this market is generally global, most of their turnover is generated in Europe and/or North America. Substantial differences exist in the size of the companies (see table). To understand the strategies of LSCs fully, however, it is not sufficient to show differences and similarities. One must analyse how the differences are influenced by various factors such as the historical development of the companies, the compatibility of certain research and development (R&D) activities, and the regulatory environment.

History paves the way
The current combination of several life science activities in a single company is the result of strategic decisions made in the past. Most LSCs have developed from being producers of mainly chemicals into the conglomerates they are now.
• One example is the history of the British company Zeneca, which merged in 1999 with Astra (Sweden) into AstraZeneca. In 1926, the UK chemical company Imperial Chemical Industries (ICI) was established. Within ICI, specialist divisions developed for bulk chemicals, pharmaceuticals and agrochemicals. In 1993, the pharmaceutical and agrochemical divisions were separated from the bulk chemicals, and put together in a new company called Zeneca. The main reasons for this de-merger were the excessive diversity within ICI, the threat of a hostile takeover and subsequent selling out of the company, and the need for additional capital. By setting up a separate company for pharmaceuticals and agrochemicals, this diversity was reduced, a takeover was averted and additional funds could be raised by the new company. The seed companies that ICI had acquired over the years mainly in North America were linked up with agrochemicals under the roof of Zeneca.
In the agrochemical division, substantial biotechnology research takes place in Zeneca Plant Sciences, which since 1997 has included the Dutch dedicated plant biotechnology company Mogen. In the meantime, Zeneca has linked its seed business with VanderHave, a Dutch seed company, to form the joint venture Advanta.
The merger of Zeneca and Astra resulted from the need for an increase in scale in the pharmaceutical division. Since Astra did not have an agrochemical division, pharmaceuticals is now by far the largest activity in AstraZeneca, which has become one of the top five drug companies in the world.
• Novartis, which was formed in 1996 by the merger of the Swiss companies Sandoz and Ciba Geigy, presents itself as a world leader in life sciences. Compared to other LSCs, Novartis has a relatively large stake in food and nutrition. Its consumer health division, producing for instance self-medication products, functional foods and baby foods, accounts for 18 per cent of the turnover. Although the health care division provides more than 55 per cent of the total turnover, Novartis’ agribusiness division has an outstanding position in the world market. At present the company is the largest producer of agrochemicals and the second largest producer of seed in the world.

The pharma merger mania
Although agrochemicals and seeds are important elements of the life science concept, structural changes in LSCs are determined by developments in the pharmaceutical sector. The human health care sector is where most of the money is being made and future prospects are good due to an ageing population in the two most important markets, the USA and Western Europe. Thus, strategic decisions in the pharmaceutical divisions of the companies determine the structure of the agrochemical and seed divisions, and not the other way around.
In the pharmaceutical industry, consolidation is the major trend. On 31 March 1999, a Financial Times survey of the pharmaceutical industry indicated four reasons for the recent merger mania among pharmaceutical companies.
• First, the pharmaceutical industry faces a record number of patent expiries. Once a product is no longer protected by a patent, other companies will start producing it too and the original patent holder may expect a decrease in revenues. This was one of the main reasons for Astra to team up with Zeneca.
• Second, not all companies will be able to live up to the high profit expectations embodied in their high stock market valuations. This is particularly true for US drug companies, which have not faced the kind of cost restraints on the health care system experienced by European companies.
• Third, consolidation in the pharmaceutical industry is needed for large-scale marketing endeavours. For Hoechst and Rhône-Poulenc, for instance, the need to build up marketing power in the USA was an important reason to merge.
• Fourth, there is a need to achieve economies of scale in R&D. In the pharmaceutical business R&D is of utmost importance; most large drug companies spend more than 15 per cent of their sales revenues on R&D. Advances in genomics, bioinformatics, combinatorial chemistry and high-throughput screening are revolutionizing the drug discovery process. However, such tools do not come cheap and consolidation of companies may be the only way to afford large-scale R&D.

Agrochemicals and seeds
While pharmaceuticals were a logical extension of (agro-)chemical companies in the past, their investment in plant breeding was not self-evident. Although chemical giants had already acquired seed companies in the 1960s and 1970s, these early attempts to create synergy between seeds and agrochemicals were not successful. Chemical companies soon found that breeding plant varieties and selling seeds required skills very different from those needed in the chemical business. At the same time, the companies had to be content with much lower profit margins and growth figures. Only in the 1980s did the agrochemical and seed activities become part of an integrated plant production and plant protection strategy. Developments in technology, in markets and in regulatory requirements made the combination of seeds and agrochemicals worthwhile.
By the 1980s, the intensive use of pesticides in agriculture was no longer considered sustainable; protection of the environment became a major social and political issue, forcing producers of pesticides to reconsider their growth strategies. Since then, agrochemical companies have tried to compensate for the stagnant markets in Europe and North America by expanding in other parts and the world and by moving into seeds. As plants still had to be protected from diseases and insect pests, alternatives for chemical protection were sought in enhancing the resistance of the plant itself. This shift in emphasis in plant protection, from external protection by pesticides to internal protection by improved resistance, received an enormous boost when biotechnology breakthroughs showed that resistance could be built in by genetic engineering.
So far, a major part of the agrochemical industry’s investment in plant biotechnology has gone into developing herbicide-resistance or herbicide-tolerance. As herbicides are the largest group of pesticides sold worldwide, the economic stakes in extending the commercial life of currently used herbicides are huge. The enormous increase in the cost of developing new herbicides has provided a further incentive to find ways to continue to sell existing products. Herbicide-resistant plant varieties provide the opportunity to bind farmers to a particular herbicide supplier beyond the duration of the patent (see box).

Scaling up regulatory expertise
Besides the indirect effects of stricter environmental policies, which lead producers of agrochemicals to look for other markets, LSCs are also directly affected by the expensive and time-consuming registration procedure for their products. LSCs can create synergy by pooling their capacities in sectors responsible for safety and efficacy dossiers and for dealing with public authorities for pharmaceuticals, for animal health products, for agrochemicals and for genetically modified organisms (GMOs).
The legislative environment is also important for protection of Intellectual Property Rights (IPRs). Given the substantial sums involved in R&D, protection of the results is needed to recoup investments. In the pharmaceutical and chemical sectors, applying for patent protection has a long tradition. This expertise can also be used for protecting the results of biotechnology research, whether it is the discovery of a new gene or the development of a technique used for genetic modification. Thus, experience in protecting intellectual property can be used for all parts of the life science R&D, again generating synergy benefits in LSCs. Another reason for the trend toward consolidation in the agrochemical and biotechnology industries has been legal conflicts over biotechnology patents.

Monsanto: LSC or just agbiotech? Monsanto was originally a manufacturer of agrochemicals and pharmaceuticals. Already in the early 1980s, Monsanto took the strategic decision to become a leading agricultural biotechnology company and over the last 15 years, it has spent more than US$ 500 million on plant biotechnology research. This investment was made possible by the continuous profits from the sale of its main herbicide, Roundup. According to the company, Roundup, with the active ingredient glyphosate, is the most commonly used broad-spectrum herbicide in the world. However, this source of income is shrinking because in Europe the patent protection for this substance has already expired and the same will happen in 2000 in the USA. Since the active ingredient is easy to produce, generic herbicide producers will conquer part of the glyphosate market. To have farmers buy Roundup instead of a generic glyphosate product, Monsanto is selling the herbicide and the herbicide-resistant seed, so-called Roundup Ready varieties in a package.  In order to commercialize its biotechnology research, the company needs access to the best plant varieties available. Depending on the structure of the seed market for a particular crop, Monsanto chooses between making strategic alliances with major seed companies in order to license its technology, or developing and selling improved crops varieties itself. In recent years it has invested US$ 5.5 billion on acquiring seed companies worldwide, and there is still a pending US$ 1.9 billion acquisition of the cotton seed producer Delta and Pine Land (USA). Monsanto is now the second largest seed company in the world. Compared to other LSCs, particularly the Europeans, Monsanto has heavily invested in agricultural biotechnology, and less in pharmaceuticals. This strategic choice makes it vulnerable to the effects of farm crises in the USA and consumer refusal of GMO food products in Europe. To strengthen its position, Monsanto had planned a merger with American Home Products (USA) in 1998, which would have led to the formation of a strong LSC (see table on page 16). However, AHP and Monsanto could not find agreement on future strategy in the agbiotech sector. Another issue that played a major role in the merger failure was the heavy debt of Monsanto, caused by the unprecedented scale of buying seed companies. In order to restructure its debt position, recently Monsanto announced that it would divest itself of several of its subsidiaries, such as its artificial sweeteners business known for the brand name ‘NutraSweet’.

Synergy in R&D: The role of genomics
While strategic decisions were at the basis of combining certain life science activities, and regulatory requirements have played a role in the consolidation process, present and future synergy benefits are on the technology side.
Whatever innovation strategies the LSCs follow, it is primarily the pharmaceutical division and the search for new drugs that sets the pace.Until the 1980s, the pharmaceutical industry was driven by chemistry, as developing a new medicine started with creating chemical compounds and testing them on animals as model organisms. With the growth of biological knowledge since then, however, the pharmaceutical industry has become a biological industry in which this newly gained understanding is exploited to synthesize chemicals. Drug discovery is now focused on molecular targets thought to be relevant to particular diseases. Thus, biological molecular insights have become the core of pharmaceutical R&D.
In recent years, the key word in biotechnology business is ‘genomics’ (see glossary in this issue). Although this term covers a broad range of activities, the core of genomics is discovering, mapping and sequencing genes. The management of huge quantities of mapped genetic information and the creation of easily accessible libraries for this information requires substantial effort in bioinformatics (see also the article by Pongor and Landsman). It is this combination of genomics and informatics that is currently attracting most of the investment in biotechnology.
Even more important will be the conversion of these data into an understanding of the genes’ function. This field of finding out how and why genes behave in specific organisms and specific conditions is called ‘functional genomics’, and it is here that the synergy benefits of LSCs are most promising. Techniques developed in genomics can be used for any species. A new kind of biotechnology firm has emerged, mostly from human genome and bioinformatics research: genomics companies, which have developed their platform technologies and can now expand with applications into other sectors. For example, the genomics company Millennium Pharmaceuticals (USA) has been contracted for pharmaceutical projects by Bayer in a US$ 465 million deal. At the same time, Millennium and Monsanto jointly founded a new genomics company, Cereon Genomics (USA), for agrobiotechnology research. Representatives from this company believe that agriculture will benefit from genomics even earlier than the human health care sector.
Another example of a genomics company working both in the pharmaceutical and crop breeding sectors is Incyte Pharmaceuticals (USA), which has collaboration contracts with AstraZeneca for pharmaceutical and agricultural genomics, and with Monsanto for agricultural genomics.
While most of the LSCs have established research contracts with genomics companies, Novartis has decided to build up its own functional genomics expertise. Although the company has its headquarters in Switzerland, most of its biotechnology investments, particularly in genomics, are in the USA. In 1998, the Novartis Research Foundation invested US$ 250 million in the establishment of the Novartis Agricultural Discovery Institute Inc. (NADII), in La Jolla, CA (USA). This was the first step of a plan to invest US$ 600 million, over the next ten years, in agricultural genomics. Discoveries made at NADII will be used further for research at the Novartis Agricultural Biotechnology Research Institute in Research Triangle Park, NC (USA), and developed into products of Novartis Crop Sciences and Novartis Seeds. The NADII is located in close proximity to Novartis’ pharmaceutical genomics institute, the Novartis Institute of Functional Genomics. This institute, also established in 1998, will receive an investment of US$ 250 million spread over ten years. The NADII and the Institute of Functional Genomics will closely collaborate, in order to benefit from synergy between agricultural and pharmaceutical genomics research.
Even Novartis cannot do everything itself, however. In November 1998, the NADII announced a five-year research agreement, worth US$ 25 million, with the University of California at Berkeley (USA). The agreement has no set goal, but will foster collaboration between scientists of both institutes. Furthermore, in September 1999, the NADII signed a US$ 33 million partnership with Myriad Genetics (USA) to investigate the genetic structure of cereal crops.
These examples reflect the trend that most European LSCs are going to the USA for their genomics investments and genomics research alliances. Thus, the growing importance of agricultural genomics for crop plant improvement reinforces the need for European LSCs to have R&D facilities in North America.
From the perspective of the genomics companies, agriculture is an interesting market to service in addition to their work on the pharmaceutical side. Most genomics companies have already developed their platform technologies, and can now expand the applications into other sectors. For agribusiness companies, especially seed producers, the need to invest in genomics is urgent. Competition between the seed companies is basically a competition between genes; the current agrigenomics game is all about sequencing the genome of major crops and then patenting the newly discovered genes.
In applying functional genomic information, each sector has its own goals and requirements. In agricultural biotechnology the challenge lies in the next phase of genetic engineering. In the first generation of transgenic crops, control of gene expression was reasonably straightforward. Agronomic traits such as herbicide tolerance and insect resistance required the overexpression of just one gene. However, as most agronomic and quality traits are of a multigenic nature, the challenge is in learning how to coordinate
the expression of several genes simultaneously, in both a tissue-specific and a temporal manner. In human health care, the application of functional genomics will be particularly relevant in discovering therapeutic proteins and genetic dispositions for diseases (see also the article by Lehmann and Lorch).

Major Life Science Companies   Company  1998 Turnover  (in billion US$) Monsanto (USA)           8.6 Rhône-Poulenc (France)          13.7 American Home Products (USA)         13.5 AstraZeneca (Sweden/UK)         16.0 Novartis (Switzerland)         20.6 Hoechst (Germany)         23.3 DuPont (USA)         24.7 BASF (Germany)         28.8 Bayer (Germany)          29.0 Figures compiled by the author

Pharma and crop sciences: a ‘natural’ combination?
The synergy of technologies such as functional genomics and bioinformatics in crop enhancement and in developing new therapeutic proteins for human health care are now widely acknowledged, especially since the development of all of these products requires an enormous R&D investment in both biology and chemistry.
Nevertheless, doubts have recently been raised over the wisdom of putting all the diverse activities into one company. From the marketing point of view the life science concept is questioned because the markets for agricultural products and for health products are very different in size, in growth perspective and in profitability.
In mid-1999, several LSCs, such as AgrEvo, American Home Products (USA), AstraZeneca and Novartis announced bad results for their agrochemical divisions while, at the same time, the results for the pharmaceutical divisions were satisfactory. Novartis, the world’s largest producer of pesticides, has decided to lay off more than 1100 people and the company is even ‘thinking aloud’ about the future of its agribusiness division. The North American market, in particular, is depressed due to low commodity prices, and competition among suppliers of pesticides is strong.
The question now being raised is how ‘natural’ or necessary is the combination of the various activities in the LSCs? In the case of AstraZeneca, for instance, now that is has obtained sufficient scale in the development and marketing of pharmaceuticals, the combination with agrochemicals and seeds is no longer so obvious. The markets for agrochemicals are stagnant, at least in Europe and North America, and competition is fierce. Even if companies do make a profit, margins are much lower than in the expanding pharmaceutical business.
Therefore and because of the heavy investments in plant biotechnology research that may not pay off until well in the next decade, the prospects for the agrochemical and seed divisions of LSCs do not look good. The anticipated growth in transgenic seed sales that was expected to compensate for the shrinking of the pesticide market has not yet materialized, certainly not in Europe and maybe only partly in North America.
The concern of the European public over GMOs is becoming an increasing problem for LSCs. Whereas several years ago negative public attitudes towards GMOs were voiced in just a few countries in Europe, public concern in most European countries has now become widespread. At the political level this has resulted in a de facto moratorium on the introduction of GMO products. At the commercial level, more and more food processing and retail companies are stating publicly that they will not use and sell GMO products. In the UK, a tomato puree of genetically engineered tomatoes has been on the shelves since 1996, but most retailers have now announced that they will only sell GMO-free products, at least for their own-brand products. Public concern in Europe about GMOs is real, and there is no reason to expect this attitude to change in the short term.
Therefore farmers producing for export to Europe, like soybean farmer in Brazil and Argentina, in the future might not want to plant transgenic varieties even if the rest of the world accepts genetically engineered crops. In the USA farmers are beginning to worry about marketing their transgenic crops, and in a scenario feared most by GM seed producers, American farmers will not choose transgenic varieties because such crops may only sell at a discount.
Both the low profit margins on agrochemicals and seeds and the public concerns about GMO-food give reason to rethink the synergy effects of pharmaceuticals and agribusiness. Several LSCs are now thinking about putting their agribusiness divisions at arms length. Thus, it was not surprising when, in December 1999, Novartis and AsrtaZeneca announced to combine their agribusiness divisions in a newly formed joint venture named ‘Syngenta’.

Implications for developing countries
Although a change in strategy by LSCs may not have direct implications for developing countries, indirectly they too will be affected. All LSCs are ‘global players’, selling products all over the world. Particularly the agrochemical and seed companies have greatly expanded their activities in developing countries in recent years, as that is where most of the growth in pesticides and seeds is to be found. Countries like India, China and Thailand are considered important growth markets for LSCs. As these companies have heavily invested in biotechnology and they find their market blocked by unwilling consumers in industrialized countries, they will put more emphasis on product development and marketing in developing countries. Marketing efforts might become even more aggressive if a restructuring of LSCs would lead to independent agrochemical and seed companies, which would have to rely entirely on revenues generated by agriculture.
Jos Bijman

Agricultural Economics Research Institute (LEI), Wageningen University and Research Centre, P.O. Box 29703, 2502 LS The Hague, the Netherlands. Phone (+31) 70 335 82 18; Fax (+31) 70 361 56 24; E-mail w.j.j.bijman@lei.wag-ur.nl

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