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7-Business: Life science: a dying breed?



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TITLE:  A) Life science – green and dying
        B) Life science: a dying breed?
SOURCE: A) The Economist
        B) Agence France Presse
DATE:   A) November 16, 2000
        B) November 20, 2000

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A) Life sciences - green and dying

FASHIONS in the boardroom can be as fickle as those on the catwalk. One of 
the latest big ideas to come unstuck is the "life sciences" company, with 
divisions specialising in agriculture, pharmaceuticals and nutrition all 
under one roof. The merit of this was trumpeted in the mid-to-late 1990s by 
firms that looked forward not only to synergies, but to a harvest of novel 
products.

This week, Aventis, a Franco-German drug company, announced that it will 
sell its agricultural business by the end of next year, in effect calling 
time on the life sciences dream. No wonder: whereas sales from its 
pharmaceutical division reached euro11.8 billion ($11.1 billion) in the 
first nine months of this year, a 16.2% increase on a year earlier, sales 
at Aventis CropScience, the agrochemical and genetically modified (GM) seed 
business, shrank by 1.4% to euro3.5 billion. Agricultural sales have been 
dented by the lingering impact of the emerging-market crisis on commodity 
prices; and the popular backlash against GM foods in Europe has dashed the 
expectations for high-tech seeds. The continuing (and costly) mess in 
America over Aventis‚s GM maize has further damaged the crop division.

Nor is Aventis the first firm to put its agricultural division out to 
pasture. AstraZeneca and Novartis, two other life science evangelists, 
agreed to combine their agribusinesses into a single entity last year. 
Their new creation, Syngenta, made its stockmarket debut on November 13th. 
The firm‘s prospectus suggested a value of $10 billion. However, after the 
first day‘s trading Syngenta‘s market capitalisation was only a little over 
$5 billion. Aventis will be watching how Syngenta fares, as it decides 
whether to float its crop business or to make a trade sale.

The unravelling of life sciences comes as no surprise to cynics who saw it 
less as a business strategy than as a pretty label to stick on what was 
left of companies once they "evolved" by disposing of their low-margin, 
cyclical chemicals assets. As Michael Pragnell, head of Syngenta, points 
out, keeping agriculture and pharmaceuticals together provides synergies in 
basic research, but these soon evaporate when it comes to further 
development and marketing. Moreover, such benefits are easily diluted by 
the strain of having to manage two very different businesses.

What then of the firms that still keep drugs and agriculture together? 
Pharmacia, a drug company that bought Monsanto, perhaps the best-known life 
sciences firm of the lot, is expected to sell the whole agribusiness within 
two years. DuPont, a chemicals conglomerate, increased its exposure to 
agribusiness with its $7.7 billion purchase of Pioneer Hi-Bred last year. 
The shortcomings of its pharmaceutical division are increasingly apparent, 
however, since sales of two of its leading products are under threat from 
generic competition and it has a lacklustre drug pipeline. P.J. Juvekar, a 
chemicals analyst at Schroder Salomon Smith Barney, reckons DuPont lacks 
the size to survive in drug making, and is likely to sell the business.

Germany‘s BASF is said to be contemplating a similar move. While its 
agrochemical division has grown through the purchase of American Cyanamid 
earlier this year, its drug division is relatively small. BASF does, 
however, enjoy lucrative sales of a drug for thyroid dysfunction and has a 
promising anti-obesity medicine. Eli Lilly and Bristol Myers Squibb could 
both be interested in its drug-making arm.

One of the last firms to keep pharmaceuticals and agriculture together may 
be Bayer, another German chemicals giant. Unlike the rest of the industry, 
whose operating margins in agribusiness are roughly half those in 
pharmaceuticals, Bayer‘s agrochemical division is more profitable than its 
drug-making business, which suffers from poor marketing. The company has 
tried to beef up its drug division through alliances with biotechnology 
firms, and is keen to find a suitable merger partnera tough task since 
there are few firms of similar size left. But it is unlikely to change its 
diversified strategy until 2002 when its chief executive, Manfred 
Schneider, retires. It may then have little choice, as consolidation and 
competition in drugs and agribusiness make it ever harder for firms to be 
good at both.


                             *****

B) Life science: a dying breed?

Life sciences, the fusion of agriculture and pharmaceuticals heralded as 
the future of food in the mid-1990s, is on the verge of becoming extinct. 
One by one, the world's pharmaceutical titans have backed away from the 
life science concept, shedding their agrochemicals interests to focus 
instead on 'pure' pharmaceuticals.

So what went wrong?

Firstly, the cost savings promised to shareholders when drugs companies 
unveiled the life science concept have been slow to materialise. "The 
synergies that the life science companies talked about in the past between 
crop science and pharmaceutical drug development doesn't seem to be there," 
Merrill Lynch analyst Owen Dwyer said. And while cost savings have been 
disappointing, sales growth has proven even more elusive.

Aventis, the Franco-German pharmaceutical group created last year by the 
merger of the life science activities of Hoechst of Germany and Rhone 
Poulenc of France, saw its pharmaceutical sales jump 16.2 percent in the 
first nine months of the year. But Aventis CropScience, its agrochemical 
venture in which German drug giant Schering also owns 24 percent, was hit 
by a 1.8-percent drop in sales. "In agrochemicals there is little growth... 
any growth that people were expecting, they were expecting it from the 
biotech and genetically modified food areas," Dwyer said.

It was perhaps not surprising, therefore, that Aventis announced on 
Wednesday it was looking to sell the business. Equally unsurprising was the 
response of Schering when asked if it was interested in buying out Aventis: 
thanks, but no thanks. Only Bayer, the German chemical and pharmaceutical 
group, has shown any real interest in Aventis CropScience. Aventis is only 
the latest in a long list of pharmaceutical companies that have begun to re-
think their love affair with life sciences and the agrochemicals sector.

Swiss drug giant Novartis and Anglo-Swedish counterpart AstraZeneca have 
spun off their combined agrochemicals interests, Syngenta, which made an 
unimpressive debut on the Zurich stock market Monday. US groups Pharmacia 
and Upjohn and Monsanto decided to spin off their agrochemicals interests 
under the Monsanto name after their tie-up earlier this year.

American Home Products also off-loaded its agrochemical operations, 
Cyanamid, to German chemicals giant BASF this year. BASF is bucking the 
trend by selling its Kroll pharmaceuticals business to focus on 
agrochemicals. "Companies are making the business decision that they need 
to concentrate on pharmaceuticals, and as a consequence they're shedding 
this life science branding and are clearly getting rid of the agrochemical 
businesses," said one London-based pharmaceuticals analyst.

So why have the returns on the agrochemicals business been disappointing?

Firstly, a series of bumper harvests have led to low crop prices and have 
depressed demand for fungicides, an important product for agrochemical 
companies.

Secondly, a backlash of public hostility towards genetically modified (GM) 
food has left companies fighting an uphill battle to gain regulatory 
approval for GM food. Consumers, meanwhile, are becoming increasingly 
suspicious about what they eat, in no small part due to the increasing 
number of deaths from Creutzfeldt-Jakob disease, the human form of madcow 
disease, or bovine spongiform encephalopathy (BSE).

In reponse, the British arm of McDonald's, the world's biggest fast food 
chain, announced Thursday it would no longer use animal feed containing GM 
ingredients. Dwyer said companies were caught a little bit by surprise by 
the degree of public hostility to GM food. "It's difficult to see any short-
term acceptance by consumers, particularly in Europe, on genetically 
modified foods," he added.

Agrochemical companies moreover face huge compensation claims if GM food is 
found to be potentially damaging to health, a claim made by 
environmentalists. But those companies that do try to weather the storm in 
the long run could reap an agrochemical windfall, analysts say. "If they 
could get those types of products accepted, then there is potentially 
massive growth opportunities," said Dwyer. "However, that's a very big if." 
In the meantime, pure agrochemical companies will be left alone to sink or 
swim. As one analyst noted, companies such as Syngenta and Monsanto "have 
no choice -- they've got to concentrate on agrochemicals because that's 
what they are."


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