GREEN  AND  DYING

Thanks to Hugh Warwick for this:

Life sciences:  Green and dying - from The Economist print edition - 16 November 2000

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.
 

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Hugh Warwick
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