Biotech Behemoth Monsanto is in Serious Trouble

Published Monday November 01, 1999

Monsanto Admits to Mistakes

THE WASHINGTON POST

The face on the giant video screen looming above the hotel conference room
was drawn and ashen. Robert Shapiro, chief executive of Monsanto Co., was
admitting corporate sin to his worst adversaries.

"We have probably irritated and antagonized more people than we have
persuaded," he told a conference organized by Greenpeace, the environmental
group. "Our confidence in this technology and our enthusiasm for it has, I
think, been widely seen - and understandably so - as condescension or indeed
arrogance."

It was an extraordinary admission for the chief executive of one of America's
proudest companies. Shapiro promised to stop lecturing and start listening in
Monsanto's campaign to sell the world on the benefits of genetically modified
food.

As a concession to his critics, he promised never to deploy a gene dubbed
"terminator" that might have protected Monsanto's commercial interests by
producing sterile seeds after one generation.

No company has bet more than Monsanto on genetically modified foodstuffs. No
company believed more deeply in their value - and potential profitability.
And now no company is suffering more, in terms of finances, stock price and
image, from the international debate about the safety of those products.

Concern about gene-altered food is spreading from Europe, where it has
bordered on panic for more than a year, to North America and Asia. Baby-food
producers in the United States, grocery chains in Europe, even a Mexican
tortilla maker have sworn off the use of genetically modified corn and
soybeans.

Monsanto is a profitable company, thanks in part to a pharmaceutical unit
that has launched the most successful new product in the history of the drug
business. But nervousness about the long-term future of agricultural
biotechnology seems to have overwhelmed whatever short-term regard investors
might have for the company's income statements.

Monsanto stock has lost more than a third of its value in the last 14 months,
and analysts believe that unless there's a sharp upturn in the stock price
soon, company executives could be forced into radical changes, possibly
including breaking Monsanto into pieces. That would shatter the company's
strategy of using its broad platform of genetic research to make simultaneous
headway on better crops and improved human drugs.

"Their big shareholders are making a stink," said James Wilbur, a managing
director at Salomon Smith Barney Inc. who follows Monsanto closely. "Monsanto
has talked about whether their model as a life-science company is going to
work anymore."

Monsanto won't comment on specific restructuring scenarios raised by
analysts. Nicholas Filippello, the company's chief economist, said in an
interview with Reuters that it would be premature to adopt big changes just
because the stock price is depressed.

"We have been receiving a lot of free advice from Wall Street recently," he
said. "We are always looking at strategic options."

Monsanto's customers, including America's farmers, have been watching the
growing controversy with alarm. Over the past three years they had
enthusiastically embraced gene-altered crops. Now many of their overseas
buyers are balking. Agricultural economists are scrambling to offer guidance.
Hearings are under way in Congress. Environmental and industry groups are
locking horns in a pitched public-relations battle.

This fall and beyond, farmers will make decisions that will largely determine
the future of Monsanto and other companies involved in agricultural
biotechnology: Should they stick with genetically modified crops for the next
few years or abandon them in favor of more traditional varieties?

Seeds of change.

It was only a few years ago that some of the world's leading chemical and
agricultural firms peered into the future and concluded that new knowledge
about the workings of genes would transform the planet's food supply.

At least a half-dozen major chemical companies, long players in the market
for pesticides and herbicides, rushed to remake themselves. Some shed
chemical businesses that had been their lifeblood for a century and adopted a
new emphasis on genetic research.

But none went farther than Monsanto, of St. Louis, whose scientists had
pioneered much of the new technology. Monsanto snapped up seed companies,
took on debt, sold off its chemical unit and put itself through other
wrenching changes to bring new crops to market.

Farmers soon heard sales pitches about the benefits of gene-altered crops
from companies such as Monsanto and Novartis AG, and they bit hard. By
industry estimates, 55 percent of the soybeans and 35 percent of the corn
produced in the United States this year contained genetic alterations.

There were rumblings of dissent from environmental and food-safety groups
early on, but Monsanto was aggressive in dismissing such concerns. The
company printed glossy color brochures tracing its decades of gene research,
and recent annual reports were hymns to the benefits of biotech.

In its 1997 annual report, the company went so far as to publish "Monsanto's
Law," a genetic corollary of a famous Silicon Valley maxim about computer
chips. Monsanto's Law posited a skyrocketing level of genetic discovery - and
implied that Monsanto's fortunes would be heading for the sky, too, if only
investors would be bold enough to come along for the ride.

Fast forward to 1999, and it looks like somebody turned the charts upside
down.

The company's shares took a nose dive a year ago when a merger deal fell
apart. The deal with deep-pocketed American Home Products Corp. might have
helped Monsanto, heavily in debt from restructuring, weather the present
storm. The shares have been held down all this year by worries about biotech
crops.

Wilbur, of Salomon Smith Barney, estimates that Monsanto's pharmaceutical
unit, G.D. Searle & Co., is worth about $32 a share, in part because it is
enjoying blockbuster sales of a new drug called Celebrex, which treats
arthritis pain and may be useful in other ailments.

If Wilbur's estimate is right, investors are valuing the rest of Monsanto, an
enterprise with revenues in the billions, at a little less than $8 a share.
Monsanto stock in August 1998 peaked at $62.721/2.

To put it another way, Monsanto's association with agricultural biotech has
led investors to ignore most of the value of the company's parts. Wilbur -
who believes Monsanto shares have taken an unjust beating - suggests that
selling off Searle might be one way to unlock value for shareholders.

At the very least, the growing controversy is likely to dampen the
willingness of investors to pour new money into agricultural biotechnology
and to slow down the expected returns from already completed research.

By all accounts, Monsanto executives are determined to continue pursuing
biotech crops while figuring out a kinder, gentler way to sell the public on
the benefits. At most, the change heralded by Shapiro's Greenpeace speech on
Oct. 6 was one of tone, not substance. As he himself said, "we continue to
believe in this technology."

"It's important for us to understand what people are thinking and feeling and
saying," said David A. Fischhoff, a former Monsanto executive who runs
agene-research venture funded by the company. "But I don't hear anything in
Monsanto that would indicate that people don't still see the tremendous
promise that the technology has."

Critics of Monsanto, including some generally supportive of the company's
goals, aren't convinced that Shapiro's mea culpa will produce even a tone
change, must less a substantive change of direction.

"We have never come across a company where the barriers were so strong," said
John Elkington, who runs a London firm, SustainAbility, that spent 18 months
trying to help Monsanto find common ground with its critics before finally
quitting in January. "They are happy to invite the outside world in to
discuss, but there is still a barrier to really listening to what people are
saying." The trait, he added, "is hard-wired. It's almost genetically
programmed."

Monsanto at a Glance

Business: Produces agricultural and pharmaceutical products, including
genetically altered crop seeds, oral contraceptives, the herbicide Roundup,
arthritis drug Celebrex and NutraSweet.
Established: 1901 (as Monsanto Chemical Works)
Based: St. Louis
Chairman and chief executive: Robert B. Shapiro
Employees: 32,000
1998 revenue: $8.6 billion
1998 loss: $250 million (due to restructuring charges)
Web site: www.monsanto.com.
Source: Monsanto, Hoover's, Bloomberg News