Engineering a Market : Biotechnology: Calgene is expected to be the first ag-biotech firm to make a profit on its plants and byproducts. Its marketing plan is a primary reason.

Zachary S. Wochok’s company was gone. Yet there was little time for mourning that summer day last year as he headed to his new job.

The familiarity of the routine may have helped soften the loss: He took his normal route to work, even parked in the same lot. But then, instead of stepping into the offices of Plant Genetics, he walked into the building next door.

As Wochok made the transition from president of Plant Genetics to president of Calgene, it also may have helped to know that his new company had the best chances of any agricultural biotechnology firm to survive the protracted shakeout that drove Plant Genetics into the merger with its neighbor.

Calgene and Plant Genetics lived side by side here in this city west of Sacramento for eight years, each watching the other to see which would be first to achieve the “critical mass” needed to sustain it during the difficult metamorphosis from a research-oriented, entrepreneurial venture into a mature product-selling company. And Calgene, Wochok explained pragmatically, reached that point first.

In fact, Calgene is expected to be the first ag-biotech company to sell its own genetically engineered plants and byproducts, and the first to become profitable. Its solid position as leader in its field, say those in and outside the company, is due in large measure to its carefully pursued strategy of building a marketing system for its innovative products while it is still developing those products.

Calgene expects to be profitable by 1992, a year before genetically engineered products from Calgene and its competitors begin hitting the market in a steady stream. The company earlier this month reported a $1.7-million loss on revenue of $6.7 million in the quarter ended Dec. 31.

Since May, 1986, Calgene has bought four small businesses that produce, sell or distribute a variety of plant seeds, oils and other byproducts. It formed, on its own and in a joint venture, two other businesses that specialize in rapeseed--a hot agricultural product these days because it can be made into low saturated-fat canola oil and has industrial uses.

These businesses serve a two-fold purpose: They bring in revenue now from traditional agricultural products, which helps support research and development of Calgene’s genetically engineered plants, and they will provide the needed venues to sell the new products later.

“Calgene has been able to acquire . . . profitable companies at reasonable value,” said Margaret McGeorge, biotechnology analyst at Sutro & Co. in San Francisco. “It gets Calgene’s name into the marketplace so when it’s ready to launch premium proprietary products, it won’t have to (start fresh to) convince buyers to pay the premium. It will already have a name and credibility with the ultimate customer.”

The ability to commercialize their technology is the biggest hurdle facing all genetic engineering companies, be they in human pharmaceuticals or agricultural applications. But many stumble long before they get to that point.

Calgene has avoided the pitfalls that have claimed other companies that, like it, were born in the early 1980s to use new genetic engineering techniques and processes to develop improved plants, pesticides and other products for agriculture.

The pressing need for enough money to keep the company going during the extended and often indeterminate period from research to market--while investors’ interest wanes with each additional disappointing financial report or hitch in governmental review--has driven many of these small companies into the arms of foreign firms or out of business altogether. Some have entered into so many joint research ventures or licensing agreements with larger, older companies that they will be left with few opportunities to realize profits from their own products.

Newness of ‘Industry’

And other ag-biotech companies suffered from their own youth and the newness of their “industry.” Advanced Genetic Sciences of Oakland never recovered from the bruises it sustained when it failed to anticipate fearful public reaction to field tests of genetically engineered products. It became a statistic of the shakeout in November, 1988, when it was bought by DNA Plant Technology.

Some luck has kept Calgene on the survivor list. Its forays into the investment community and its initial public offering of stock in July, 1986, were in sync with the upswings in the market’s shifting attitudes about biotechnology.

“It is better to be lucky than smart,” laughs Roger H. Salquist, Calgene’s chairman, chief executive, deal maker and affable evangelist.

But the smarts were also there, as Salquist steered his company into funding and research agreements that provided capital or the promise of later royalties, but did not exchange huge chunks of the company or severely restrict its potential to realize profits from its own products. The company has been scrupulous in its dealings with public and federal agencies that regulate its research.

And, when the time was right, Salquist became a player in the consolidation that has been whittling down the agriculture sector of the biotech business. Plant Genetics, by most accounts, chose the merger with Calgene over other options for needed funding.

The Plant Genetics deal, a $10-million stock swap completed last June, brought new products and sales opportunities to Calgene. Plant Genetics sells alfalfa seeds and seed potato tubers, and added research programs in those plants and tomatoes to Calgene’s lineup of rapeseed, cotton, tomatoes, soybeans and corn. Calgene expects its first genetically engineered product to reach the market to be a tomato designed to be meatier and stay fresh longer. Calgene’s other research programs are aimed at developing crops that are resistant to pests, pesticides and herbicides, and developing plants and oils for industrial uses.

However, the addition of Wochok to Calgene’s executive ranks may turn out to be the most significant aspect of the acquisition.

Wochok, a meat-and-potatoes kind of manager, will help take some of the day-to-day pressure off Salquist. With his easy smile, chatty manner and seemingly irrepressible optimism, Salquist has been one of Calgene’s best assets through its entrepreneurial, fund-raising era. Wochok measures out his words in careful doses, and projects a steady, thoughtful and conservative image.

Blending of Styles

“Zachary fills an important void at Calgene by being the day-to-day operations person, and has relieved Roger of those tasks,” said analyst McGeorge. “Now, Roger can continue to concentrate on looking at the company in a more macro fashion.”

“What ultimately happened with Plant Genetics is not a reflection of (Wochok’s) abilities,” she said. Plant Genetics was looking for funding at a “terrible time,” having gone public at the tail end of Wall Street’s enthusiasm for biotechnology issues, and shortly before the October, 1987, crash--from which ag-biotech stocks have shown only meager recovery.

How well the differing styles and talents of Salquist and Wochok can be blended is one of the questions that Calgene faces as it moves further toward maturity. By choosing the acquisition route to vertical integration, Calgene has imposed on itself the onerous task of blending several different management styles and company cultures into one.

George Dahlman, a biotechnology analyst with Piper, Jaffray & Hopwood in Minneapolis, says there is a risk that the company is taking on more than it can handle by acquiring such diverse operating businesses.

Wochok is handling the task of integrating the operating companies under the Calgene umbrella, but the company is still relying heavily on existing management at the acquired companies for stability and expertise. Daniel Wagster, Calgene’s chief financial officer, said the strength of existing management and their commitment to remain on board for a smooth transition was an important factor in Calgene’s judgment of potential acquisition targets.

At Calgene Chemical (named Agro Ingredients when it was Calgene’s first acquisition in May, 1986), the founder continued on for 2 1/2 years before retiring. And at Stoneville Pedigreed Seed Co., which Calgene bought in December, 1986, the current general manager is the company’s former owner and a member of Stoneville’s founding family.

Yet, the more diverse the operating businesses, the more daunting is the task to integrate them. Calgene Chemical sells specialty oils, chemicals and food ingredients while Stoneville produces and sells cotton seed. Other operating businesses produce and sell corn, soybean and canola seed, and process canola oil and meal. “It’s added complexity because the operating companies require different skills,” said Wagster.

FDA Role ‘Pivotal’

And yet Calgene would rather take on that challenge than narrow its prospects to one or two different product lines, or in this case, plant varieties. If part of a company’s business requires dealing with the Food and Drug Administration--as Calgene does--then “you’d better have a portfolio that spreads your risk,” said Salquist.

For Calgene, the FDA “is clearly a pivotal question,” said Sutro’s McGeorge. “The issues are how the FDA will choose to be involved . . . and to what degree they will want to review” the company’s genetically engineered plants and products.

The first test of those questions will come later this year when Calgene submits for FDA review the tomato variety that it is developing in conjunction with Campbell Institute of Research and Technology (a Campbell Soup operation).

Calgene has genetically engineered the tomato with an “anti-sense” gene to make it meatier and stay fresh longer. With antisense technology, in simple terms, genetic engineers use the plant’s own genetic design to thwart specific, unwanted traits. In the case of the tomato, a copy of the gene responsible for fruit rotting is cloned and reinserted in reverse order. The two “opposites” bind to one another, effectively blocking the rot-producing function.

Calgene’s tomato, analysts and industry observers say, is the perfect choice for a first case review by the FDA of an application to sell a genetically engineered food product. The antisense technology is less controversial than other genetic engineering techniques, such as introducing genes from one species into another.

Most industry observers believe that the antisense tomato will meet relatively little challenge from the FDA, although biotechnology critics are still pressing for extra-cautious review and safety testing of any genetically engineered food product.

Salquist seems less worried about the FDA approval process than about the current state of affairs at the agency. The FDA has been operating without a commissioner since last November, and internal scandals have heightened criticism from consumer groups and lawmakers.

“There’s no question in my mind that where there are demonstrable economic benefits and where the products have been scientifically proven to be safe . . . the (genetically engineered) products will be approved,” said Salquist. But the FDA’s situation, he said, is a “serious national problem. We need to fix what’s wrong and restore its credibility.”

Biotechnology has always been shadowed by the dark imaginings of those who fear genetic and environmental havoc will be the science’s product. Calgene has learned from the earlier blunders of other companies that failed to adequately inform the public about the safety of their products and research.

(After much tumult, Advanced Genetic Sciences ultimately received approval to spray a genetically engineered product intended to reduce frost damage on strawberry fields; but even then, the workers were forced to don spacesuit-type protective clothing, fueling unresolved fears about possible dangers.)

Consumer Concerns

On the other hand, the public’s growing concern about food safety and the environment may help expedite approval for some products being developed by Calgene and other agriculture biotech companies--plants that “manufacture” their own resistance to pesticides and herbicides.

Such plants, which would enable farmers to either use fewer chemicals, or to use ones less harmful to the environment, hold great profit potential, analysts say. Calgene hopes that its second genetically engineered product to reach the market, after the tomato, will be a cotton variety that is resistant to Bromoxynil. Bromoxynil is a widely used biodegradable herbicide that, while it kills weeds, also damages most varieties of cotton.

With the genetically engineered cotton, farmers could use Bromoxynil and reduce the amount of other, less safe herbicides. Calgene’s Wagster said U.S. cotton farmers spend about $50 million annually on seed, and $500 million more on chemicals. Genetically engineered cotton, which may cost double or treble current varieties, would be worth the premium because of the savings in chemicals, company officials believe.

Calgene is already benefiting from consumers’ increasing health concerns. In the past three years, U.S. consumption of canola oil has jumped to an estimated 500 million pounds from less than 100,000 pounds. Three of Calgene’s operations involve rapeseed products, and it has ongoing research to genetically engineer improvements in rapeseed.

The full potential of genetically engineered plants and food crops may not be realized for decades. And though Salquist believes that Calgene’s strategy has put it in good stead for the wait, he is not oblivious to the risk factors that not even the best business plan in the world could control--among them are the weather and public opinion.

In a self-inflicted taunt of his practiced optimism, Salquist daily comes face-to-face with a reminder of those risks: a sculpture of a giant, humorously misshapen head that appears to rule over his modest office. Salquist has nicknamed the sculpture “Jeremy” after biotechnology’s chief critic, Jeremy Rifkin.

Analyst Dahlman said the verdict on Calgene’s strategy should be evident within two years. “By then,” he said, “enough of two things will have happened. Those who cannot make it will give up or sell out. And, by that time, there will also have been a chance for marketplace judgments of some of the products” produced through biotechnology.

CALGENE’S GROWTH

Date Company/location/business Cost May, 1986 Calgene Chemical* $3.2 million Des Plaines, Illinois Sells and distributes specialty oils, chemicals and food ingredients December, Stoneville Pedigreed Seed Co. $7 million 1986 Greenville, Mississippi Produces and sells proprietary cottonseed varieties July, 1987 Feffer Delinting & Seed Treatment $1.5 million Maricopa, Arizona Produces proprietary cottonseed varieties June, 1988 Ameri-Can Pedigreed Seed Co. Formed by Calgene Memphis, Tennessee Produces and sells proprietary canola seed varieties October, U.S. Canola Processors 50-50 joint venture 1988 Chattanooga, Tennessee formed by Calgene Processes canola oil and meal and Central Soya June, 1989 Plant Genetics Inc. 1,539,000 Davis, Calif. common shares Produces and sells proprietary (equal to alfafa, potato and tomato seed varieties $10 million) January, Noble Bear 150,000 common 1990 Decatur, Illinois shares (equal to Produces and sells proprietary specialty $1.4 million) corn and soybeen seed varieties

* Formerly Agro Ingredients Inc.

Source: Calgene