BUSINESS
Mycogen Poised To Launch New Generation of Biopesticides With safer and more effective pesticides, strategic alliances with other firms, agricultural biotech company sets stage for near-term profitability Ann M. Thayer, C&EN Northeast News Bureau
Mycogen at a glance Founded: 1983, went public June 1987 Headquarters: San Diego, Calif. Revenues 1989: $10.18 million, up 74% from 1988 Product sales 1989: $955,000, up 448% from 1988 R&D expenses 1989: $7.84 million
Growing concern over health effects and the environmental safety of chemical pesticides is leading to increased interest in finding alternatives. Biopesticides, based on naturally occurring insect or plant toxins, are emerging as a means for more environmentally benign pest control. Mycogen, an agricultural biotechnology company located in San Diego, is nearing commercialization of a new generation of biopesticides. Biopesticides have been commercially available for about 20 years but have had only a minor impact on the nearly $20 billion worldwide pesticide market. In 1989, biopesticides accounted for less than 1% of the $5 billion U.S. pesticide market, according to Montgomery Securities, an investment banking firm in San Francisco. Available products primarily consist of pyrethroids and insect toxins isolated from strains of the bacterium Bacillus thuringiensis, or Bt. The limited commercial success of biopesticides is related in part to their rapid degradation in the environment. This leads to inconsistent performance, decreased effectiveness, and higher costs with the need for repeated application. Biotechnology offers new possibilities for producing protein toxins through large-scale fermentation processes or genetic engineering, say industry observers. Mycogen has 18
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Net loss 1989: $1.40 million, down from 1988 loss of $3.92 million Employees: 140 Business segments: Bioinsecticides, bioherbicides, and bionematicides. First product, M-One bioinsecticide, approved May 1988. First genetically engineered product, MVP bioinsecticide, currently undergoing large-scale field trials
developed a bioengineering technology that overcomes some of the problems associated with Bt-based biopesticides. The company introduces a gene isolated from Bt into Pseudomonas fluorescens, a commonly occurring microorganism found on plants. After the engineered cells produce the toxin, they are killed and treated with a process that stabilizes the cell wall. The result is an encapsulated toxin crystal with a protective coat that prolongs its efficacy. Such new technologies can make biopesticides that are as effective as chemical pesticides but safer to the environment, according to Mycogen. "Biopesticides are uniquely positioned to replace those chemical pesticides for which we have some real or perceived problems," says Jerry Caulder, president and chief executive officer of Mycogen. Biopesticides are highly selective and
can be designed to control the one or two major insects that may infect a given crop. Once removed, secondary pests can usually be kept under control by "beneficial" insects. Chemical pesticides, which disrupt the central nervous systems of insects, tend to destroy both the harmful and beneficial insects. "Biopesticides will make us look at the whole system again and start to manage pests with a more integrated program," Caulder adds. Mycogen's first bioinsecticide, MOne, is not an encapsulated product but instead is isolated from a Bt strain discovered by the company. M-One was introduced in 1988 for controlling the Colorado potato beetle and had sales of nearly $1 million in 1989. M-One sales are expected to grow substantially over the next few years. Only last week, aldicarb, the most c o m m o n l y used chemical pesticide for potatoes, was withdrawn temporarily from the market (C&EN, April 23, page 6). It took about three years and less than $5 million to bring M-One to market, which is about average for
Caulder: control of technology is key
biopesticides. This is in contrast to chemical pesticides, which can take from seven to 10 years to register at an average cost of more than $50 million, according to the National Agricultural Chemical Association. As much as $10 million to $20 million can be tied up in toxicology and testing for the environmental fate of a chemical. Only about $300,000 to $400,000 was needed for toxicology testing of the naturally occurring MOne toxin. Thus, biopesticides are often targeted for smaller niche markets for which developing a chemical pesticide is not economically feasible. Despite the Environmental Protection Agency's expedited approval process for biopesticides, registration can be delayed if environmental concerns are raised about genetically engineered products. "The concerns of EPA and the environmentalists are on how the genetically engineered microbial pesticides are contained so that you won't get a colony in a nontarget area," says Caulder. By packaging the toxins in nonviable cells, uncontrolled release and proliferation of the organisms is not possible. There have been few challenges to Mycogen's dead-cell concept or to the naturally occurring, biodegradable toxins themselves. The company does devote time to responding to inquiries about the safety of its products. The company's first genetically engineered product, MVP, is expected to be launched this year. MVP is an encapsulated toxin for caterpillars. Montgomery Securities estimates that the company will have a 10 to 15% share of the $120 million caterpillar control market by 1993. MVP works, as do most Bt toxins, by disrupting the disgestive system of the insect. Unlike chemical pesticides, which also can be toxic to animals and humans, Bt toxins are only harmful to the target insect. Farmers are eager to use the product, says Caulder, since many insects are developing resistances to chemical pesticides—not expected for Bt toxins. Mycogen just recently received EPA approval for an experimental use permit (EUP) for large-scale field testing and limited commercial sales in test markets for its MVP
product. This is the first EUP granted by EPA for a genetically engineered microbial insecticide. "EPA acted in a very cautious and judicious manner," says Caulder. "It took 14 months to get the EUP but that's still much, much shorter than getting a chemical [pesticide] EUP. "The hope is that the regulatory process will be speeded up [for future products] because the company believes it has answered most of the questions that could arise." Mycogen's technology can be used to encapsulate many genetically engineered toxins. Since the process is done in the fermentation tank, it adds little to production costs. Unlike processes that might de- Mycogen's Cellcap encapsulation system protects stroy or degrade a pro- insecticidal toxins, increasing their effectiveness tein's activity, stabilizing the cell wall does not. The com- ny is financially sound and is appany expects to be test marketing a proaching the break-even point, genetically engineered version of with profitability for the company M-One, called M-One Plus, later this in the next year or two. year. Contributing to this move toward Mycogen is currently working on profitability is the company's recent expanding the use of Bt in other bio- acquisition of the commercial and insecticide products to be intro- agricultural products division of Safduced by 1993. The discovery of a Bt er. Safer develops biodegradable bionematicide is expected to offer pesticides based on fatty acid technew commercial possibilities. Nem- nology. Mycogen spent $2.25 milatodes invade the roots of plants and lion to acquire the division and the gastrointestinal tract of animals. rights to existing and future agriculThe company has had some techni- tural products for commercial marcal problems with its bioherbicides, kets. Mycogen also made a $3.25 which are based on living microbial million equity investment, or 8%, pathogens and require a minimum making Safer the exclusive distribumoisture level to survive. In the tor of Mycogen's products in conshort term, a more promising herbi- sumer markets. cide product is being developed to The acquisition will immediately control turf weeds found in lawns expand Mycogen's product line to and golf courses, where the proper six products, adding two to its less growth environment can be main- prosperous bioherbicide program. tained. Caulder explains that the commerProduct sales are expected to be- cial development and marketing ingin contributing more significantly frastructure the company was buildto the revenues of the company. In ing, at great expense for just two 1989, Mycogen reported a net loss of products, could equally well support $1.4 million on revenues of $10.2 half a dozen products. In addition to million, primarily from collabora- acquiring a complementary technoltive R&D agreements. However, fi- ogy and products, Mycogen gained nancial analysts indicate the compa- senior management and commercial April 30, 1990 C&EN
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Business development teams, and a field sales force. Mycogen's first product, although not genetically e n g i n e e r e d , has started the company off well. "It certainly got the company's toe in the water with respect to sales and visibility," says George Dahlman, a research analyst with the investment banking firm of Piper, Jaffray & Hopwood in Minneapolis. "And the Safer acquisition starts giving the company an even more important critical mass with respect to products and markets—it's a perfect strategy." The acquisition is viewed as a strong move and is expected to contribute as much as 50% to the company's profits by 1993, say some analysts. The seven-year-old company is in the process of making the transition from a research operation to a commercial enterprise. Often this is the breaking point of many biotechnology companies since the necessary funds to develop products, manufacture, and begin marketing can overtax the resources of small companies. Caulder explains that, having anticipated this, the company has put aside ample cash to get through this stage. Another important factor, he explains, was putting together a management team with experience in taking products from the research phase to the market. "From day one, Mycogen decided it wanted to be a fully integrated pesticides company," says Caulder, with its own manufacturing and marketing efforts. "The only way to build a truly large company in the biopesticide area is to have control of your technology." In doing so, the company has formed strategic alliances to fulfill the needs of the company, yet in which it maintains all rights to its technology in North America. This is in contrast to the path taken by many biotechnology companies, which license technologies to larger companies in return for royalties and investments to support research. "These are alliances in which Mycogen is forming partnerships to participate in the downstream profits rather than just a small royalty," says Caulder. "You can't make a living just collecting royalties, or you always are going to be a research 20
April 30, 1990 C&EN
boutique." Mycogen's near-term products are aimed at North American specialty markets. These markets have potential sales of $600 million, according to Montgomery Securities, with $400 million in insecticides and $200 million in herbicides. By 1993, the company's revenues are estimated to reach 10 to 25% of their target markets, depending on competition from chemical pesticides and other biopesticides. The company's first alliance was with Lubrizol. Mycogen licenses any genes with agronomic activity it discovers to Lubrizol for use in genetically engineered plants. Mycogen retains the rights to use the genes in its core microbial pesticide business. "Lubrizol was willing to pay us for an asset that we had no use for," says Caulder. "It was a good alliance to leverage the company's technology into an area that it was not going to use and still create revenues in order to keep research going on the products it wanted." In early 1987, Lubrizol's initial support included two three-year R&D contracts valued at $5.4 million each and a 16% equity investment in the company. Lubrizol has just recently made another $6 million investment in the company, raising its interest to 21%. To sell its products in major markets, Mycogen next looked for other worldwide partners. It joined with Kubota of Osaka, Japan, in 1988 through a three-year, $6 million R&D agreement for bioinsecticides. Kubota, a major farm equipment manufacturer with a similar customer base, was looking to diversify in the nearly $5 billion crop protection market in Asia and the Far East. Kubota is building a $10 million research facility to look for pesticides specific to crops in Asia. A 50-50 Kubota/Mycogen joint venture will market products in the Far East. Mycogen will have exclusive rights in the rest of the world for any products jointly developed. In July 1989, Kubota made a $10 million, or 14%, equity investment in Mycogen. With JT Biotech, a U.S. subsidiary of Japan Tobacco of Tokyo, the company formed an R&D partnership to jointly develop and commercialize bioherbicides worldwide. Two other marketing partnerships with Japan
Tobacco will split profits between the two companies; Mycogen is to receive 25% of the profits from sales in Japan and 75% of profits in the U.S. In the rest of the world, the two companies will share profits equally. Japan Tobacco took about a 3% equity position in the company and is also funding research at Mycogen at $7 million over three years. To cover the European markets, which account for about 25 to 30% of worldwide pesticide sales, the company joined with Shell Research Ltd., a subsidiary of Royal Dutch/ Shell Group. The 1989 agreement includes the development and commercialization of bioinsecticides on a worldwide basis, excluding North America, Asia, and the Far East. The agreement includes R&D funding for a total of $3 million over three years. "Mycogen made it clear that its primary market is North America and that it will structure alliances to take advantage of opportunities in other areas," says Dahlman. "It really has the best of both worlds in keeping the North American market . . . and at the same time getting funds and technologies to exploit other parts of the world." Collaborative agreements between 1987 and 1989 have totaled more than $19 million. The company has one of the broadest product bases and a wellestablished worldwide infrastructure for commercial development and marketing. Among the agricultural biotechnology companies, Mycogen is rated high by financial analysts. They say that the company's unique technology for safe and effective biopesticides differentiates it from many of its competitors. Historically, agricultural biotechnology companies have the shortest survival rates at about two years with more than half surviving less than 12 months. "The company has to stay extremely focused in getting products to the marketplace. Most of [our research] is highly directed, highly focused on one area," says Caulder. Caulder has served as president and chief executive officer since joining the company in 1984, after having spent 15 years with Monsanto Agricultural Co. In July 1989, he also was elected Mycogen's chairman. •
