Calgene Inc. funding history
Life has been a mixed bag for Calgene Inc. The company was first to win FDA approval for a genetically engineered food plant, but it has disappointed investors as difficulties with production of its Flavr Savr tomatoes have led to continued losses.
The company's stock, which reached $20 briefly at the end of 1992, last week closed at $5.875, up 21 percent on the news that Monsanto Co. would make a $50.2 million equity investment, increasing the St. Louis, Mo., company's stake to 54.6 percent from 49.9 percent.
Through good times and bad, for the past 12 years CGNE has been led by Roger Salquist, who last week stepped down as chairman and CEO of the Davis, Calif., company (see BioCentury Extra, Aug. 1).
In a conversation with BioCentury, Salquist, who will continue as a director, reviewed the key milestones that determined the company's direction, leading to Monsanto's acquisition of its minority stake in 1995. He also discussed the consolidation of the agricultural biotechnology sector, which has accelerated in the last two years.
The FDA decision
Salquist contended that people have quickly forgotten the importance of getting the genetically engineered tomato through the FDA regulatory process and into supermarkets. The FDA review was a strategic decision on the company's part, because it was not required to launch the product.
"In retrospect, people look back and say that getting the tomato approved and gaining public acceptance was a no-brainer," he said. "Well, it wasn't a no-brainer. Jeremy Rifkin waged a holy war against genetically engineered tomatoes, but in the end he was the only one who was dead on arrival. So getting approved and getting on the shelves in a situation where all anybody asked was 'does it taste better?' not 'is it genetically engineered?' was a major milestone."
The company was less successful with the commercial launch, however, and Flavr Savr tomatoes will be available only in limited quantities next year, as CGNE works on agronomically improved varieties.
Both regulatory delays and flaws in the product were to blame for the failure of the product launch. "We had a strategy that said it didn't matter how big the initial launch was, but it had to be successful," Salquist said. "The delay at the FDA and management mistakes in ignoring our strategic premise of being small got us into the conventional tomato business where we became too big, too early, with an imperfect product. We had a gene that worked fine, but it wasn't homozygously expressed in high-yielding germ plasm.
"But since we were a year late, we felt tremendous pressure from Wall Street," he said. "We paid the price for that: we lost a lot of money, our share price went down, and we ended up disappointing Wall Street anyway."
Still, Salquist said he doesn't regret the decision to put the tomato through the FDA approval process, despite the loss of time to market. The company had hoped for approval in mid-1993, but the product wasn't approved until mid-1994.
"Our decision to go through the FDA was critical for us and for everybody else," Salquist said. "By getting FDA approval - and by getting the negative press out early - we got the safety issue off the table. Every 'Frankenfood' article had already been written by the time we got on the market. So the focus at launch and in the press was on the flavor of the tomatoes. It was a choice between the delay at the FDA versus fighting a running four or five year battle over safety. We put that issue to bed for us and for everybody else."
Looking back, Salquist said, "We should have stayed real small, launched the tomato in a very narrow test market and disappointed Wall Street up front. By saving money, that would have saved the need to do one equity offering."
Having learned from those mistakes, the company has taken the tomato off the market everywhere except for limited markets served by tomatoes grown in Mexico, where they can be produced cost-effectively. CGNE has hundreds of new varieties in field trials with what it hopes will be better agronomic traits, Salquist said. The company plans another season of testing before scaling up production.
There were other distractions along the way, Salquist said. One was Calgene Pacific, based in Australia. The company received local financing to develop forestry products and ornamental flowers. "That was a deviation of management time, but it wasn't a significant user of cash," he said. CGNE was in and out of that business within two years, in 1984-85.
The company dumped other research areas along the way as well, including potatos and alfalfa. Since 1991, CGNE has focused on cottonseed, tomatoes and canola.
In its canola-based oils business and its cotton business, Salquist maintained that the company couldn't have moved any faster than it did. "We couldn't have done the research any faster," he said. "This was particularly true in oils, where we had to do the biochemistry from scratch to find out what the proteins were."
The Bt decision
In cotton, the company made a strategic decision not to develop the Bacillus thuringiensis insect-protection technology on its own, but to license it from others. That has meant that CGNE is "a little bit behind everybody else," Salquist said.
Finally, the company, like the rest of the agbio sector, has been hampered by funding problems. "Agbio companies are subject to Wall Street's disinclination to spend the kinds of dollars they have on therapeutics," he said. "Every time we did an offering, we raised $10 million less than we would have liked. Over the course of three offerings, that adds up to an entire additional offering."
Nor did the ag sector benefit from early successes in the same way the therapeutics group has. "The biomedical arena was driven by companies like Hybritech and Zymogenetics - early acquisitions which pumped a lot of money in," according to Salquist. "That gave a lot of money to entrepreneurs to go out and do it again. Some of those people are still using that money for new investments."
Yet despite Wall Street's disinterest, CGNE has created enough value to garner last week's $50 million infusion from Monsanto, plus Monsanto's contributions in the companies' original 1995 transaction: a $10 million note, a $20 million investment, two credit lines for up to $85 million, technology and Monsanto's interest in Gargiulo, the largest fresh tomato grower, shipper and packer in the U.S. (see BioCentury Extra, June 29, 1995).
"What has created value for Calgene, and what got Monsanto interested, was that we were the first company with a commitment to molecular biology in plants," Salquist said. "The only thing we felt would be worth anything in the long run was proprietary technology."
The company has patents in enabling technology such as antisense for genetic transformation, and has a number of issued patents for improved agronomic traits. These include areas as diverse as delayed ripening tomatoes, naturally colored cotton, and canola with improved oil content.
CGNE's experiences provide a good illustration of the hazards small companies face in entering agricultural commodity markets, which make drug markets appear puny by comparison. "The scale required to be successful is dramatically larger than the scale required to sell an oncology drug. Companies in agriculture are subject to the weather, to commodity price swings - there's so much more uncertainty," said Salquist.
Still, none of that was surprising to Salquist, who said the structure of the agbio industry hasn't turned out much differently than he had expected. "We contemplated that there would be very few companies that survived as independent entities," he said.
Salquist ticked off the companies, in addition to CGNE, that have participated in the industry's consolidation. He said Mycogen Corp. (MYCO) has become an affiliate of Dow Elanco, DNA Plant Technology Corp. (DNAP) was acquired by Empresas La Moderna, PGS of Belgium is on the block, Agracetus was bought by Monsanto, and Crop Genetics International Corp. and AgriDyne Technologies Inc. were acquired by Biosys Inc. (BIOS).
Looking forward, he doesn't see many new companies arising to take their place. "I just don't see any molecular biology-based startups," Salquist said. "The basic technology to get in requires so many licenses, and the money required is so large, that it's just not happening."