Monsanto

Harvard Business School
9-690-009
Rev. October 7, 1993
Monsanto’s March into Biotechnology (A)1

We were going to become a world force in biotechnology in applying molecular
biology to
industry in five or ten years. I didn’t know if that would occur through making new
plastics
or making new drugs or making new plants or improving the growth of animals—or
what.
But I had a vision that we would be outstanding and we would hire outstanding
people.
— Howard Schneiderman
In late 1985, Howard Schneiderman, Monsanto’s senior vice president for Research
and
Development, faced a number of major decisions. The past six years had seen
Monsanto’s in-house
research and development activity in molecular biology grow from a skunkworks into
a world class
research capability (see Exhibit 1 for an overview of biotechnology). Now, however,
there were those
in the company who believed that Monsanto could execute its strategy of moving into
high valueadded chemical and biological products better by licensing
biotechnologies and by contracting for
biotechnology R&D than through extensive internal research. Indeed, Monsanto’s
first commercial
biotechnology product, which was expected to be available on the market in the late
1980’s, was
developed from technology that had been licensed from the genetic engineering firm,
Genentech.
Even if Monsanto were to continue building internal biotechnology R&D capabilities,
there was
considerable debate about the proper locus and focus of such activities.
Biotechnology R&D was
currently centralized at the corporation’s Chesterfield Village research campus.
With an eye on
reducing corporate overhead and on shifting biotechnology R&D from a technology to
a market
focus, some managers within the company were arguing that biotechnology research
should be
organized according to markets, to correspond with the operating divisions that
would eventually
commercialize the products.
This debate was further stimulated by Monsanto’s recent acquisition of G.D. Searle,
a $2.8
billion drug company with the strong distribution capabilities that Monsanto would
need to compete
in pharmaceuticals. The acquisition was requiring some reorganization of research
capabilities
throughout Monsanto, not only because of the potential for a shift in research
emphasis towards
drugs, but also because of some redundancies in the biotechnology research
conducted at the two
companies. Finally, Howard Schneiderman realized that if he was to retire in
several years as
planned, he must think seriously about grooming a successor. Would it be important
to recruit
someone to head up research in the coming years who had strong scientific abilities
and an academic
standing comparable to his own? Or would the future of research at Monsanto be
different enough
1A few dates have been altered, compressing events in time, so as to create a

better teaching vehicle.
Professors Dorothy Leonard-Barton and Gary Pisano prepared this case as a basis for
class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
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690-009
Monsanto’s March into Biotechnology (A)
from the past to require different skills? It would certainly be much easier today
to attract an
academic or business super-star than it had been in 1979, when an executive search
firm first sought
him out at the behest of Monsanto’s then chairman, John Hanley, to head up
Monsanto’s research.
Monsanto—1979
The Monsanto Company originated in 1901 when John F. Queeny, a chemicals salesman,
began producing saccharin, a synthetic sweetener. In the ensuing decades, Monsanto
moved into raw
materials production and by the 1950s became a multinational, integrated chemical
manufacturer.
The company was one of the world’s largest high-volume, low-margin commodity
chemical
producers, although it had little proprietary product technology. Exhibit 2 lists
the company’s
product lines in the 1970s. During the late 1970s, most commodity chemical
producers, buffeted by
unprecedented competition from overseas and new environmental regulations in the
U.S., began to
move toward higher margin, patent-protected specialty products. Monsanto
experienced the same
volatility in profits, because the energy crisis sharply increased the costs of the
petrochemical raw
materials upon which so many of its products were based. Late 1979 quarterly
earnings dropped a
precipitous 88%.
To facilitate diversification, Monsanto set up a venture capital firm, Innoven II,
which,
according to Chemical Week (12/14/83) “aggressively invested in a portfolio of
small entrepreneurial
companies focused on agribusiness . . . and life sciences, electronic chemicals,
process control and
instrumentation” as well as biotechnology (specifically Genentech, Genex, and
Collagen). Innoven
“received a constant stream of proposals from innovators and entrepreneurs. By co-
investing and
sharing information with other venture capitalists, Monsanto learned a great deal
about the markets
and top talent in the company’s field of interest. . . .” Concurrently, Monsanto
began building up a
large production capability in silicon, anticipating the explosion of the
semiconductor market.
Ernie Jaworski’s Skunkworks

John Hanley’s interest in biotechnology dated back to his early days as a new
Monsanto CEO
when he had helped Ernie Jaworski start a small “skunkworks” biotechnology
operation in the midst
of conventional chemical research projects in Monsanto’s Agriculture Company. A
Ph.D. biochemist,
Jaworski had maintained strong links with the academic research community after
coming to
Monsanto in 1952. Symposia he organized had kept him abreast of developments in
plant genetics.
As a result of these symposia, he foresaw enormous potential benefits for
Monsanto’s traditionally
strong agricultural business if crop plants could be genetically altered either to
resist herbicides that
would kill the weeds around them, or to resist pests rather than being chemically
treated with
pesticides. The first possibility was especially appealing because rendering plants
herbicide-resistant
would extend the market for one of Monsanto’s prime agricultural products, Roundup®
herbicide.
Currently, Roundup® could be only applied before crop growth or on weeds near a
crop, but could
not be applied directly to growing crops because it killed such crops along with
the weeds (with the
exception of orchard crops like pecan trees).
In 1973, Jaworski went before Monsanto’s board of directors to request money for
cellular
research. Once the general manager of the Agriculture Company agreed to fund the
project, Jaworski
set up his program and staffed it with about 35 scientists. Although the focus of
the program was on
creating plants with innate herbicide resistance, Jaworski saw this research as a
door to more
ambitious work in genetics and the creation of whole plants from cells. Until
Howard Schneiderman
was hired, however, the infant cell biology research program was continuously at
risk, competing for
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funds against agricultural projects with much greater likelihood of near term
payback. Moreover, it
could not achieve the critical mass of scientists necessary for a top-notch
scientific endeavor.
Recruitment of Howard Schneiderman

At the time he was approached by a headhunter, Howard Schneiderman was Dean of
Biological Sciences at the University of California at Irvine. He was not
interested in moving, yet one
meeting with Jack Hanley changed his mind. As Schneiderman recalled:
Hanley posed a question to me: “We’re about to make a big investment in a silicon
plant in the United States. Is silicon the material of choice for the semi-
conductors of
the future?” I asked: “How long will you give me to answer that—one day, one
week, a month?” “Play it by ear,” Hanley responded.
“Well, if I had one day, I would call up the top biologist at the Massachusetts
Institute of Technology, whom I know, and I would ask to be introduced in a
telephone conference call to the top materials scientist at MIT. Then I’d pose the
question to that person and ask him to think about it. I’d tell him: ‘I’d be happy
to
give you $2,000 for an answer, and I’ll call you back tomorrow.’ I figured that guy
would get on the telephone, and he would ask colleagues, and in 24 hours, I could
give Hanley a reasonable answer, although it wouldn’t be perfect.
“If I had a week, I’d get people together through my contacts at the National
Academy of Sciences and M.I.T. and Caltech and Stanford. Smart people know
smart people, and if I spoke to the best biologist I knew, or the top physicists at
Cornell where I had been a professor at one time, they would point me in the right
direction.”
Hanley asked me a bunch of similar questions, and then he said: “Schneiderman, last
year we spent $150 million in research. We probably should have spent $250 million.
Do you have any good ideas?”
What researcher, who has spent years worried about small budgets could resist the
question of whether he had $100 million worth of ideas? Of course, Hanley could
have been just talking. But he wasn’t. Soon after he hired me, he put up another
$150 million, to build the new Life Science Center in Chesterfield Village, even
though we didn’t have a single product yet. He said, “I’m sure we will. But we
won’t if we don’t have a place to do research—good enough to attract top people.”
Building the Staff

In the fall of 1979, when Schneiderman was brought in, Ernie Jaworski transferred
his cellular
biology research group from the Agriculture Company to Corporate Research. He and
Schneiderman
began the task of building a world-class molecular biology program. In addition to
Jaworski’s
existing group, Schneiderman identified a number of “brilliant, flexible chemists”
who willingly
applied their expertise to biochemistry. Schneiderman gave Jaworski “carte blanche”
for outside
recruiting, and Jaworski enthusiastically set about utilizing his numerous contacts
with experts in the
field. Schneiderman in turn had been given an almost completely free hand to
recruit other
accomplished scientists. As he recalled, “The Executive V.P. of Monsanto, Louis
Fernandez, would
ask just one question whenever I said I wanted to hire someone: ‘What would this
person be doing
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Monday morning?’“ As intended, the question forced Schneiderman to think in

pragmatic, industrial
terms. CEO Hanley’s vision was for Monsanto to become a world force in
biotechnology in five to ten
years by creating outstanding applications of molecular biology to industrial
problems.
Recruiting in the early days was not easy. Other established scientists could have
been
attracted to Schneiderman’s position but saw little advantage in coming to Monsanto
just as a team
member, however highly salaried the available position might be.
In addition, although
Schneiderman’s presence presaged a good program, younger scientists feared that
industry jobs were
vulnerable to changes in economic conditions and hence less secure than university
positions. During
the 1970s, the same downturn in the chemicals industry that led Monsanto management
to consider
diversifying into biotechnology had necessitated the layoff of about 2,000
employees. Most of the
down-sizing was accomplished through generous and carefully orchestrated early
retirement
programs. Monsanto also invested in reskilling some of its personnel for totally
different careers.
More than one chemical engineer was able to return to school at Monsanto’s expense
to gain new
skills in biochemical engineering.
None of this changed the fact, however, that business factors had forced Monsanto
to
restructure, and some academics feared it could happen again. One isolated incident
involving about
30 researchers obscured accounts of the humane, often innovative down-sizing
programs. An overzealous manager, focused on protecting proprietary company
materials, had had some researchers
abruptly escorted to the door by security personnel, without prior warning that
their jobs were
terminated. This tale of uncharacteristic brutality reverberated through the
academic communities,
causing some professors to warn their graduate students against joining Monsanto.
Molecular biologists were scarce: Monsanto had to compete for university-trained
scientists
with new start-up ventures such as Biogen and Genentech which could offer
attractive stock options.
However, unlike most other companies and university laboratories, Monsanto could
offer its
researchers opportunities to devise long-term projects, such as a 14-year project
to design new kinds
of plants that could resist insects, herbicides, and diseases. Schneiderman made a
point of assuring
new hires that they could continue to explore cutting-edge issues, to publish, to
attend conferences,
and even to take sabbaticals to learn new skills. He firmly believed that “We need
good science to
make really innovative and durable products.”
Alliances
Monsanto gradually built up internal capability by attracting young researchers.
Schneiderman realized, however, that Monsanto would not grow quickly enough to
prove the utility
of biotechnology if he relied on in-house capacity alone. “We decided we would get
technology and
products from wherever we could. There was no problem of NIH (not-invented-here).”
Within three
months of joining Monsanto, Schneiderman signed a licensing agreement with
Genentech. Jaworski
already knew this start-up company well: he had tried to interest Monsanto in
Genentech at its very
inception in 1975 when its founders were seeking venture capital. At the time,
Monsanto was
uninterested, but by 1979, however, Genentech had developed a human growth protein
which
enabled children with extremely stunted growth to achieve a more average stature.
In the 1960s,
Monsanto scientists had extracted a growth hormone from the pituitary glands of
pigs and cows.
Because the technology for making proteins was in its infancy at that point,
further research was not
pursued. Genentech’s technology, along with the hiring of a researcher with
expertise in the growth
hormone field, revived Monsanto’s interest in the bovine (cow) and porcine (pig)
growth hormones.
Jaworski was convinced that Genentech could help speed Monsanto’s progress towards
commercialization of cow and pig growth hormones.
In 1979, Monsanto and Genentech reached a development and licensing agreement for
animal growth hormones. Monsanto agreed to fund a portion of Genentech’s animal
growth
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hormone R&D expenses, in return for which Monsanto received the rights to license
certain growth
hormone producing microorganisms under development by Genentech, paying royalties
to
Genentech for the sales of those products. In 1983, Genentech delivered a vial of
bovine somatotropin
(BST) to Monsanto. After preliminary safety and efficacy tests, Monsanto decided to
go ahead with
development and exercised its right to use the BST-producing microorganisms in a
large scale
process, whose development was an extremely complicated project in what one
scientist called a
“very artsy-craftsy field of science.” Few organizations had ever produced large
quantities of a
genetically engineered protein before.
Schneiderman also looked to universities as sources of knowledge and new
technology,
focusing much of his efforts on building a strong alliance with nearby Washington
University in St.
Louis. Schneiderman believed that alliance with universities would ensure that
Monsanto was
positioned at the cutting edge of research, particularly in the life science:
When you face problems of the difficulty we are trying to solve, we just need the
best
brains in the world wherever they are, Washington University or overseas in
Cologne; we will seek collaborators. Maybe it will be just collaboration for the
sake
of science; maybe there will be royalties or a consulting arrangement.
A prior arrangement in the form of a $50 million grant to Harvard Medical School
had not
been satisfactory because the Harvard researchers had been unwilling to share any
of the results of
their research with Monsanto personnel before it was available through open
publication. The
informally worded Harvard agreement, intended to provide a window into new
technology, turned
out to be a closed door to Monsanto. Determined to make alliances that would be
more useful to
Monsanto, Schneiderman took care to structure the Washington University
relationships so that both
parties would profit: it called for Monsanto to invest $23.5 million over five
years to establish a
program at the Medical School to discover, study, and isolate proteins and peptides
regulating
cellular functions.
The research would be performed at the university in collaboration with Monsanto
scientists
when appropriate. Any scientist at the Medical School could apply for a grant, just
as they would to
the U.S. government’s National Institute of Health. Funding was available both for
exploratory
research and for studies that could lead to product development. A few Monsanto
scientists had
Adjunct Professorships and laboratories at the university as well.
New grant applications would be reviewed by a committee made up of five university
Medical School professors and five scientists from Monsanto. Should research
develop into a
successful product, royalties would be paid to the university. The university
decided on the
following distribution of royalties: 20% would go to the Medical School, 40% to the
university
department originating the discovery, and 40% to the departmental laboratory that
made the
discovery. The individual scientist at the university would not receive royalties.
All research would
be open, with each scientist able to publish findings, although Monsanto was
allowed a thirty day
period in which to review an early draft for possible patent positions. All patents
would be held by
the university, with Monsanto having first rights of refusal for licensing. The
agreement was to be
reviewed every three years by a panel of prestigious scientists from outside of St.
Louis, chaired by a
Nobel prize winner. The Monsanto funding represented about five percent of
Washington
University’s total gifts, grants, etc., in the biomedical field.
The Potential of Biotechnology for Monsanto

Several features of biotechnology were potentially important to a company like
Monsanto
(see Exhibit 3 for the distribution of firms pursuing specific applications of
biotechnology):
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Plant Agriculture
Biotechnology, especially genetic engineering, could lead to new crops that would
be insect
resistant and never require insecticide sprays, disease resistant and never need
fungicide sprays or
resistant to an environmentally friendly herbicide like glyphosate (Roundup®) which
could then
replace many other less desirable herbicides. However, no one had ever made a
business of
genetically engineering crop seeds before. Monsanto would either have to license
the technology to
seed companies, acquire such companies, or set up their own. All three
possibilities were
accompanied by some risk. Licensing appeared to be the most appealing option, but
would require
extensive work with the seed companies since Monsanto’s bottom line for the seed
business would
depend upon the performance of those companies. Not only would Monsanto need to
transfer the
considerable technical know-how required to produce the seed in large quantities,
but would also
need to train the company personnel to effectively sell this very different kind of
seed. The
environmental and financial advantages of a seed crop that did not have to be
chemically treated six
times a year were considerable. However, some farmers were still leery of bio-
engineering processes
and therefore marketing would have to be accompanied by more than the usual amount
of consumer
education. Furthermore, as in the case of all licensing agreements, Monsanto might
not be able to
appropriate all the benefits from the invention.
Acquiring or setting up a seed company was problematic because of the myriad
ancillary
businesses that were required. Seed companies had experimental farms, huge
inventories, dispersed
warehouses and elaborate distribution networks. Therefore any venture into the seed
business would
require significant investments of management attention and capital.
Animal Agriculture
The application of bio-engineering to animal agriculture held ripe possibilities
because not
only could therapeutic proteins to prevent or treat various animal diseases be
produced, but it was
now possible for the first time to enhance natural animal characteristics through
such growth proteins
as bovine and porcine somatotropin. Bovine somatotropin would increase the
efficiency with which
dairy cows convert feed into milk by 10 to 25%. Tests of porcine somatotropin
showed it could speed
the growth of pigs to marketable size by about two and a half weeks, yielding 30%
leaner meat. Such
products would run a triple gauntlet in reaching the market. As in the case of
other products
affecting food, the FDA, whose approval process was familiar to Monsanto, would
have to approve
them. Less predictable would be the response from the dairy and pork farmers
themselves, since the
growth hormones could change the current industry economics and potentially drive
prices down.
Finally, although studies showed that growth hormone from cows would be inactive in
humans and
that 90% of the hormone would be destroyed in pasteurization, anti-biotechnology
activists might
nonetheless arouse consumer concerns about the use of hormones in the production of
something as
basic as milk. Furthermore, selling these products directly to farmers would
require a new
distribution system, which was complicated by the limited and fragile shelf life of
the growth
hormones; Monsanto currently sold mostly through distributors, and to crop farmers
rather than
animal husbandry businesses.
Pharmaceuticals
Biotechnology could produce proteins in quantity for use directly as drugs (such as
human
insulin or interferon). Most such proteins could not be ingested but had to be
injected, but research
was underway in many laboratories to solve that limitation. Proteins could also be
produced for use
in designing new drugs. The exploitation of this third possibility would require
the acquisition of an
established pharmaceutical company, and such an acquisition had been under
consideration since the
early 1970’s.
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Formal Creation of Health Sciences at Monsanto

In 1982, Monsanto created a Health Care Division to provide a focus for internal
research and
development in pharmaceutical products, and to bring technology much closer to the
market place.
The division was established with two purposes in mind:
1. to prepare the way for acquisition of a pharmaceutical company by developing
some internal capabilities that would make Monsanto more attractive to
prospective acquisition candidates; and
2. to provide a focus for developing strategies for how Monsanto was going to
develop an important and profitable pharmaceutical company.
This division, which contained about seventy people at its maximum, was an integral
part of
Schneiderman’s strategy:
I am convinced that unless you build internal capabilities, you don’t know the
right
price for technology that you acquire from the outside. You don’t know whether a
discovery is significant and durable or whether it is ephemeral. You don’t know
what the best procedure is, where the bottlenecks are. I think you have to have
terrific internal capability to make such judgments. Now that’s not a universally
held
opinion. Some companies have bought other companies and have essentially tried to
assimilate them—with varied degrees of success. We are building our technology
internally, and I think that way is working for us. The research is part of the
company—not separate. There is no “we” versus “they.” Everything is “we.”
Acquisition of Searle
As early as the mid-1970s, John Hanley, then Monsanto’s CEO, had determined that
the firm
should acquire a pharmaceutical company to support its diversification into
therapeutic drugs, but a
suitable match was not found until after he turned the reins over to Richard
Mahoney. The goal was
to build a $2 billion drug company by the early 1990s; anything smaller would not
be a real player in
the industry. In the mid 1980s, Mahoney bid for the ethical drug business of G.D.
Searle, but the
owners insisted on a package deal that included their profitable NutraSweet
operation. Since the
patent on aspartame, the sugar substitute marketed as NutraSweet, was due to expire
in 1992,
Mahoney initially balked. He eventually gave in and paid $2.7 billion, which was
5.5 times book
value and 19 times earnings for what the press at the time frequently described as
a “lackluster”
pharmaceutical firm. The major value Searle brought to Monsanto was access to the
highly profitable
drug business through an already established distribution system. In addition to
causing an initial
downgrading in Monsanto’s credit rating—due to $1.2 billion of new long-term debt—
the
acquisition, not unexpectedly, posed some management challenges. A number of Searle
executives
resigned, leaving that organization in much uncertainty.
Researchers throughout Searle faced an especially uncertain future. Even after
Searle’s
consumer products division was sold and the NutraSweet division was made a separate
company,
nearly two thousand people at Searle were still engaged in research and development
activities.
Searle also had a biotechnology center at High Wycombe in England where a new $15
million
biotechnology pilot plant had recently been built. Forty-five of High Wycombe’s 350
scientists used
this plant for small, preclinical development. Searle had inadvertently become one
of the very earliest
industrial biotechnology explorers when a group of researchers at High Wycombe had
started a small
program in 1973. By 1985, the small group had gained much experience, but their
work was largely
redundant with Monsanto’s in St. Louis. Schneiderman thus faced the problem of
deciding how to
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handle the redundancies. The High Wycombe physical plant itself was a problem,
because no other
biotechnology research organization was likely to want to buy the facility. Each
biotechnology
venture was taking its individual approach to production and therefore equipment
was still quite
customized. A far more pressing matter was what to do about the 350 scientists and
technicians if the
facility were closed: while a few were approaching retirement and would want to
take advantage of
the kind of retirement package that had been offered in the U.S. during downsizing,
and while a few
others would be willing to relocate to St. Louis, Schneiderman had to face the
possibility that several
prominent specialists, particularly in the field of fermentation, would almost
certainly leave the
company.
In addition to High Wycombe, there was Searle’s Sophia-Antipolis facility in
France, where
animal safety testing and dosage level formulation took place, and a facility in
Belgium, where about
65 people worked on preclinical development of drugs, of whom several were at the
top of their
fields. Some at Monsanto argued that a certain amount of redundancy should be
encouraged in
research so that an optimal approach could be identified. Moreover, the research
presence in Europe
was very desirable because regulations governing testing and dosage differed there.
If all the
European facilities were closed, not only would much intellectual capital be lost
to Monsanto, but so
also would presence in Europe and the concomitant representation of the European
marketplace
during drug development. Although the scheduled advent in 1992 of a combined
European
community was still several years in the future, some Monsanto researchers warned
that it would be
short-sighted to close down High Wycombe. Still, R&D funding was limited and hard
choices had to
be made.
Deciding How to Organize R&D

The Searle acquisition also reopened an issue that still provoked debate several
years after the
initial establishment of Monsanto’s Life Sciences Center in Chesterfield Village:
should research in
biotechnology be organized according to discipline (molecular biology and
chemistry) or according to
markets served (Agriculture and Pharmaceuticals)? However they were organized, the
researchers
could not all be co-located because of physical constraints on the land available
to Monsanto for R&D
facilities, either in Chesterfield Village or at Corporate Headquarters, ten miles
away.
There were arguments to support organizing research either way. Operating line
managers,
many of whom had worked most of their adult life in the chemical industry, favored
organizing
according to markets. They pointed out that most of the major chemical companies
had recently
moved towards decentralization in order to focus their research efforts on
particular markets. While a few companies in commodity chemicals maintained
centralized
research facilities focusing on process innovations that would drive down costs,
most chemical
companies were focusing on specialty chemicals for niche markets, and that product-
focus motivated
the shift to market-focused research as well.
Multifunctional teams focused on a common objective, they argued, were more likely
to
produce products that will have a significant impact in the marketplace. Industrial
research should
have an area of focus relevant to the business—or else the research yield would be
very low.
Focusing research by market area, they emphasized, did not mean focus as narrow as
on a specific
product.
Another advantage to cross-disciplinary teams would be a common interface with
government regulatory agencies. Team members could develop important personal
communication
ties into the agencies that would enable the teams to anticipate possible changes
in regulation and
select appropriate, acceptable scientific tests to meet environmental and health
standards. Team
members would also have in common regulated procedures for developing new products.
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Corporate researchers, who tended to favor organizing by research discipline,

pointed out
that biotechnology was a far less mature field than chemistry and that copying the
structure of
research in chemical companies was likely to prove disastrous for the fledgling
molecular research.
Dispersing the molecular scientists among several market-focused efforts might lead
to some
advances in products in the short term, but that hope rested on the assumption that
individual
scientists could make large strides in an emerging science and at the same time
apply their new
insights towards specific product targets. The more likely outcome of such a
division, they argued,
would be to diffuse and dilute scientific effort, sacrificing the development of a
long-term scientific
capability on the altar of short-term goals.
To be a world leader, Monsanto must do great science. “Out of great science,”
Schneiderman
maintained, “will come unique insights that will lead to product opportunity.” For
example,
Schneiderman pointed to research on differences in the dialect of genetic code used
by plants versus
animals as a piece of extremely “esoteric” research. Yet such basic scientific
knowledge, developed at
Monsanto, was now supporting the development of a crop that could produce an
insect-destroying
protein, i.e., a crop with a built-in pesticide. While in the future, Monsanto
might wish to reorganize,
Schneiderman believed that at this time, when the company was venturing into a
totally new area of
science, it was important to keep the scientists together so that there would be
the critical mass
necessary for good scientific work.
The acquisition of Searle threw this debate, which had been initially settled by a
division in
corporate research along disciplinary lines—such as biology or chemistry— into high
gear again for
several reasons. First, all the staff operations were undergoing scrutiny, to see
where money might be
saved and to determine which such functions were contributing to Monsanto’s bottom
line. Strong
arguments were made that all research should be parceled out to operating
divisions: this would have
created market focus at the expense of a central research capability. Corporate
Research had as yet
produced no biotechnology products and the ones under development from the
Genentech
technology (BST and PST) were several years away from commercialization. Secondly,
through
Searle, Monsanto now had a distribution system clamoring for new products, and
market-focused
research had better potential to optimize the distribution network in the short-
run. Finally, the
acquisition meant a larger portfolio of research projects to be funded, and
therefore long-term
biotechnology projects faced even more competition than before.
Of all these issues, the one most threatening to the existence of Corporate
Research was the
first—that corporate downsizing might well include doing away with centralized
research. As
Hilliard Williams, Director of Central Research Technology, observed:
Consultants’ advice as well as internal analysis convinced Monsanto that it had
much
too much corporate overhead. So there was a real drive to break the company up
into manageable, free-standing units with autonomy and control over their own
destiny and all the resources that they needed, and to get rid of those resources
that
the operating units didn’t need or want. Corporate research underwent the same
microscopic scrutiny as everyone else and we had to justify our existence in
everything that we did.
Mahoney believed in getting personally involved in the decisions that had to be
made if the
company was to achieve his goals of 10% annual growth rates and 20% returns on
shareholder’s
equity. Management Today quoted him as saying: “I see and participate in the R&D
selection
process—I have to,” he said. “I’ve seen a lot of money go down rat holes. You have
to be ruthless
with R&D”. Williams and Schneiderman decided to “offer up for dismemberment those
parts of
corporate research that were not top priority” but to protect the biotechnology and
crucial chemistry
projects. The researchers in conventional chemistry, such as polymer chemistry,
were dispersed to
operating units and the total size of the group was reduced by about fifty percent.
The number of
patent lawyers was also reduced somewhat. A small scale production plant, used
primarily by the
9
690-009
Agricultural Company for pilot runs of new chemical products was transferred to the
Agricultural
Company.
Technology Strategy for Pharmaceuticals

The acquisition of Searle also triggered debate among Monsanto and Searle
researchers about
the appropriate role of biotechnology in the company’s drug development efforts.
Drugs could be
very broadly classified into two basic types: large molecule and small molecule
compounds.
Historically, most drugs had been small molecule entities. Small molecule drugs
could be
synthesized through traditional chemical methods and could be ingested orally by
the patient. Large
molecule compounds or protein-based drugs were far too complex to be synthesized
through
chemical methods; most, therefore, had to be produced from genetically engineered
cells. Thus, it
was not until advances in biotechnology made possible the efficient production of
proteins that drug
researchers began to search for protein-based drugs. During the late 1970’s and
1980’s, many new
biotechnology firms such as Genentech were formed specifically to develop
potentially therapeutic
proteins.
During the late 1980’s, many drug companies realized that biotechnology could be an
important tool in the discovery of small molecule drugs. Traditionally, drug
research and discovery
was a highly empirical process involving a large dose of trial-and-error. A large
pharmaceutical
company would screen thousands of chemical compounds every year in search of
certain therapeutic
properties. Every once in a while, a compound would be found that had desirable
therapeutic effects
without serious side effects.
For many years, drug researchers had hoped to make drug discovery more “rational”.
Biomedical research had revealed that many diseases occurred when certain of the
body’s cells either
overproduced or underproduced certain chemicals. Thus, a rational way to develop a
drug for ulcers
was to develop a chemical that could bind to stomach cells and “switch off” their
production of
digestive acids. The site on the cell where the chemical would bind was called the
receptor. To
develop a chemical that “fit” the cell’s receptor, researchers needed to isolate
and model the threedimensional structure of receptors. Receptors were complex
proteins, and one barrier to rational
drug design in the past has been the lack of a method to produce the receptor
proteins of interest.
With biotechnology, drug companies had a critical new tool for producing the
receptor proteins
required for drug research: biotechnology would be used, not to produce the drugs
themselves, but
rather to create the critical research materials needed to design safe and
effective small molecule
compounds.
To date, most of Monsanto’s and Searle’s bio-pharmaceutical research had pursued
the
earlier approach of making proteins to be used directly as drugs). A serious
obstacle to this approach
appeared to be that proteins needed to be injected, since the digestive system
rendered them useless if
they were ingested. Given that injections implied disbursement through medical
facilities rather than
through drug stores, some people argued that research on such products was unlikely
to contribute
significantly to the bottom line, since the target populations for such injectable
treatments was
significantly lower than that for traditional drugs. For example, Genentech’s TPA
was used to break
up a life-threatening blood clot, and the company could therefore charge several
thousand dollars a
treatment when it was administered by medical personnel. However, products that
were intended to
be administered over a longer period of time—for example, anti-ulcer treatments—
needed to be
available as a pill or liquid, and some people at Monsanto believed that its
therapeutic product
possibilities lay in this region.
Another important consideration was that proteins as products might be difficult to
protect
with patents. Indeed the entire field of patenting proteins was so new that there
was not a body of
case law to which one could refer. A clever molecular biologist could make variants
that were
10
690-009
functionally similar but that did not infringe on the original product patent. The
time window
between commercialization and a viable imitation was likely to be too short to
recover the enormous
research investments. In contrast, the second application of biotechnology, as a
research tool,
appeared promising. Such applications built more directly on Monsanto’s and
Searle’s previous
capabilities in chemistry. Perhaps the greatest risk in pursuing this route lay in
the potential for
reducing the biotechnology function to a mere supplier of receptors for use in drug
design, a course
of action that could cause Monsanto to lose the best people in its powerful
biotechnology group.
Some felt the acquisition of Searle could push the biotechnology research too far
in this direction. The
challenge would lie in keeping biotechnology on the cutting edge of science, where
six years of
intensive work and investment had placed Monsanto.
Either route would require extensive collaboration between the cell and molecular
biologists,
located primarily in St. Louis, and the drug designers, located primarily in
Skokie, Illinois, some 300
miles away. Even Monsanto’s pockets were not deep enough to support major thrusts
in all
directions at once. Some choices must be made.
Schneiderman’s Successor
Schneiderman had several criteria in mind as he considered his successor. Among
these was
his belief that the Senior Vice President of Research had to be someone who could
not be intimidated.
“If you are intimidated, you are dead—particularly if you don’t have a practical
concrete bottom line
of sales and profits every year but instead are a loss center, with costs
increasing every year.”
While some felt that the biotechnology program at Monsanto had matured enough over
half a
decade that there were some internal candidates to succeed Schneiderman, the most
obvious one,
Ernest Jaworski, was himself nearing retirement. With a precedent of reaching
outside the company
for top scientific skills, Monsanto also had the option of hiring one of the
several outside expert
consultants who had reviewed the internal research over a period of years. A number
of these were
considered as possible successors to Schneiderman, among them a PhD pharmacologist,
Philip
Needleman. Professor and Chairman of Pharmacology at Washington University School
of Medicine,
Needleman could bring a highly pragmatic approach to the job because of his
experience with
pharmacology. (Pharmacology, the study of and the discovery of drugs that affect
human beings, is a
scientific discipline that involves both basic and applied research.) Also, he was
a superb scientist.
For 25 years he had successfully competed for the scientifically rigorous National
Institutes of Health
grants and, like Schneiderman, he was a member of the National Academy of Sciences.
He was also
twelve years younger than Schneiderman and could be with Monsanto for at least a
decade.
Needleman had made no secret of his views about research: “I have discovered a lot
of
things that could be drugs; I have always been interested in the chemical
manipulation of biology.
Academia is pretty good training for directing research at Monsanto because there
is this drive for
excellence in science in both places.” If selected for the job, Needleman intended
to continue to rely
upon the universities (rather than licensing from other companies) as prime sources
for cutting edge
technology:
The most important external vehicle for Monsanto’s discovery base is the university
affiliations they have developed. The university professors have no development
costs. All their government grants are pure discovery money. So bang for buck, you
have access to some of the finest minds. Monsanto’s investment in the university
research provides a scientific base, a lead for new discoveries far in excess of
the cost
of the investment. The university ties extend Monsanto’s discovery activities.
There
is no small time player if you are going to biotechnology. Either you can clone the
genes, have mammalian cell culture, can build vectors, do all the sequencing—or you
are a bit player.
11
690-009
The Future of Biotechnology Research at Monsanto

Whoever took over the position would face enormous challenges to keep the R&D
budget in
biotechnology at levels comparable to those in the past (Exhibit 4 lists the 1982
biotechnology R&D
budgets for leading U.S. and foreign companies; Monsanto’s 1985 sales and R&D
investments by line
of business are shown in Exhibit 5). While CEO Mahoney was on record as supporting
the
biotechnology push, he was himself being pressured to show some concrete results.
After six years of
research, Monsanto still had not one biotechnology product on the market—and didn’t
expect to have
one for at least four or five more years.
Wall Street was less than impressed. In 1983, Monsanto shares had traded at about
13 times
earnings—close to overall average for the time and somewhat above the industry
average of 12 times.
However, in early 1985, investors had traded Monsanto shares at a steep discount to
rivals DuPont
and Dow Chemical. Moreover, some investors made pessimistic comparisons between
biotechnology
and Monsanto’s extremely ambitious foray into silicon manufacture. In 1985, silicon
production at
Monsanto ran at 20% of capacity, way below the break-even point of 50%, and there
were estimates
that the company had lost at least $100 million in the past five years. Mahoney
referred to silicon
production as “always a bridesmaid,” meaning it never really succeeded. Some
skeptics believed his
optimism about biotechnology in 1985 could be similarly misplaced.
However, Monsanto was not alone in foreseeing enormous potential in biotechnology.
Not
only were there hundreds of small firms springing up around the world, but a number
of wellestablished firms were making sizeable investments as well. Even some
traditional competitors such
as American Cyanamid, Dow, DuPont, and Sandoz were building in-house biotechnology
capabilities
in plant-related research and were forging alliances with small firms to develop
drugs with novel
characteristics. So were the Japanese. Monsanto could not afford to be left behind.
12
Exhibit 1
690-009
An Overview of Biotechnology
Biotechnology is a body of knowledge and techniques for using live organisms in

production
processes. It has been used since the Stone Age to make various fermented products
like bread or
wine from live yeast, bacteria, and fungi. During the first three quarters of the
20th century,
biotechnology was used to produce certain foods, beverages, and a limited number of
pharmaceuticals (e.g. penicillin), and in the breeding and growing of plants and
animals.
Over the past fifteen years, biotechnology has been revolutionized by genetic
engineering, a
set of techniques for selectively altering the genetic structure of plant,
bacteria, yeast, and animal
cells. Because genes determine the characteristics of cells, a researcher can
change a cell in some
desired way by selectively altering its genes.
Plant agriculture is using biotechnological and genetic engineering methods to
develop new
types of plants or plants with specific desirable characteristics (such as
resistance to cold weather).
Before genetic engineering, plant breeders could only develop new plant
characteristics by selective
breeding.
Because genes also control the production of proteins in cells, genetic engineering
can also be
used to produce proteins which cannot be synthesized through traditional chemical
methods.
Traditional chemical synthesis is applicable for “small molecules”. However,
proteins are very large
molecules and thus normally require genetically engineered cells for production.
Once a cell is
“programmed” to produce (“express”) a specific protein, it essentially becomes a
miniature factory.
To produce a protein in any type of quantity, the cell must be placed in a solution
of nutrients and
kept under carefully controlled conditions so that it can replicate. The process of
growing cells and
harvesting the protein they produce is known as fermentation or cell culturing. One
of the first
commercial applications of genetic engineering was the implantation of the human
genes for insulin
into a bacteria cell; the bacteria cell was then capable of producing insulin. This
technology has been
particularly important for producing proteins which have been suspected of having
therapeutic
effects but which are extremely difficult and costly to isolate and purify in
quantities sufficient for
further development and testing. Genetically engineered cells can produce proteins
for a wide
variety of applications, including: drugs, research materials, diagnostics,
specialty chemicals and
food.
13
690-009
Exhibit 2
Monsanto Product Lines in the 1970s
Commodities
Proprietary Products
Ammonium nitrate
Styrene
Phenol
Acetic acid
Ethylene
Methanol
Maleic anhydride
Phosphorous and derivatives
Caustic potash
Sulfuric acid and oleum
Acrylonitrile
Adipic acid
Detergent builders
Plasticizers
Water-treatment chemicals
Blow-molded plastic containers
Polyethylene film
Polyester fiber
Heat-transfer fluids
Process-control equipment
Parathion insecticides
Analgesics
Crude oil
Natural gas
Proprietary herbicides
Plant-growth regulators
Electronic-grade silicon
Rubber chemicals:
• Plasticizers
• Animal feed ingredients
Food ingredients
Pollution-control equipment
Proprietary plastics
Specialty resins for coatings
ASTROTURF synthetic surfaces
Proprietary synthetic fibers
Fire-resistant additives for plastics and foams
The products in the left-hand column are not protected by patents, and are marketed
primarily on the basis of lowest delivered price. The higher margin products in the
right-hand
column, while generally protected by patents, nevertheless represented a small
proportion of the
company’s total sales.
14
Exhibit 3
690-009
Distribution of Firms Pursuing Specific Applications of Biotechnology
Source: Office of Technology Assessment (United States Congress) Commercial

Biotechnology: An International Analysis, 1984.
15
690-009
Biotechnology R&D Budgets for Leading U.S. and

Foreign Companies, 1982a
Exhibit 4
Company
Hoechst (F.R.G)
Schering A.G. (F.R.G.)
Hoffmann-La Roche (Switz.)
Schering-Plough (U.S.)
Eli Lilly (U.S.)
Monsanto (U.S.)
DuPont (U.S.)
Genentech (U.S.)
Cetus (U.S.)
Genex (U.S.)
Biogen (U.S.)
Hybritech (U.S.)
Sumitomo (Japan)
Ajinomoto (Japan)
Suntory (Japan)
Takeda (Japan)
Elf-Aquitaine (France)
Source:
Biotechnology
R&D Budget
(millions of dollars)
$4.2b
4.2
59
60
60
62
120
32
26
8.3
8.7
5
6+
6+
6+
6+
4+
Office of Technology Assessment (United States Congress),

Commercial Biotechnology: An International Analysis, 1984.
a Biotechnology R&D figures for British companies not available

b 1983 figure
16
Exhibit 5
690-009
Monsanto Sales and R&D by Line of Business

(in millions of dollars)
Sector
1985 Sales
1985 R&D
Agricultural product:
Crop chemicals
Animal sciences
Total
$1,073
79
$1,152
$110
32
$142
Chemicals:
Detergents and phosphates
Engineered products
Manmade fibers
Plastics
Resin products
Rubber chemicals and instruments
Specialty chemicals
Total
550
251
1,080
804
637
283
446
$4,051
128
Electronic materials
137
16
Fisher controls
652
20
NutraSweet
317a
11
Pharmaceuticals
262a
96
Oil and gas
172
31
Corporate
26
$6,747
$470
Total consolidated
Source: Compiled from the Monsanto Corporate Data Book, 1988

aG.D. Searle & Co. and The Nutrasweet Company are included for the five-
month period August-December 1985
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Harvard Business School

Monsanto’s March into Biotechnology (A)1

1A few dates have been altered, compressing events in time, so as to create a

Monsanto’s March into Biotechnology (A)

Ernie Jaworski’s Skunkworks

Recruitment of Howard Schneiderman

Building the Staff

Monsanto’s March into Biotechnology (A)

Monday morning?’“ As intended, the question forced Schneiderman to think in

The Potential of Biotechnology for Monsanto

Monsanto’s March into Biotechnology (A)

Formal Creation of Health Sciences at Monsanto

Monsanto’s March into Biotechnology (A)

Deciding How to Organize R&D

Corporate researchers, who tended to favor organizing by research discipline,

Monsanto’s March into Biotechnology (A)

Technology Strategy for Pharmaceuticals

Monsanto’s March into Biotechnology (A)

The Future of Biotechnology Research at Monsanto

Biotechnology is a body of knowledge and techniques for using live organisms in

Monsanto’s March into Biotechnology (A)

Monsanto Product Lines in the 1970s

Distribution of Firms Pursuing Specific Applications of Biotechnology

Source: Office of Technology Assessment (United States Congress) Commercial

Monsanto’s March into Biotechnology (A)

Biotechnology R&D Budgets for Leading U.S. and

Office of Technology Assessment (United States Congress),

a Biotechnology R&D figures for British companies not available

Monsanto Sales and R&D by Line of Business

Oil and gas

Source: Compiled from the Monsanto Corporate Data Book, 1988

month period August-December 1985

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