For AGS, the Chill Is Gone : Frostban Test a Milestone for Biotech Firms

OAKLAND —  When Joseph Bouckaert left here last Tuesday afternoon to catch a flight to Los Angeles, he was a little nervous but plenty proud.

Bouckaert, a native Belgian who came to Oakland in 1985 to become chief executive of Advanced Genetic Sciences, had been invited by the Belgian consulate to be the guest speaker at the Belgian-American Chamber of Commerce’s annual dinner meeting. He was to tell his story as a successful Belgian businessman in America.

It was a story Bouckaert couldn’t have told even a week earlier.

Bouckaert’s company, known as AGS, made history on April 24 in a strawberry field in Contra Costa County, about an hour’s drive east of here. It became what is believed to be the first company in the world to release a genetically engineered microorganism into the environment.

As precedent-setting as the spraying was, the experiment is just the first step in a series of tests that will be needed to determine whether the microbe, a product AGS calls Frostban, will work to help plants fend off damaging frosts.

Even so, the experiment marked a turning point for the small Oakland company, which had spent four years battling to do the test, and for the fledgling agricultural biotechnology industry as a whole. Now that AGS has gone through the “labyrinth,” as company officials termed the review and approval process, it will be easier for it to negotiate other products through. Also, AGS left some conspicuous markers on the trail that could help guide other companies as well.

Yet it was an experience that strained the company’s resources, tested its resolve and, some in the industry contend, left an indelible black mark on the new industry’s image.

“It’s darn hard to be carrying the weight of the whole industry on our back,” said Kaley Parkinson, the company’s chief financial officer.

AGS was already staggering under the weight of its own problems in July, 1985, when Bouckaert was enlisted by AGS from his work in Belgium, where he successfully financed, managed and exploited commercial outlets for research of universities and other companies and was co-founder of Plant Genetic Systems (32% owned by AGS).

And AGS’ situation would get worse before it got better.

Management of the company already had changed twice in the six years since it was founded. Chronic under-funding problems dogged the company, especially since it went public in 1983--a time when the investment community’s enthusiasm for all high-technology start-ups, and biotech companies in particular, had begun to ebb. Of the $40 million the company hoped to raise in its initial outing in the stock market, it got only $16 million.

Qualified Opinion

In fact, after the company’s 1984 financial results, which included a $7-million loss and a precipitous drop in revenue, auditors Arthur Andersen & Co. rendered a qualified opinion, saying AGS’ ability to survive was in doubt.

“The company was, from Day One, under-financed. And it came home to roost in 1985,” said Parkinson, who joined the company last August.

The losses deepened to $8.2 million in 1985, and revenue had only marginally improved. It had begun initial production of its first product, Snomax, but sales were nominal. And, despite its excellent reputation in the scientific community, Advanced Genetic Sciences’ efforts to draw in additional revenue through research contracts were stalled.

In late 1985, the Environmental Protection Agency gave approval for AGS to test Frostban in a Monterey County strawberry field--a move that, by all rights, should have propelled AGS into a an enviable position in the agri-biotech business.

But AGS, and other researchers planning to test genetically engineered microbes, ran smack into a wall of opposition, led primarily by industry opponent Jeremy Rifkin. AGS had neither anticipated the controversy, nor was it prepared to handle it.

“We substantially underestimated the need for a public relations effort the first time around,” said John R. Bedbrook, the company’s director of research. “We focused on the regulatory process; in hindsight, we made an error.”

Outside observers consider that an understatement. “In the short-run, indeed (the AGS experience) makes companies aware--if they weren’t already--that an essential part of new technology is public education. The problem was, AGS was one of the companies that didn’t believe it before they got into trouble,” said Roger Salquist, chief executive of Calgene, a Davis, Calif.-based plant biotech company.

“In a sense, it’s unfortunate that AGS was first out of the chute” with a microbe release, he added. “They made virtually every mistake a company could make.”

The company did not pave its way in the community by meeting with local groups and explaining the inherent safety of the experiment, critics have noted. The most debilitating mistake, however, was made in 1985 and surfaced in 1986.

In pre-tests of the Frostban microbe, AGS had injected microbes into trees in planters on the roof of its Oakland facility. In the microbe that AGS calls Frostban, the gene that scientists believe hastens the formation of frost has been deleted. By spraying the microbe, also called ice-minus, on plants, scientists believe that the plants’ existing frost-promoting genes will be overwhelmed, and the plants’ durability will be increased. AGS officials say that injecting Frostban under the bark of trees was not the same as an open-air release.

But in March, 1986, the EPA fined the company $20,000 for not following correct notification procedures because its rooftop experiment was not conducted in a greenhouse. (The fine was later reduced to $13,000.) The EPA also jerked AGS’ license for the Monterey test.

In August, AGS succumbed to the heat and dropped its plans to test Frostban at the Monterey site. But it continued to press for the right to test it while fighting a suit by Rifkin that challenged the thoroughness of the regulatory review.

A month later, the EPA restored the company’s license, but the damage to AGS’ image was severe. It had learned its lesson. Late in the year, AGS began an aggressive campaign, this time focused on the Brentwood community in Contra Costa County, and enlisted the help of three public relations agencies--each tackling a different area of concern.

The company’s executives then delved headlong into the Frostban project in an attempt to head off public opposition, draining attention from its other product development efforts. “Certainly the Frostban experience has delayed substantially other objectives we are pursuing,” acknowledged Bouckaert. Since it renewed its efforts to test Frostban--which is only a small part of the company’s ongoing programs--AGS has devoted nearly 10% of its budget and staff time to the project’s approval.

“We went into (the project) this year, the second time around, fully cognizant” of the need for public relations, said Bedbrook. “We were ahead of the problem. Once you’re behind it, once you’re defensive, you’re lost.”

Through the effort, AGS began to restore its image with others in the agricultural biotech industry, which had carefully distanced itself from AGS, if not from the technology itself, during the debacle over the roof-top testing.

The Industrial Biotechnology Assn., a Washington-based trade group, joined AGS in fighting the suit. Some biotech executives empathized with AGS’ plight as the first to actually release genetically engineered microbe into the environment, even as Monsanto, a company many times larger, put a hold on its plans for an environmental microbe release in the face of public controversy. “My perception is that a great deal of what happened to AGS had to do with their position as the first through the labyrinth,” said Richard Godown, executive director of the IBA.

Yet, quietly, many biotech companies were careful, in their own dealings with the press and the public, to outline the distinctions between their efforts in biotech and the open-air release of microbes that AGS had planned.

Can All Get Tarred

“In this business,” said an executive of a San Diego biotech company, “we unfortunately can all get tarred with the same brush.”

Said Calgene’s Salquist, who also is chairman of the California Industrial Biotechnology Assn.: “I thought AGS was derelict the first time around, and I was not supportive at all. In my industry role, I was careful to distance the general industry from them. But the second time around, AGS did a fabulous job.”

AGS officials said they have jokingly broached the idea of serving as public relations counsel to other companies that must go through the same process of gaining regulatory approval and public acceptance.

And indeed, others in the industry are studying the Frostban episode for lessons that can be applied to themselves. “This is the thing a lot of companies are grappling with. . . . What are the lessons from AGS’ experience?” said Brian Sway, executive director of the California IBA. “They know they can’t just rely on good science as a passport to successful products. They also have to have public awareness of the risk-benefits trade-off.”

Some observers fear the industry will be a long time in recovering from the AGS controversy. “Several companies have slowed down or abandoned their projects in microbial release, and the incentive is strong to abandon them,” said Winston Brill, vice president of research development at Agracetus, the agri-biotech joint venture of Cetus and W. R. Grace based in Middleton, Wis. “If it costs you this much trouble and time to test a concept, you’ve got to have phenomenal incentive to go ahead.”

Brill faults, in part, the EPA, which, because of its regulation of the chemical pesticide industry, required AGS scientists to don protective “moon suits” during the April 24 spraying in Brentwood--something Brill said “no scientist in his right mind would ever dream of as necessary,” and indeed, something that is not done by AGS scientists in everyday handling of the microbe.

Brill believes that the image of the protective wear will remain in the public mind. “Even I, knowing how safe this is, would worry if I saw them in their moon suits,” he said.

Too, some industry experts are concerned by the intensified strategies of Rifkin’s group and other vocal opponents, which during the public debate over the microbe release experiments took their protestations to the local communities, rather than just the federal courts.

Industry participants note that in the past, furor over a new technique has abated after the “first” use of a new biotechnology technique passed into history. Now, some worry that such groups may persist in hampering the use of technology even after it has passed the rigorous regulatory and public approval process.

Such concerns have led companies such as Genencor, the industrial biotechnology venture of Genentech, Corning, Kodak and A. E. Staley, to begin their own community outreach programs. “We are taking a grass-roots approach,” said Robert E. Leach, Genencor’s president, “and inviting the local community people into our facilities to provide them with information and a feeling for what’s going on.

The stigma of the AGS experience may also taint the funding prospects for other plant genetics firms. Brentwood Associates in Los Angeles, the third-largest venture capital firm, which specializes in high-technology companies, has turned down several agricultural biotech deals, in part because of the problems of public perception of the industry.

“In recent years, there have been so many environmental scares that the public is hypersensitive to such issues,” said Roger Davisson, a general partner at Brentwood. Too, said Davisson, investors have gone beyond the early euphoric stage about biotech’s promise and now are paying more attention to the business management aspects of a given company.

Biotechnology executives say this a natural part of the evolution of the industry. As biotech moves from the laboratories into the marketplace, these executives say, the companies must have seasoned business management to guide them, and especially someone in administration who has had experience going through the regulatory process.

“Part of the business strategy has to be anticipation of the problems, and then solving the problems associated with the public’s concern,” said the San Diego biotech executive. “A company can ameliorate the risk by having people who have done it before. We need to see these firms being led by business managers, and moving away from founding Ph.D.s.”

Many in the industry credit Bouckaert with bringing such a level of sophistication to Advanced Genetic Sciences.

Infusion of Money

Last year, AGS got a new infusion of money, through research contracts with Du Pont and Eastman Kodak. Parkinson said, “After Joseph (Bouckaert) came on board, he and John (Bedbrook) pulled off a minor miracle by getting Du Pont to fund us with a $13-million research contract.” But though the contracts are funding the company’s research, it still must look to product revenue to pay the administrative overhead, Parkinson said.

Company officials believe that there could be a $300-million annual market for Frostban, based on annual crop losses from frost of $1.7 billion.

But Frostban, if it proves a success, won’t be ready for the marketplace for another three years. And it is only one of three major projects in AGS’ research involving use of microbes as biological control agents. Another centers on using isolated bacteria to inhibit disease in vegetables that are started as seedlings in the greenhouse, then transplanted to the field.

Analyst Handley believes that this technology “ranks with Snomax and Frostban as offering the most significant sales potential over the next few years.”

The first of the company’s product revenue is trickling in through sales of Snomax, a product that grew out of the Frostban technology, yet doesn’t use genetic engineering. Snomax capitalizes on the discovery of the genetic material that encourages frost. Mixed with water, it allows the formation of ice at higher temperatures. It is currently being marketed to ski resorts.

A bulletin board in AGS’ laboratory area proclaims: “There’s no business like snow business”--and Bedbrook believes that the business could bring in $70 million a year. However, Stephen L. Handley, an analyst with Smith Barney in New York, more conservatively estimated that “Snomax could be a $20-million to $30-million product in three years.”

Because of start-up problems at Kodak’s new biotech fermenting laboratories, where Snomax is being produced, the company missed most of this past ski season. Bedbrook said plans call for nearly 10 metric tons of Snomax to be made for the next ski season, up from 1 million tons last year. That, said Bedbrook, should help the company become “slightly profitable this year” after having lost about $3 million in 1986.

Other projects involving the Snomax “ice nucleation” technology include using the technique to help oil companies build dense ice platforms for drilling in the Arctic.

But the one that sets Bedbrook to licking his lips is an attempt to purify the naturally occurring frost-enhancing bacteria used by Snomax, so that it can be used to improve the quality and durability of ice cream--an $8-billion worldwide market.

AGS’ third major research area involves plant genetic engineering, the aspect of the business that has drawn in Du Pont and other companies interested in finding new ways of making plants resistant to herbicides and diseases. This is the largest area of activity in the company, commanding nearly 50% of AGS’ resources, said Bedbrook.

“This . . . area generates the most research revenues for the company,” said Bedbrook, “but from the standpoint of product development, it’s relatively slow” because of the years-long process of breeding new generations of plants. In a shorter-term project in plant engineering, AGS is in a race with other biotech companies to develop new kinds of “ornamental” plants, specifically, blue roses and carnations.

Yes, that was blue roses.

“Oh, there’s a market for blue flowers all right,” said Bedbrook. “The cut-flower industry is just waiting for them, you know; they’re saying, wouldn’t it be nice to have red-white-and-blue arrangements for the Fourth of July? and such things.”

“After Frostban,” said one bemused biotech executive, “getting the public to accept blue flowers should be a snap.”