Replies to post #88482 on Biotech Values

[DewDiligence]

I REALLY hope your MON pick helps you win the contest :-)

If you’re interested in MON, stop by and say hello at the MON board (#board-6650) and The Global Demographic Tailwind (#board-15787). You’ll find some insightful posts by Democritus_of_Abdera, one of the best contributors you’ll ever run into on a biotech message board.

[DewDiligence]

As rkrw post kind of implied, many if not most really cannot place a significant difference in EV between the top 4 and the bottom 4.

If that’s genuinely the case, I suppose I would argue that the individual in question needs to do more thorough DD :- )

[DewDiligence]

Forbes Magazine has named Monsanto Company of the Year
in the cover story of its 18-Jan-2010 printed edition. It might
be more apt to call MON the company of the new decade; that’s
what I think it will turn out to be for buy-and-hold investors.
(See #msg-44000346 for a companion piece from Barron’s.)

http://www.forbes.com/free_forbes/2010/0118/americas-best-company-10-gmos-dupont-planet-versus-monsanto.html

›The Planet Versus Monsanto

by Robert Langreth and Matthew Herper
01.18.10

Monsanto biochemist Roy Fuchs takes fish oil pills every morning in hopes of warding off heart disease. He'd much rather get his omega-3 fatty acids in a granola bar or cup of yogurt. But it is tricky to add omega-3s to food products without adding unwanted flavors. After a while on the shelf, omega-3-enriched products can smell and taste like old fish, he says.

Fuchs hopes that the new genetically engineered soybeans Monsanto is working on will solve this problem. The soybeans contain two new genes to make a tasteless oil that is converted inside the body into the form of omega-3 thought to be good for the heart. In a 157-patient study presented at a cardiology conference in November, those volunteers who had high triglycerides saw their levels drop 26% after eating 15 grams of the oil daily for three months.

Wouldn't that be a wonderful product to have for sale? Stops heart disease--and protects the environment, too. People could get their nutritional supplements without depleting fish stocks.

Monsanto needs crowd-pleasers like this to get past its image problems. In economic terms, the company is a winner. It has created many billions of dollars of value for the world with seeds genetically engineered to ward off insects or make a crop immune to herbicides: Witness the vast numbers of farmers who prefer its seeds to competing products, and the resulting $44 billion market value of the company. In its fiscal 2009, Monsanto sold $7.3 billion of seeds and seed genes, versus $4 billion for second-place DuPont and its Pioneer Hi-Bred unit. Monsanto, of St. Louis, netted $2.1 billion on revenue of $11.7 billion for fiscal 2009 (ended Aug. 31). Its sales have increased at an annualized 18% clip over five years; its annualized return on capital in the period has been 12%. Those accomplishments earn it the designation as FORBES' Company of the Year.

But economic achievement is not the same thing as public adulation. Over most of the time that Monsanto has been working to make humanity better fed, it has been the object of vicious criticism. In the first round of attacks the company was portrayed as the Satan of agriculture for daring to modify the genes in corn and soybeans. That people have been selecting plant genes for 5,000 years was no defense; Monsanto's gene-splicing threatened the world with ecological catastrophe. Genetically modified crops were the subject of legislation outlawing them and numerous protests in Europe and elsewhere in which biotech crops were ripped from the ground. In 2002 Zambia, during a famine, rejected a cargo of donated corn because it might have been tainted with the offending seeds.

Over time the protests have mellowed, and the legal impediments to GM are gradually falling. [Europe is the last major holdout.] It didn't make sense for a hungry planet to reject tools to increase the productivity of farmers. Much of Europe, while still forbidding the planting of GM crops, permits the importation of foods made from them.

But now Monsanto has a new round of enemies. This time its supposed sin is making seeds that are too good. The company has something too close to a monopoly in some seed markets.

The public is hard to please, isn't it? But Monsanto perseveres. It has been in biotech long enough to develop a thick corporate skin.

Chief Executive Hugh Grant, 51, is both manager and evangelist. He says the new generation of biotech crops will go beyond mere herbicide tolerance and pest-killing to help feed the world. "There is bigger demand for food than ever. There is no new farmland," he says. "The business model is you provide more yield to growers, and you are rewarded for that." He vows to increase gross profit (approximately $6.8 billion in 2009) by 25% over the next three years.

By marrying conventional breeding with genetic engineering, Monsanto aims to produce more food for less money on the same amount of land. Conventional breeding--these days a high-tech matchmaking process guided by DNA sequencing machines--will help boost maximum yields. Biotech genes will ensure that pests, weeds, drought and other problems don't destroy a crop's potential, Grant says.

"It is like computers in the 1960s," says Robert T. Fraley, Monsanto's chief technology officer. "We are just at the beginning of the explosion of technology we are going to see." Adds Grant: "Our pipeline is richer and deeper than it has ever been." A new corn variety that includes eight genes for pest resistance and herbicide tolerance could become the company's next big product. It is due out this spring. Also in testing are drought-tolerant corn [#msg-41324910], corn that needs less fertilizer and higher-yielding biotech soybeans and corn.

Farmers complain about Monsanto's prices, but they still buy the seeds. Ninety percent of the U.S. soybean crop and 80% of the corn crop and cotton crop are grown with seeds containing Monsanto's technology. Other countries are also growing Monsanto's biotech crops, including India, with 20 million acres of cotton; Brazil, with 35 million acres of soybeans; and Argentina, with 43 million acres of soybeans. (Brazil once blocked genetically modified plants, but farmers planted the crops anyway, and it eventually legalized them.) Packaged foods with corn syrup or soybean oil likely contain the fruits of Monsanto's gene-modified agriculture.

But agriculture is not a business that tolerates resting on your laurels. Monsanto faces a rough 2010. Rivals are producing more competitive products, and farmers are likely to resist further price increases. Sales of the herbicide Roundup, the company's second-biggest product, have been declining as renewed availability of raw materials allows other companies to make cheap generics. [See #msg-39841050 for my prediction regarding this dilemma.] Monsanto laid off 8% of its staff this fall. Another headache: The Justice Department is looking broadly at competition in agriculture--and is asking questions about Monsanto's practices in particular.

One trend in Monsanto's favor: Demand for grain is likely to grow as emerging countries like China adopt a meat-heavy Western diet. It takes a lot of feed to make all that steak. "How are you going to feed everybody? Yield. Farmers are going to get better yield with genetically modified seeds," says Edward Jones analyst Daniel Ortwerth. Monsanto "is chasing every acre in the world, figuring what bugs are eating people's crops and how to stop them." He predicts Monsanto's sales (after a slight drop in 2010) will climb 10%, to $13 billion, in fiscal 2011.

The business model here is productivity: increasing the tons of crop that can be produced per hour of labor and/or per acre of land. Monsanto created soybeans, corn and other plants resistant to Roundup by inserting a gene from glyphosate-resistant bacteria found near a Roundup factory in Luling, La. Farmers can plant their crops and then, whenever weeds emerge, spray on Roundup without worrying about killing their crop.

Monsanto's other main line of products is corn and cotton seeds containing genes for pest-killing toxins produced by the soil bacterium Bacillus thuringiensis, or Bt. Organic farmers have been spraying these natural pesticides on their crops for decades. Monsanto's technology puts the stuff right into the plant. "We are getting more bushels per acre with the same amount of fertilizer" and fewer pesticides, says Champaign, Ill. farmer John Reifsteck, who plants mostly biotech corn and soybeans on his 1,800 acres. Terry Wanzek, a farmer in Jamestown, N.D., used to plant mostly conventional wheat. Now he plants mostly bioengineered corn and soybeans because they produce crops that are more reliable and more profitable. "Wheat and barley haven't kept up with the times," he says.

Even some organic farmers are clamoring for genetically modified crops. Don J. Cameron grows both organic and conventional cotton on his farm in Helm, Calif. The organic fields cost $500 per acre to weed by hand, versus only $30 an acre for glyphosate-immune fields. Lately he can't even sell organic cotton because the stuff coming out of India, Syria and Uganda is so cheap. "I feel the organic industry has painted itself in a corner saying that all genetically modified organisms are bad. Eventually they're going to have to allow it," Cameron says.

The enemies haven't disappeared entirely. A 2009 Union of Concerned Scientists study calculated that only 14% of recent corn-crop yield increases are due to genetically engineered Bt corn. Roundup-ready corn and soy seeds don't increase crop yield at all, it found. Genetic engineering of crops "is inherently risky," says Greenpeace Policy Director Marco Contiero. [LOL—I wonder if he could get a *real* job.] "We cannot recall crops that are released into the environment." He says Monsanto's dominance decreases seed biodiversity.

Monsanto, formed in 1901, was a food additives and chemical company before starting crop biotech research in 1981. Its biotech crops come out of the same genetic engineering revolution that produced companies like Genentech and Amgen. But while biotech medicines hit the market in 1982 with the approval of recombinant insulin, biotech crops took longer to develop. (The chemical business was spun off in 1997.)

Some of the difficulty was technical. It took a while to figure out how to regenerate whole plants from genetically modified plant cells. In one method scientists would blast new genes into plant cells at high velocity with a gene gun. An advance came in the early 1980s, when researchers at Monsanto and, independently, in Europe discovered that the soil bacterium Agrobacterium tumefaciens could do the job more precisely. The bacteria cause benign tumors called crown gall disease in trees. Researchers remove disease-causing genes from the bacteria, add new genes of interest and then mix the bacteria and plant cells in a petri dish; the bacteria do the hard work of inserting the new genes into the plant. Most of Monsanto's genetic engineering work still uses this method.

Monsanto's foray into biotechnology was controversial from the start. Its first genetically engineered product, bovine growth hormone for boosting milk production, was introduced in 1994 to a furious debate over whether it was deleterious to health. "It probably wasn't the wisest product to bring out first," admits Earl Harbison, Monsanto's president from 1986 to 1993. "But we had it." (Monsanto sold the product line to Eli Lilly in 2008.)

Initially Monsanto aimed to roll out biotech seeds slowly, Harbison says, building consensus by engaging potential critics. "Seeds are not products people have to accept," he says. The go-slow approach evaporated when Robert Shapiro, who had been head of Monsanto's former Nutrasweet business, became Monsanto's chairman. Highly promotional, Shapiro courted the press with stories about how Monsanto's crops were going to help the environment by reducing pesticides and pushed seeds through friendly regulators. A backlash was inevitable.

Making crops resistant to Roundup was an obvious idea. But it proved difficult to do until someone came up with the clever idea of trying genes from bacteria living in the wastewater near a Roundup plant. "I walked in the lab one day and saw the results on my robot, and it was 'Holy cow,'" recalls Monsanto Vice President Stephen Padgette. Roundup-ready soybeans were introduced in 1996. Bt-endowed cotton came that same year, followed by Bt corn in 1997. The cry went up that genetically engineered crops would cause allergies, but this has not been true for marketed crops "at all," says University of Georgia researcher Wayne Parrott. Then it was charged that Bt corn would kill butterflies or do other bad things to the environment. But the effect on the environment is just the opposite. GM seeds lower pesticide use or, in the case of Roundup resistance, may reduce soil erosion by making low-till farming more practical. "We have to feed people in a less destructive way," says UC Davis plant biologist Pamela Ronald, author of the pro-biotech book, Tomorrow's Table. "Genetically engineered crops can be useful for that."

When drug giant Pharmacia (now Pfizer) agreed to merge with Monsanto in 1999 to snag its arthritis drugs [mainly Celebrex], Pharmacia shares dropped because drug investors wanted no part of the controversial seed business. The genetically modified crop controversy reached a climax in 2000, when a competing genetically modified corn product--one not approved for human consumption--was detected in Kraft taco shells, prompting a nationwide recall and yet more bad publicity.

When Monsanto was spun off from Pharmacia in 2002 sales of the synthetic seeds were gaining, but the company was not making money on them. "We were a mile wide and an inch deep," recalls Monsanto molecular biologist David Stark. There were research projects in everything from wheat to turf grass to coffee. Hugh Grant, a company lifer who snared the top job in 2003, killed most of these projects and bet heavily on three big crops--corn, soybeans and cotton [these three crops comprise the overwhelming majority of MON’s seeds and traits business]. These crops were the most likely to generate sales big enough to justify the $100 million investment that new genetically engineered crops require. Bioengineered corn and soybeans are less controversial because they are rarely sold directly to consumers.

Grant also realized that genetic engineering alone was not enough for success in the seed business. It cannot replace conventional breeding methods, which allow crop scientists to create hundreds of seed varieties tailored to different soils and weather. Monsanto's research budget is now split equally between genetic engineering and conventional breeding. "If you have incredibly brilliant biotech and extraordinarily average seed, you will end up with average crop yields," Grant says. "The thing the [genetic engineering] does is protect that preprogrammed yield."

Grant's job gets more difficult from here on out. A main patent on Roundup-ready soybean seed expires in 2014. This could threaten $500 million in royalties Monsanto gets from licensing this genetic trait to competitors, estimates JPMorgan. Monsanto just introduced a second-generation herbicide-tolerant product that it says will produce 7% more soybeans per acre. But rivals like DuPont are working on their own herbicide-tolerant seeds. [“Were” might be more accurate than “are” in this context: see #msg-44228263.] Dupont hopes to combine its herbicide-tolerant trait with the Roundup-proof trait; Monsanto is suing DuPont to stop it. "It's all being slowly chipped away," says Ticonderoga Securities analyst Chris L. Shaw, who calls the company overvalued.

Then there are antitrust questions. Competitors like DuPont, which has countersued Monsanto on antitrust grounds, and some farmer groups object to Monsanto's licensing agreements with numerous small seed companies. They say the agreements are too restrictive and limit other companies' ability to blend in their own traits. Monsanto says the Department of Justice has made inquiries "similar to the claims made by DuPont" in its lawsuit. "Concentration in the seed industry has resulted in higher prices and less choice" for farmers, complains William Wenzel of the Wisconsin nonprofit Farmer to Farmer Campaign on Genetic Engineering. Wisconsin dairy farmer Paul Rozwadowski blames Monsanto for the difficulties he has had finding the conventional corn seed that he has used for decades. "Monsanto is taking over the industry," he says. "They are trying to eliminate all conventional seed."

"Any time you have a firm with 90% to 95% market share and you have concerns about super-competitive pricing, you're going to get on the DoJ's radar," says Brian A. Weinberger, an antitrust attorney at Buchalter Nemer. "If Monsanto clamps down too hard on the licensees, it puts itself front and center."

Monsanto says it licenses its genetic traits broadly and is so far ahead simply because it bet heavily on genetic engineering years before the competition no kidding]. "Farmers vote one spring at a time. You get invited back if you do a good job," Grant says.

Since 2005 Monsanto has been gradually moving back into other food crops, including fruits and vegetables. Among the projects in the works are a lettuce with the crunch of iceberg and the nutrients of romaine [sounds great :-)], and a watermelon whose flesh doesn't leak after being cut. This research involves conventional breeding. Monsanto abandoned its biotech wheat research in 2004 after it proved too controversial. In July, Monsanto reentered the wheat business by acquiring conventional breeder WestBred for $45 million [#msg-39551239, #msg-42530685]. It hopes to use genetic engineering to create drought-tolerant varieties.

"When people are confused or worried the natural tendency is to just say no," says Monsanto scientist Stark. "The only thing we can do is produce products with real benefits and hope that people eventually become comfortable what we are doing is good."‹