Monsanto's Biotech Empire Threatened by Economic Losses

CONTINUED LOSSES PUT PRESSURE ON MONSANTO PRODUCT LAUNCH
ISB News Report, November 2004
Anastasia L Thatcher
http://www.isb.vt.edu/news/2004/news04.nov.html#nov0405

On Oct 6, 2004, Monsanto posted a net loss of $42M for the fourth quarter,
spurring a 3.2% single day drop in share price1. Continued erosion of sales,
down 3% from a year earlier, has increased expectations for the agrochemical
giant's newest product: low linolenic VISTIVE soybeans.

A Troubled Horizon

Since 2000 when U.S. patent protection expired for its flagship product,
Round-Up®, Monsanto has been struggling to keep market share and stay in the
black2. Despite increased sales in its growing trait business, which
partially offset losses in the herbicide arena, a year ago the company
posted significant losses-$188M, or $0.72 per share. This year, despite near
perfect global farming weather, Monsanto has been unable to stem the tide of
falling sales and prices for its Round-Up brand herbicide, a situation
exacerbated by global glyphosate (active ingredient in Round-Up) dumping by
Chinese manufacturers. U.S. prices for Round-Up are now predicted to hit
$11-$13 per gallon, well below Monsanto's expectations, and market share to
fall near 65%, similar to what Monsanto sees in countries where generic
glyphosate has been available for years.

Monsanto has been further hit by the inability to collect royalties on
pirated soy seeds in Brazil, Paraguay, and Argentina-globally the top three
soybean exporters after the United States. Until very recently, genetically
modified crops were illegal in Brazil and are still illegal in Paraguay,
although farmers are thought to have been planting genetically modified soy
for the last six years3. Monsanto's Round-Up Ready® soy seeds, genetically
modified to withstand Round-Up herbicide, are especially popular because of
the reduced time and expense required for their cultivation. Monsanto, as
well as producers subject to patent laws who must pay licensing fees to
access the technology, believe strongly that everyone who benefits from
proprietary technology should have an obligation to pay for it. Licensed
producers bear that burden but unlicensed producers do not. Progress was
made earlier this year when farmers in Brazil¹s Rio Grande do Sul region -
where experts estimate close to 90% of the soy is genetically modified -
finally agreed to pay a technology fee of $3.50 a ton to Monsanto for use of
its seeds. More importantly, the company¹s aggressive lobbying paid off when
the Brazilian government passed an executive order allowing farmers to plant
genetically modified soybeans. Although the bill will give Monsanto legal
standing to enforce collection of royalties on unlicensed use of its seeds
in the entire country, it will not, however, sanction the sale of
genetically modified soybeans

Monsanto faces a more difficult situation in Paraguay. Although 40 ­ 50% of
soy is believed to be genetically modified, Rosa Oviedo, member of
Paraguay¹s biosafety commission, comments that, "Monsanto has no right to
charge royalties. As of now, none of its varieties is legally sanctioned." A
bill has been introduced that would legalize biotech crops, but continued
peasant and farmer protests against the bill have delayed its passage
indefinitely.

Unlike its neighbors, Argentina's government has allowed Monsanto to build
royalties into the price of its seeds. However, the country has been unable
to collect these royalties effectively, because pirated Monsanto seeds are
widely traded on the black market. In response, Monsanto stopped selling soy
seeds in Argentina in 2003. It is also threatening to collect royalties on
soy shipments from Argentina to countries where its seeds are patented, if
they are found to carry unlicensed Monsanto products.

Other risks to Monsanto include rising oil prices, which could affect its
chemical business, and a limited supply of its Posilac bovine growth
hormone, where unresolved quality control issues are now expected to extend
well into 2005. Syngenta's pending anti-trust lawsuit, filed in July, 2004,
which challenges that Monsanto has illegally monopolized key corn traits in
the United States, poses another risk to the company.

Promises of Growth

Despite depressed earnings, losses to share price, and a troubled horizon,
Monsanto has promised investors a share price growth of 10 ­ 18% in 2005 and
another 10% in 20061 - to be driven primarily by its growing genomics
business and higher prices for soybean traits. However, stock analysts give
mixed reviews of the firm's prospects, many citing concerns that the company
is overvalued by Wall Street, and that long-term growth will be below
average. Overall, recommendations to investors range from strong sell to
strong buy. According to eight independent equity research firms consulted,
opinion on Monsanto is split evenly between three recommendations to buy,
two to hold, and three to sell. Yet, there is consensus among analysts that
makes one point clear: Monsanto's future will be critically dependent on the
success of developing its genetically modified seeds and traits business.

Increasing global sales of cotton, corn, and soybean products is the
cornerstone of Monsanto's growth plan. Sales potential has been boosted by
the recent decision of the U.S. Patent and Trademark office that Monsanto
was the first company to develop Agrobacterium transformation in dicot
plants such as cotton4. The decision ends a twelve-year patent dispute
between Monsanto and the Max Planck Institute (The Netherlands) and will
allow Monsanto to collect fees from companies using the technology to
introduce characteristics into dicot plants as well as providing patent
protection for its Bollgard® brand insect-protected cotton.

While the win on Agrobacterium transformation is a boon, achieving growth
targets will still be an arduous challenge, because existing Monsanto
products are quickly reaching market saturation, particularly in the United
States. Robert T. Farley, Ph.D., Monsanto¹s Chief Technology Officer, sites
the company's belief that the average number of Monsanto traits per acre of
crop is 1.5 for cotton and 1.2 for corn in the United States. Round-Up Ready
Soybeans are also near full market penetration in the United States.
Monsanto will fall short of its growth targets without successful new
product launches. Not surprisingly, the company's less than stellar results
recently have raised the stakes and further heightened the pressure to
develop and bring to market new agbiotech products... [more on VISTIVE]

Selected References
1. "Slumping Roundup sales hit Monsanto." Oct 6, 2004. CNNmoney.
http://money.cnn.com/2004/10/06/news/fortune500/monsanto.reut
2. Melcher, Rachel. Oct 6, 2004. "Monsanto Raises Bar for Fiscal ¹05
Earnings." St. Louis Post-Dispatch.
3. Burke, Hillary. (Reuters.) Sept 28, 2004. "Monsanto prods South American
nations on soy royalties." http://www.checkbiotech.org
4. "Monsanto Wins Key Patent Dispute Regarding Dicot Plant Transformation."
Oct 5, 2004. (PRNewswire-Firstcall.)
http://prnewswire.com/news/index_mail.shtml?ACCT=104&STORY=/www/story/10-05-
2004/0002266187&EDATE=

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