David Barboza
ST. LOUIS - Monsanto jumped headfirst into the future five years ago, when
it spun off its old-line chemicals business and rechristened itself a "life
sciences" company that used biotechnology to develop genetically altered
crops.
After investing billions in that vision - some of it to create
bioengineered corn, soybeans and other crops, and some to buy large seed
companies - Monsanto is prospering. But not because of any proliferation of
genetically modified supercrops, which have been widely accepted in the
United States but have come under fire in Europe and Japan.
What keeps Monsanto healthy is Roundup, a chemical herbicide developed more
than two decades ago. It is the best- selling agricultural chemical product
ever, with $2.8 billion in sales last year; it outsells other chemicals
five to one.
The growth of Roundup, which accounts for about half of Monsanto's revenue,
is the primary reason that the company reported a solid profit in the
second quarter, despite the resistance overseas to bioengineered crops and
a depressed agriculture economy that has battered other companies.
Monsanto has maintained and even souped up Roundup's status by forging what
analysts say was a brilliant strategy of dropping its price years ahead of
patent expiration and tying its use to the early growth of genetically
modified crops - crops made to work in tandem with the herbicide.
"It was a classic pricing strategy," said Leslie Ravitz, an analyst at
Morgan Stanley. "It was a textbook case. Every 1 percent price drop led to
a 2.5 or 3 percent increase in volume."
Monsanto still faces challenges. Roundup's lower price and global dominance
mean that it faces difficult growth prospects. And if consumers and
regulators here and abroad reject biotech crops, Monsanto and its
multibillion-dollar investments would be devastated.
But analysts say the company seems to be positioning Roundup as a hedge
against that possibility. And if biotechnology is not dealt a significant
blow, Monsanto could become the world's most profitable agriculture company
because it would then command 80 percent to 90 percent of its two primary
markets - nonselective herbicides and biotechnology seeds. The combination,
analysts say, could lead both product lines to reinforce each other,
helping Monsanto's seeds dominate certain crops in the same way Roundup
does in herbicides.
Even competitors marvel at the growth and size of Roundup. "This is a
blockbuster in an industry where a blockbuster is a $200 million product,"
said Jerome Peribere, vice president for herbicides at Dow AgroSciences.
"In pharmaceuticals, a blockbuster is $1 billion; this is like imagining a
$10 to $15 billion product."
That is why analysts project double-digit growth for Monsanto over the next
few years. It would be a remarkable turnaround for a company whose profits
had been weighed down by huge research costs and by the debt that came with
buying seed companies in the 1990's. That debt, about $6 billion, helped
push Monsanto into a merger with the Pharmacia Corporation (news/quote) in
1999.
Pharmacia swallowed up Monsanto's drug unit, Searle, and its Celebrex
arthritis drug - then spun off Monsanto as a separate company after
investors complained that Monsanto would weigh down Pharmacia's profits.
But since Monsanto's initial offering in October, its shares have jumped
about 82 percent. Shares of Pharmacia, which still owns 85 percent of
Monsanto, have fallen about 19 percent.
Investors have reacted to two trends: the company's biotechnology seeds are
now planted on about 80 million acres worldwide. And Roundup commands 80
percent of the world market in herbicides that do not target specific weeds.
Even more, few competitors are willing to produce a generic version of
Roundup, a glyphosate herbicide that kills just about anything green,
because Monsanto has protected its market dominance by cutting the price
while finding new uses. This built loyalty while reducing the profit that
potential competitors could reap by trying to lure away customers.
For example, in 1996 Monsanto began marketing genetically modified crops
that were immune to Roundup. The crops, called "Roundup Ready," allow
farmers to spray the herbicide on the fields, killing weeds but not the crops.
The company also lowered the retail price of Roundup years before its
patent expired in 2000 - dropping it from about $44 a gallon in 1997 to $34
in 1999 to about $28 today. This drove up demand and may have also deterred
competitors. At the same time, profits did not suffer; volume gains made up
for the price cuts.
"If you look at the period 1994 to 2000, the price decreased 45 percent but
our gross profit was up 90 percent," said Hugh Grant, the chief operating
officer at Monsanto, which is based here.
Roundup also helped speed the adoption of conservation tillage, a system
where farmers do not weed and till the soil before planting; they simply
spray weed killer and then plant. Con-till, as it is known, reduces soil
erosion, saves fuel and eases wear and tear on farm equipment, not to
mention lowering labor costs.
The tillage method is used on about 300 million acres worldwide, and
Roundup is used on about two-thirds of those acres.
Monsanto also decided that once its United States patent expired, it would
supply its glyphosate molecule to competitors. The drop in the price of
Roundup and the size of Monsanto's volume - it produces close to 160
million gallons a year - seemed to deter competitors from building plants
because the economics make it difficult to compete.
"They said, `We'll license you the molecule, and you can buy it, repackage
it, do whatever you want. Or you can build your own plant.' " said Jeffrey
Peck, an analyst at Bear Stearns (news/quote). "Just about every company
they offered it to took the deal."
Monsanto extended its advantage by sharing its regulatory clearances with
companies that buy the ingredient from Monsanto rather than make it
themselves. That sped up government approval.
The world's biggest agricultural seed and chemical company, Syngenta
(news/quote), which was formed last year when Novartis (news/quote) and
AstraZeneca (news/quote) combined their agrochemical businesses, has begun
to make a glyphosate molecule, but its market share is small. Another
competitor, Dow AgroSciences, has set the modest goal of being No. 2 in the
market, with 10 percent of glyphosate sales.
Some companies are fighting Monsanto in court. The DuPont Company has filed
two lawsuits in federal courts accusing Monsanto of violating antitrust
laws by linking the sale of Roundup and Roundup Ready crops and by using
incentives and requirements to lock out rivals.
"The pressure Monsanto puts on dealers and distributors makes it very
difficult for competitors to sell their own glyphosate products, even when
those products are cheaper than Roundup," said John Hinderaker, a lawyer
who represents Dupont. A spokesman for Monsanto said the Dupont case is
"absolutely without merit."
In any case, analysts said it would be hard to compete with Monsanto on
price because it could always cut the cost of the herbicide and make up the
difference by raising prices for Roundup Ready seeds. Such seeds, which are
protected by patents, account for almost 70 percent of the 70 million
soybean acres in the United States.
"They take a lot of the price out of the herbicide but probably put it in
the seed," said Ian Heap, who heads the International Survey of Herbicide
Resistant Weeds in Corvallis, Ore. "And that gets a lot of companies out of
the herbicide market."
The question is whether such strategies will continue to pay off. Analysts
are betting yes, but there are obstacles. Adoption of the con-till method
could slow. And Roundup could be nearing a saturation point - or at least a
point where sizable growth is difficult, analysts say.
Industry executives agree. "The problem with Monsanto today is volumes have
grown tremendously because of price elasticity, but this growth is coming
down," said Mr. Peribere at Dow AgroSciences. "One has to ask whether the
horse is out of the barn."
Still, analysts say Monsanto looks substantially better than it did two
years ago. The company was reincarnated with a better balance sheet after
the Pharmacia spinoff. It sold divisions, cut costs and trimmed its
biotechnology ambitions.
Instead of trying to develop biotech versions of a dozen or more crops, it
has focused on four: corn, soybeans, wheat and cotton.
Monsanto is pumping about $600 million a year in research and development,
far more than any rival. The company knows that Roundup is its past, and
perhaps its present. But it is counting on biotech to be the profit
generator of the future.
Though costly to research and bring to market, biotech seeds generate large
profits once they are licensed. This year, Monsanto is expected to bring in
about $400 million from its biotech traits - the technology implanted in
seeds to make a plant release an insecticide or resist weed killer.
But do not underestimate the power of Roundup, analysts say. "As the price
of Roundup goes down, it's going to open up even more markets," said Andrew
Cash, an analyst at UBS Warburg. "Roundup is a blockbuster right now, and
it'll get even bigger."
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