Monsanto's Genetically Modified Comeback
Two years ago, Monsanto Co. (MON ) was a mess. Protests by activists froze the company's biotech operations in Europe and threatened its U.S. business. The company was tottering under more than $6 billion in debt from buying a slew of seed companies. Its unfocused portfolio included the vaunted arthritis drug Celebrex as well as an herbicide sold to farmers. To top it off, Monsanto had a reputation as an arrogant outfit with no time or inclination to address the public's growing fears about biotech crops. "In the beginning, we said, `Go away. These are good products. Just accept it,"' says President and CEO Hendrik A. Verfaillie.
Today, St. Louis-based Monsanto has quietly turned a corner in its effort to build a successful biotech business. Under the stewardship of parent Pharmacia Corp. (PHA ), it has spruced up its balance sheet and installed tighter financial controls. More important, the backlash against genetically modified foods is fading as new studies ease fears about the health and environmental effects of such crops, though serious obstacles still retard their potential abroad. And there's a growing appreciation of biotech's ability to feed the world's hungry. Plantings are up, and protests are down. Roughly 90% of biotech crops worldwide contain a Monsanto gene, so the company is well-positioned to profit from this shift.
AUTONOMY AGAIN. And next year, the company will gain its freedom as well. Pharmacia announced on Nov. 28 that it will spin off its 85% share of Monsanto to shareholders in an $8 billion deal, probably in the second half of the year. That will allow Monsanto to concentrate on agricultural biotechnology without having to win approvals from a parent that is focused on drugs. "If I were [Monsanto] and I were to go to the [Pharmacia] board and say, `I want to buy a $4 billion company,' that's probably going to be a tough sell," says Ajay Bansal, a partner in Mehta Partners, an asset manager that owns Pharmacia shares.
Monsanto started getting its act together in March of last year after it was forced into the arms of Pharmacia Corp. in a $30 billion deal. Pharmacia integrated the company's pharmaceutical business into its own operation, leaving a much leaner Monsanto that concentrated on biotech and agriculture. Meanwhile, Verfaillie, a 56-year-old Belgian who has run Monsanto since February, 2000, narrowed the company's biotech focus to areas where the payoff promised to be biggest: soybeans, cotton, wheat, and corn, while dropping potatoes, vegetables, and other crops. And he's got the company reaching out to its critics.
Wall Street has warmed to Monsanto in a way that didn't seem possible a year ago. Its shares have soared 75%, to roughly $35, since Pharmacia listed 15% of the company in October, 2000. And the bottom line is looking better. For 2001, Deutsche Banc Alex. Brown Inc. analyst John Moten expects income to jump 7.9%, to $475 million, on a 1.6% rise in revenue, to $5.58 billion. Next year, he expects 5% higher income of $500 million on a 4.8% revenue increase, to $5.85 billion. Monsanto has "unlocked value, developed a much tougher financial model, and put a sharper focus on cash flow," says Pharmacia Chairman and CEO Fred Hassan. "Monsanto's profits are up, and [management's] self-confidence is up."
Biotech critics still warn of the possible dangers of genetically modified foods--they say they might cause illnesses and hurt the environment, and that more tests should be done. But the tide seems to be running against them these days, especially in the U.S. A turning point came last year after StarLink, a corn seed approved only for animal feed, found its way into taco shells and other U.S. food. Critics expected the incident to become a rallying cry against genetically engineered ingredients, but consumers just shrugged. Then, last summer, a United Nations report backed biotech crops, stressing the benefits for the 800 million people worldwide who suffer from malnutrition. The report received widespread publicity and answered critics who argue that biotech helps only big farmers in the U.S. In October, the Environmental Protection Agency approved the sale of a genetically modified corn for seven more years after finding that it posed no risk to humans or animals. This past growing season, U.S. farmers ignored protests by activists and planted 11% more genetically modified seeds from Monsanto. Biotech soybean plantings rose 16%. And 63% of this year's 75.4 million acre U.S. soybean crop came from biotech seeds, up from 54% last year.
But the big payoff for Monsanto remains off in the distance. The company still can't market its biotech soybean seeds in Brazil, the world's second-largest soybean producer behind the U.S. And no new biotech seeds or foods have been approved in Europe in three years. "In terms of the biotech pipeline, there's a tremendous amount of work going on there that isn't reflected in the valuation of the company," says Michael Judd, an analyst at Merrill Lynch & Co. "Eventually, that value will be recognized."
Monsanto can afford to be patient, thanks to the cash being thrown off by a decidedly old-fashioned product. The company gets nearly half of its revenue from its market-dominating Roundup herbicide. The profits from Roundup, which outsells the next six best-selling herbicides combined, fuel Monsanto's $600 million a year research and development effort. Out of those labs come genetically modified seeds for basic crops such as corn and soybeans that can stand up to repeated dousings of Roundup, which kills everything else green in its path. So far, there are seeds for Roundup Ready corn, cotton, canola, and soybeans, and Roundup Ready wheat is on the way. Each of these new products boosts demand for Roundup. But CEO Verfaillie knows that high-margin biotech seeds rather than low-margin chemicals will propel his company's growth. "It is clear that biotech acceptance is going to be a determining factor in the success of this company," he says.
FRESH PASTURES. Verfaillie sees Roundup Ready seeds as only the start of a parade of biotech products. Monsanto already produces corn and cotton seeds that resist insects in the U.S. and elsewhere. Now it's testing an insect-fighting cotton seed for the huge India market that could be ready in a year. There's also a corn seed going through regulatory channels in the U.S. that resists rootworms. Roughly $1 billion is spent in the U.S. each year trying to control the pest, making it the No. 1 insect problem for corn farmers. Dow AgroSciences and Pioneer Hi-Bred International Inc. are jointly working on a similar product but are not as far along.
Verfaillie's biggest challenge now is to get Roundup Ready soybeans approved in Brazil. Commercial planting of biotech seeds is banned there, though thousands of acres are planted illegally. The issue is tied up in the courts, and Brazilian environmentalists vow to keep it there for years. But the country took a step toward approving biotech crops last summer when it adopted a food-labeling law that laid out rules for genetically modified ingredients. And more than 800 government-sponsored field tests on biotech crops are under way. "Once Brazil goes," Verfaillie says, "then basically soybeans around the world will be Roundup Ready." This is because Brazil is a major exporter of soybeans to Europe, so Europe might have little choice but to accept biotech soybeans.
That may not be as easy as it sounds. Nowhere has the resistance to biotech foods been stronger than in Western Europe. As the intensity surrounding the issue begins to ease, the European Union is weighing a compromise that may lead member countries to lift their bans on new biotech products. But Sue Dibb, a policy analyst at the National Consumer Council in London, says her group's research shows that consumers are still concerned about genetically modified food. "Ultimately, if you don't have consumer confidence, the market isn't going to work," she says.
Indeed, Monsanto still has a long row to hoe in converting overseas consumers. But the prize--a bumper crop of biotech seeds--promises to make it worthwhile.
By Julie Forster in St. Louis, with Geri Smith in Mexico City