NYT article on Monsanto and Roundup.
August 2, 2001
A Weed Killer Is a Block to Build On
By 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."
Copyright 2001 The New York Times Company |
