Stock of the Day - Monsanto: Long Tunnel, Distant Light
Online Investor
Jan 22, 1999
When you talk about Monsanto (NYSE:MTC - news) , you have to talk about the future. That's because the present is not very pretty. This food, drug and chemical conglomerate reported disappointing earnings on Thursday and expanded its plans for a restructuring, doubling the expected number of layoffs in order to cut costs. Just a few days earlier they halted studies on two major heart drugs that were in late-stage clinical trials because they lacked efficacy. The stock has tumbled from $64 in October to the high-$30s currently. Is there anything good for investors to look at here?
As we said, you have to look to the future, and there's a fair amount of uncertainty on several fronts. Monsanto is a leader in Life Sciences--food and health products based on shared forms of science and technology among agriculture, nutrition and health. In other words, Monsanto makes pharmaceuticals, biotech-based agricultural seeds and food ingredients. They also do a nice business in herbicides, thanks to the $2.5 billion in sales from Roundup alone. Other noteworthy products in their stable are the artificial sweetener Nutrasweet and newly approved arthritis drug Celebrex.
Monsanto went on a buying binge last year to build a global seed empire, spending $4.2 billion to acquire DeKalb Genetics, Delta & Pine Land, and seed businesses from Cargill and Unilever. The plan is to engineer seeds with biotech-based traits, boosting crops' resistance to pests, tolerance to pesticides, and even increasing crop yields and nutritional composition.
The seed industry has long been a commodity business, but ag-biotech companies like Monsanto hope to change that by creating a remium-priced product environment. Value-added traits from genetic engineering are already paying dividends in crops such as corn, soybeans and cotton. These genetically engineered crops have gained some acceptance in the US, but Europe has shown reluctance toward ag-biotech amid fear of unforeseen side effects and environmental impact. Monsanto has assembled a formidable ag-bio seed business so it is well positioned if this industry's promise is achieved, but market development is in the early stages and consumer acceptance
remains a wildcard.
In the pharmaceutical area, Monsanto has had mixed results lately. Bad news came last week when the company announced it was halting trials on two anti-clotting drugs which were in pivotal Phase III trials. After ten years of development and hundreds of millions of dollars spent, clinical testing did not demonstrate significant effectiveness in preventing death or heart attack. Investors were very disappointed because they were hoping these drugs would make a big splash in the fast-growing market for anti-clotting compounds.
The good news is that Monsanto's much anticipated arthritis drug, Celebrex, also launched this month, but for now the FDA is limiting the label regarding claims about side effects. Specifically, Monsanto's Searle unit and marketing partner Pfizer had hoped to be able to say Celebrex effectively treats arthritis pain without the heightened risk of ulcers and other stomach ailments associated with current arthritis treatments. Clinical trials on the so-called Cox-2 inhibitor showed it did result in significantly fewer gastrointestinal side effects than non-steroidal anti-inflammatory drugs, but the label still has to carry a warning until follow-up studies are done.
The market for arthritis treatment is estimated at $6 billion, and Monsanto scored a noteworthy victory because Celebrex is the first Cox-2 inhibitor on the market. Analysts figure Celebrex could top $1.5 billion in peak sales. Competition is not far off, with Merck (NYSE:MRK - news) expected to bring its own Cox-2 inhibitor to market later this year. But Monsanto has three more Cox-2 inhibitors in late-stage clinical trials designed for broader use in treating pain, not just that caused by arthritis.
Monsanto's pipeline also contains late-stage drugs targeting heart disease, cancer and estrogen deficiency. The disappointment with the anti-clotting drugs last week may detract from Monsanto's credibility, though. As the saying goes, it takes not only good science but good management to successfully bring new drugs to market.
In sum, Monsanto's pharmaceutical and ag-biotech units hold great promise, but at this point only a fraction of that promise has been realized and the future is fairly uncertain. Monsanto will have to
integrate its many acquisitions in the seed area, no small task considering the scope of last year's buyout binge, and the market for ag-biotech is still young and unproven with consumers. Monsanto also needs more successful drug launches to restore credibility with Wall Street on the pharmaceutical front, and that may take several years.
Monsanto does have solid businesses in herbicides and food ingredients to keep the cash flowing, but that cash flow is sorely needed with over $6 billion in long-term debt. Furthermore, the company faces hefty expenditures for marketing (Celebrex launch), restructuring (seed company acquisitions) and research (half a dozen late-stage clinical trials) in the next few years. So while there is light at the end of the tunnel for Monsanto, it is a very long tunnel.
fnews.yahoo.com |
