Monsanto scales down hopes on GM foods 

CAROLINE DANIEL / Financial Times 19aug02

Monsanto has dealt a blow to the biotech industry by accepting that it could take at least until 2005 to gain regulatory approval in either Europe or Brazil for its genetically modified products.

In an interview with the Financial Times, Hendrik Verfaillie, chief executive, said Monsanto needed to be more transparent about its growth assumptions.

"We are assuming no progress in Europe until 2005 . . . Weare trying to be conservative. It is better to under-promise than under-deliver, I have learned. I don't like earnings revisions, they are painful," he said.

Although Monsanto has not given up hope of eventual approvals and will continue to press for GM crops, its decision not to include progress in Europe and Brazil in its forecasts to 2005, marks an admission that it underestimated the depth of hostility from environmental groups to GM foods and the pressures on governments to stop their production.

Monsanto had been unique in the industry in betting that biotechnology would take off quickly. Its admission could prompt rivals such as DuPont and Syngenta to rethink plans for expansion outside the US.

Although Monsanto's rivals are starting to be more active in biotechnology, Mr. Verfaillie said he was surprised they hadn't been quicker to do so, as growth is expected to slow for agricultural chemicals. "I'm somewhat surprised. They have access to the same data as we do."

The company has become more vulnerable to investor pressure since Pharmacia, the US drugs company that merged with Monsanto in April 2000, last week spun out its 84 per cent stake in the group to its shareholders. Management credibility was dented by a profits warning in June.

Mr. Verfaillie is pinning his hopes on a change of heart in Europe. "We like what has happened with elections in Denmark, France and Holland and hopefully in Germany, which will lead to more science-based decisions," he said.

The company must also manage the decline of its flagship product, Roundup herbicide, which dominates profits. It warned that if the price or volume falls of Roundup "deviate significantly from our previous experience, we will need to consider additional changes to our business model".

Mr. Verfaillie also addressed fears of a further writedown of its Latin American operations. "We have taken very aggressive actions and believe these will be sufficient. I don't think there will be any further writedowns. There is no second shoe to drop."

Monsanto enters a time of transition 

CAROLINE DANIEL / Financial Times 19aug02

The chief technology officer of Monsanto, the leading agricultural biotechnology group, has a framed cartoon in his office.

Under the caption: "We're giving genetically engineered food two thumbs up," it depicts a fat professor, hair awry, displaying two prominent thumbs on his left hand.

While the cartoon suggests Monsanto executives may have developed a sense of humour about the controversy GM food has sparked, they remain baffled and angry that the public has been slow to see bio-technology's benefits, such as making crops more drought-resistant and bolstering yields.

For Monsanto, speedier acceptance is critical. That is especially so since US drugs maker Pharmacia divested itself of 84 per cent of Monsanto through a spin-out last week, leaving Monsanto without a financial umbrella. The two companies had merged in April 2000.

In an interview with the FT, Hendrick Verfaillie, the Belgian chief executive, said: "We are now having to stand on our own two feet from a financial perspective and that is the biggest difference. We can now make our own decisions and be totally responsible for the outcome. Good or bad, we are it." A hint of the challenges came two weeks ago. Monsanto, which had relied on Pharmacia to cover its operating needs with short-term commercial paper, was seeking $750m-$1bn of longer-term debt. Monsanto was only able to raise $600m, at a higher yield.

On August 13, it was forced to plug the gap, borrowing $150m from Pharmacia. Mr. Verfaillie, however, stresses Monsanto faces no liquidity problem. "We have made cash flow our number one target instead of market share," he said. "We are forecasting $400m-$460m of free cash this year, and $500m next year."

Monsanto's access has been limited by a profit warning when it cut 2002 earnings forecasts by a third.

The shares have halved over the past year. It was also slow to react to the economic fallout in Latin America, forcing a $167m write-off for bad debt. "I don't think there will be any further write-downs. There is no second shoe to drop," said Mr. Verfaillie.

He admits he must improve credibility. He is open about the problem Monsanto faces since its US patent ran out on Roundup, a traditional herbicide, that generates about 45 per cent of revenues. "Roundup has been a tremendous cash cow for us. It is critical we manage its expiration and provide cashflow to fund R&D [for biotech]."

In the first half, volume and average selling prices of Roundup fell 13 per cent in the US, which led overall Roundup sales to fall 20 per cent to $1.2bn. Earnings have also fallen fast, amid pressure from cheaper generic competitors.

Although Monsanto spends the bulk of its $500m of R&D on seeds and genomics, the division is loss-making and generates only 28 per cent of revenues.

Mr. Verfaillie is confident Monsanto can manage the transition. "We expect by 2005 our [Roundup] brand share will be about 60 per cent against 78-80 per cent now. For our molecular share [based on licensing the technology] we are forecasting we will retain over 80 per cent by 2005."

Monsanto has a plan B. "If price declines faster than we are projecting, we would have to take our cost down fast, so we have a contingency plan in place," he said. That includes cutting R&D and bringing forward cuts to sales and marketing, from 21 to 18 per cent of revenues.

That could be avoided if biotech approvals come faster - Monsanto estimates approvals for products pending could generate $600m of earnings. But these approvals are hard to predict. A year ago, Mr. Verfaillie told the FT he had three wishes: "The first is [approval for] Roundup Ready soyabeans in Brazil. The second is making progress in Europe specifically around Roundup Ready corn. Number three is Bt cotton in India."

Just one wish has been granted, for Bt Cotton, a cottonseed with internal resistance to the bollworm. In Brazil and Europe, Monsanto has given up predicting approval. Mr. Verfaillie is upbeat that the entrance of rivals such as Syngenta into biotechnology could mean Monsanto is not alone in touting the benefits of the technology, and bearing the slurs of its opponents.

But the concern is that if Monsanto's shares fall further it could again become a takeover target and never be able to reap the gains from the genetically modified crops it is sowing in the greenhouses on top of its St Louis headquarters.

"There are a number of defences a company could use [in that situation]. At the right time, if necessary, we will put them in place," said Mr. Verfaillie. "But no one has called me yet."