Monsanto & DuPont Announce Next-Gen Licensing Agreement
Comment of the Day

March 28 2013

Commentary by Eoin Treacy

Monsanto & DuPont Announce Next-Gen Licensing Agreement

Thanks to a subscriber for this interesting report by David Begleiter and colleagues at Deutsche Bank which may be of interest. Here is a section
Under the licensing agreement, DuPont will make a series of upfront and variable based royalty payments for the rights to offer RR2Y soybeans and RR2Xtend in its products. DuPont will make four annual fixed royalty payments from ‘14-'17 totaling $802MM for trait technology, associated data, and soybean lines to support commercial introduction. In ‘18, DuPont will begin paying royalties on a per unit basis for RR2Y and RR2Xtend for the life of the agreement for continued technology access, subject to minimum payments thru ‘23 totaling $950MM. We believe this agreement mitigates uncertainty for DuPont around the patent expiry of RR1 in ‘14 and will allow DuPont to offer a strong product suite to its customer base well into the future. The added flexibility to combine RR2Y traits with other traits/genetics is critical for DuPont to compete and maintain its position as the #2 player in global seeds and traits. Additionally, Monsanto has dismissed its RR1 soybean patent lawsuit against DuPont, including the August ‘12 jury damage award of $1B, and DuPont has dismissed its antitrust case against Monsanto. For Monsanto, the agreement is a clear positive as it validates the RR2Y and RR2Xtend platforms. Additionally, the agreement appears $0.35-$0.40 accretive for Monsanto upon full adoption of the next-gen traits by DuPont (in 4 yrs) based on royalties of $10-plus/bag on RR2Y/RR2Xtend (vs ~$1/acre on RR1) on 28MM acres (35% DuPont market share on 80MM US soybean acres). We note that payments in ‘14 will offset the $0.20-$0.25 lost as RR1 comes off patent in Brazil in ‘13.

Eoin Treacy's view Prior to the credit crisis, there was a high degree of commonality across the agriculture sector but since then performance has been dependent on the individual merits of various companies. Some of the reasons for this include the tightening of lending conditions imposed on farmers following the credit crisis as well as the negative effect on farm incomes of the drought in much of the USA's Mid-West.

Despite these headwinds, the global population continues to expand and more importantly the ability of an increasing number of people to afford a higher calorie intake suggests food demand is likely to remain on an upward trajectory. The fact that two of the most influential companies in the seed and pesticides sector have set aside their differences can be considered a net positive for both shares.

The USA accounts for 55% of Monsanto's (DY1.43%) revenue while Latin America represents its second largest market with 22.5%. The share has held a progression of higher major reaction lows since at least 2011 and has been ranging mostly above $100 since January; in a relatively gradual process of mean reversion. It rallied impressively this week to test the upper side and a sustained move below the MA, currently near $93.50, would be required to question medium-term potential for additional upside.

DuPont de Nemours (3.51%) rebounded particularly impressively following the credit crisis to retest the $50 area which has offered resistance on a number of occasions since 2000. The share has been ranging in a volatile manner and with an overall downward bias since 2011 and will need to sustain a move above $52.50 to break the progression of lower rally highs and indicate a return to medium-term demand dominance. The US accounted for 38% of DuPont's revenue while Europe and Asia Pacific represented 23% each in 2012.

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