Seed Money

Research and development has gone to seed, literally. Over the past decade, most of the major R&D companies have been transitioning their research budgets to fuel their burgeoning seed businesses. The reasons are many, but chief of them might be the rapid growth and potential profits of genetically modified seed, especially in emerging markets.

Biotechnology has reached a saturation point in the Western Hemisphere. Almost all of the soybeans in the US, Brazil and Argentina are GM crops, and the same is true for corn in the US and cotton almost everywhere it is grown. The Western Hemisphere accounts for 89.3% of the world’s 126.1 million global GM hectares, which leaves gargantuan opportunities in Asia and elsewhere.

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The upward spike of GM sales and the potential profits hidden outside of the Americas has prompted the traditional chemical companies to invest heavily in their seed businesses, some analysts say at the cost of discovering new actives for farming.

The overall R&D budgets of 15 leading companies devoted to both traditional chemicals and biotechnology have shifted to seed on average from 35.7% of budget in 2000 to 49% in 2009, according to research consultancy Phillips McDougall. Subsequently, the compound average growth rate during this time has been 8.7% annual increase in seed research money versus a 2.3% rise each year in conventional chemical R&D expenditures. Seed sales have risen 5.5% per year during this period of time.

The heightened investment among the major R&D companies results in greater competition in seed technology, prompting greater investment at a time when the cost for developing new molecules is at an all-time high.

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New actives cost more than US$250 million to bring to market, according to a recent report by Phillips McDougall conducted for CropLife America. That number represents an almost 40% rise in research and development costs from 2000 to 2008 for basic manufacturers, largely as a result of more numerous and rigorous field trials for various markets.

The cost of R&D has been a lingering concern for the crop protection industry in the past decade as companies have been introducing and commercializing fewer new actives compared to previous decades. The average annual rate of introduction of new actives from 1980 through 2000 was 12. That number ebbed to 10 per year this past decade, and projections based on patents and product pipelines suggests that new introductions could slow to as few as eight per year. By comparison, seed traits are projected to be introduced at a rate of 12 per year.

The result of fewer chemicals could have a compound effect on the entire industry, as fewer new chemistries means fewer opportunities to reinvest into R&D. It will translate into fewer post-patent opportunities in the pipeline for generic companies as well, which could be a serious concern in the current regulatory environment of challenges to re-registrations of many chemicals. The sparse pipeline from the previous decade will equate to fewer business opportunities for basics and post-patent producers alike.

But that trend appears to be tapering, largely as a result of mixtures or combination products. Major research companies have strong development portfolios for a slew of new formulations, many of them combination products of patented products and post-patent proprietary products. More than 30 new insecticide patents were filed in January, and a total of 98 crop protection patents were granted in January, almost all of which were either mixtures or new derivatives of already known families.

Bayer has been especially aggressive in this commercialization phase, and the fruits of its labor could be a result of its investment in new chemistries, which leads all basic R&D companies. Bayer also has most new actives in development with six.

R&D budgets are expected to rise to more than $2.9 billion for chemical research in 2012, compared to $2.3 billion in 2007. The largest areas of growth are expected to be in the areas of developing generic, stewardship and monitoring the development of active ingredients during commercialization. That represents an expected increase of 4.8% compounded annual growth rate during the next couple years compared to about 3% during the past few years.

Company Level

The lack of investment in new actives appears to be affecting the earning of companies that rely heavily on older technologies for profits. Most notably, Monsanto’s chemical business as down almost 35% compared to 2009 as competition of glyphosate has become so ubiquitous that it has commoditized the active. However, Monsanto is implementing programs aimed at reinvigorating its chemical business with farmer incentives, especially in the US.

Bayer, Cheminova, Isagro and Syngenta all posted lower revenue in the first half of 2010 compared to last year, but their relative stagnation could have been worse. Agrochemical products are finally starting to liquidate in the distribution chain off their jam-packed highs in 2008 and 2009. The return to more normal inventory in the supply chain has taken longer than many industry analysts had hoped, but farmers are returning to more regular purchasing habits in the wake of higher commodity prices and better farm incomes.

Soybeans, rice, rapeseed and of course wheat are all at elevated levels compared to past few years, excluding 2008. Favorable prices for farmers are expected to continue as cereal stocks fall globally to meet this year’s demand, and farmers are already planning to expand their plantings to capitalize on higher prices and the need to replenish food stocks.

Subsequently, the farm economies are expected to be strong in 2011, which will fuel investment in additional crop inputs to maximize yields. Also, the lower price of oil has stagnated ethanol businesses in the US, but investment is expected to return to ethanol as the price of oils rises.

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