Monsanto and DuPont Put Away Their Swords, Sign Licensing Agreement for Next-Gen Soybeans

On Tuesday, Monsanto MON and DuPont DD announced a series of biotech seed licensing agreements, the most important of which will give DuPont access to Monsanto’s next-generation soybean technology, Roundup Ready 2 Yield. The deal will also give DuPont greater flexibility to stack and combine a wide array of previously licensed corn and soybean traits from Monsanto’s portfolio. This had been a source of conflict between the two companies recently, resulting in a string of lawsuits. We expect to moderately raise our fair value estimate for Monsanto, and don’t expect much, if any, change in our fair value estimate for DuPont. Our view of the relative competitive standing of the companies is confirmed by this deal, not changed.

We think this deal is a prime example of Monsanto’s wide moat and the company’s continued position as the leader in the biotech seed market. While DuPont licensing Monsanto soybean traits is nothing new–DuPont currently licenses the original Roundup Ready beans–we think the fact that DuPont must still lean on Monsanto for product innovation despite its accelerated research and development efforts highlights Monsanto’s first-mover advantage and supremacy in the industry.

That said, we think narrow-moat DuPont has built a solid position in the seed market, controlling a solid germplasm, or seed bank, and capable distribution and marketing operation. In fact, the company has bested Monsanto in recent years on the marketing front with its more regional strategy. Despite the fact that DuPont seems to be struggling to leapfrog Monsanto on the technology front, the we think company’s main brand, Pioneer, will remain a formidable competitor to Monsanto’s DeKalb.

The deal also signals what could be a period of relative peace between the two seed industry giants following years of legal battles. As part of the transaction, the companies agreed to dismiss pending litigation surrounding firstgeneration Roundup Ready soybean patents. From our understanding, this will wipe away the $1 billion award a federal jury said DuPont must pay Monsanto for soybean patent infringement. That’s good news for DuPont and essentially reduces the amount the company will pay to license Roundup Ready 2 Yield.

The financial aspects of the deal include DuPont paying four annual fixed royalty payments from 2014 to 2017 for $802 million total. Also, DuPont, starting in 2018, will pay royalties on a per-unit basis, subject to annual minimum payments through 2023 totaling $950 million; for a total deal minimum of $1.75 billion. Finally, and notably, the agreement only covers Monsanto’s soybean offerings in the United States and Canada, not South America, which we view as big potential growth market.

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Justin focuses on tech and internet news.