While genetically engineered (GE) foods and products have the potential to cause harm to health and the environment, they could also pose financial risks to investors of companies in the industry and to food companies, according to recently released reports.
Monsanto, the world's leader in developing and marketing GE seeds, risks financial setback if it continues with its current business focus on GE-related products, says Innovest Strategic Value Advisors in a report commissioned by Greenpeace, and released in April 2003 (http://www.greenpeace.org/multimedia/download/1/213812/0/Innovest_Monsanto_Analysis.pdf). Since Monsanto has many collaborative projects with public research institutions and governments in many developing countries, it is important for decision-makers to be informed of the company's financial status.
The report warns shareholders that Monsanto is facing substantial market risks that could threaten future earnings of the company due to genetic contamination, sustained market rejection both in the US and abroad, competition and product failures. Already suffering a loss of US$1.7 billion on sales of US$4.7 billion in 2002, Monsanto's GE-focus strategy poses large risks, concludes Innovest.
Innovest, a financial services leader in analysing the financial impacts of environmental and social issues, accorded the lowest of its environmental ratings to Monsanto, implying that the company has above-average risk exposure and less sophisticated management than its peers. As a result, Monsanto's stocks are likely to 'underperform in the stock market over the mid to long term', it says.
Last year's profit losses in Monsanto led to a change in leadership at the company but this did not lead to a change in strategy.
'Monsanto could be another disaster waiting to happen to investors (after Enron and other financial disasters),' the report warns, adding that if Monsanto does not take steps to mitigate its substantial market risks, for example by diversifying its GE-focused strategy, further investor losses are likely.
Currently, Monsanto's main product, Roundup (a herbicide) is already under pressure from competition and the company predicts that its market share will likely go down. Furthermore, major droughts which caused reduced Roundup use last year are expected to remain in 2003, which suggests that sales will continue to be affected. Another problem faced by Monsanto is that resistance to Roundup is said to be developing in many of the weeds it aims to control.
The company, however, seems to be relying on the riskier business of selling GE crop varieties to make up for the drop in sales of Roundup to bring in profits but according to Innovest this is not a viable course of action. It is notable that Monsanto's major GE crops are engineered to be tolerant to Roundup.
What are the risks associated with a strategy that focuses on genetic engineering?
For a start, consumer rejection of GE foods has been considerable and is not showing signs of abating, extending along the food industry supply chain from consumers to retailers to producers to farmers. This fact is reinforced by the recent survey of public opinion by Eurobarometer, commissioned by the EC Directorate General, that confirmed the widespread mistrust of plant biotechnology. It found that over half of the European population polled consider genetically modified foods to be 'of little value and dangerous to society', with 95% wanting clear labelling of GM-derived foods. (http://europa.eu.int/comm/public_opinion/archives/eb/ebs_177_en.pdf )
There is also the problem of competitors coming out with new products that will challenge Monsanto's dominance of biotech corn and cotton, says a New York Times (NYT) article dated 31 May 2003.
Governments and scientists have also begun to question the safety and risks of these crops. The recent rejection by Zambia of food aid that is likely to be tainted by GE varieties is a case in point.
The dynamics of rejection can play out in various forms where rejection in one sector can lead to rejection in another. For instance, farmers in North America have begun to question the commercialisation of GE wheat for fear of potential loss of market in Europe as well as globally, while many producers in Europe have stated that they will not accept GE wheat owing to strong resistance of Europeans to GE foods.
Market watchers warn that Monsanto needs to heed such sentiments. Data shows that 90% of all GM crops grown worldwide in 2001 were from Monsanto seeds. The company currently produces GM corn and soya bean which find their way into many food products which use GE food crops as ingredients. Any backlash on GM food worldwide will have far-reaching implications to its bottom line.
The company's intention as stated in its annual report, that it plans to increase the percentage of revenues earned from genetic engineering technology fees relative to its regular seed and chemicals businesses, will only increase the company's risk exposure to potential problems associated with GE crops.
The other question relates to liability. The company will have to contend with the high risk that lawsuits will be brought against it for contamination of non-GE crops as such incidences are acknowledged to be inevitable. Monsanto is also expected to initiate its own lawsuits against farmers in an effort to protect its patent rights on GE crops.
The analysis in the Innovest report is shared by UBS Warburg's analyst, Andrew Cash, who was quoted by the New York Times as saying: 'There are a lot of risks. The market is worried about competition. The market is worried about costs. The market is worried about them getting paid for their traits. They've got a big hill to climb.'
The NYT report noted that Monsanto spent dearly to get where it is today, investing billions in the last decade to acquire huge seed companies and to develop GM crops.
Yet profits are in a slump, with share prices plunging nearly 50% in two years, from US$38 in June 2001 to US$20 at the end of May 2003, and the company continues to take a beating over the introduction of GM crops.
Despite being the largest seed company in the world, its progress has been impeded by 'heavy spending, management shake-ups and the unexpected costs of trying to win the world over to those altered crops', according to analysts.
With much of GE foods finding their way into the food chain, food companies are also not immune to the impact of genetic engineering.
Food companies such as Kraft Foods face risks that include product liability, biopharm contamination, consumer rejection, loss of competitive advantage, damage to reputation, insurance industry concern and shareholder and analyst concern, thus subjecting the company to unnecessary financial risk, according to an analysis on the financial impact of GE foods on the American giant company.
The report, published by Public Interest Research Groups and As You Sow Foundation of the US, said the Starlink contamination of food supply cost the food industry about a billion dollars due to recalls, lawsuits, lost sales and consumer rejection. Krafts Foods was not spared, and the incident demonstrated the financial risk that GE foods can create and the inadequacies of current regulations to protect food companies from liability. (http://pirg.org/ge/GE.asp? id2=3D9677&id3=3Dge&)
Contamination of Kraft products by approved and unapproved GE crops could create significant financial liabilities for companies if they did not act to prevent contamination, the report warns.
In addition, GE foods offer no marketable benefit to food companies. Instead, the report found that companies which switch away from using GE ingredients in most cases showed sales increases in the years following the switch.
While there seem to be no clear benefits, potential experiences of future financial risks await food companies like Kraft Foods if they were to continue to use GE ingredients, the report concludes.
As individual companies face challenges posed by genetic engineering, the biotechnology sector itself is seen to be facing leaner times ahead.
Warning signs have been issued by the investing fraternity which suggest that the nice run that the sector seemed to have enjoyed might hit a brake.
'The financing environment for biotechs is really tough today, and I expect that we will see quite a few companies going under in the near future,' Chris Ehrlich, a venture partner with InterWest Partners in Menlo Park, was quoted in East Bay Business Times in the US, dated 28 April 2003.
Meanwhile Morgan Stanley also adopted a negative outlook on the industry. In May, the investment house downgraded the biotech sector to inline from attractive meaning that after a robust run, it expects the industry to perform on par with its relevant broad market benchmark over the next 12 to 18 months, and advised investors that it is time to take profit in the biotech 'While there are still a number of near-term positive catalysts for the sector, with the likely approval of four additional drugs in the next two months, strong [second-quarter] earnings ... and continued supernormal growth, we believe that valuations are beginning to reflect this reality,' the firm's research note said. 'Growth rates are beginning to slow for the large-cap sector going into the latter half of 2003 (tougher competitions and maturing products) and beyond,' says Morgan Stanley, as quoted in theStreet. com.
Even though fundamentals have 'significantly improved' over the past year, with current valuations 'we struggle to find stocks that we believe can meaningfully outperform the broader market in the near term'.
The future of biotechnology is uncertain and riddled with problems, and in parts of the world, the industry is undergoing tremendous shakeup.
Because of the uncertain future market situation due to low consumer and user acceptance of GE products, many firms in the EU have cut back on their research in biotechnology. The EC reported that between 1998 and 2002, the number of plant field trials applications in the EU dropped by 87% owing largely to widespread public rejection and to the EU decision not to approve any new commercial release of genetically modified organisms.
The EC found that more than half of small and medium-sized enterprises and two-thirds of large companies have cancelled research projects in the last four years. The other reasons cited for the cancellation included matters pertaining to the regulation field, that is, unclear legal situations, unclear or high requirement for safety testing of GMO products, and high cost of GMO projects.
Over in the US, the success rate of biotech has also been low.
According to a Brookings Institution study (http://www.brook.edu/dybdocroot/es/urban/publications/biotech.pdf), half of the biotech companies formed in the 1970s have folded or merged with other companies. The uncertainties in product development and economics are so great that most small biotech companies have failed over the last two decades.
'The apparent scale of research funding required for becoming a biotechnology center may be beyond the reach of most metropolitan areas,' concludes the report, which looks at biotech centres in 51 major metropolitan areas in the US. It adds that most biotech firms operate at a loss, spending large amounts on research and development for several years in advance of earning any sales revenue. According to the study, the typical biotech firm spent about $8.4 million on research and development and earned revenues of just $2.5 million in 1998.
As countries and investors scramble to join the biotech race, these financial assessments are useful for developing country governments and peoples to consider in their economic analysis when considering investments in GE technologies and companies.
About the writer: Chee Yoke Heong is a researcher with Third World Network.
