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Seed Trait Valuation: Value Creation Opportunities in Agricultural Markets

Soyatech
October 16, 2006
47 Pages - SKU: HQP1379496

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The agricultural biotechnology industry marked its tenth anniversary of product sales in 2005. The adoption of genetically modified (GM) crops has greatly surpassed the adoption of most other technologies, not just expectations for GM crops. The U.S. leads with 124 million acres, while the ISAAA has estimated that over 222 million acres (90 million hectares) of GM crops were planted in 2005 in 21 countries, with a corresponding seed value of over $5 billion. This follows global growth rates of 10 percent or greater per year over the ten-year period. The market continues to be dynamic, as evidenced by the recent announcement by Monsanto of its intended acquisition of the leading cotton seed company Delta and Pine Land Company for $1.5 billion.

In the U.S., the corn and soybean seed markets are dominated by GM products (61% and 89% of acres, respectively). Certain GM traits, such as herbicide resistance, are becoming "expected traits" that farmers will demand in most, if not all, new products. New traits, such as drought tolerance and enhanced nitrogen utilization are being developed, along with enhanced characteristics specifically aimed at improving the production of biofuels and animal feeds. The successful commercialization of these new traits will require the detailed understanding of the determinants of value that this report describes.

The agricultural biotechnology industry shares some of the same characteristics of the pharmaceutical biotechnology industry, with lengthy and costly product development cycles. However, there are significant differences that create complex issues for valuation. Agricultural biotechnologies are usually embodied into a seed product, which represents an extensive package of value, and is in striking contrast with the development of a defined active ingredient in pharmaceuticals.

This report will describe the determinants of value for different types of technology applications in this industry, along with examples of valuation methods often used in the industry. Value creation opportunities in agricultural markets are identified. Determinants of value are reviewed in detail for genetically engineered traits. How value created can be shared is an important consideration for technology developers. Types of payments and considerations for their use are also provided, along with examples of methods for valuation.

This report provides insights from over twenty years of experience in biotechnology licensing and will be of value to investors and venture capitalists, biotechnology executives, business development managers and legal and licensing personnel.

1 Overview
2 Value Creation Opportunities in Agricultural Markets: Grower Markets; Processor Markets; Consumer Markets
3 Determinants of Value: Nature of Technology, Utility and Advantages; Trait versus Enabling Technology; Commercial Success Likelihood; Strategic Fit; Understanding the Product Development Cycle; Funding During the Development Cycle; Breadth of Technology Applicability; Strength of Intellectual Property Protection; Freedom to Operate Position; Regulatory Issues
4 Trait Valuation: Additivity of Value; Germplasm; Customer Relations and Marketing
5 Value Sharing in Licenses: Examples from Agricultural Biotechnology
6 Payment Structures in Licensing and other Transactions
7 Methods and Models for Valuation: Cost Method; Market Method; Income Methods; Estimation of Revenues and Other Economic Benefits; Estimation of Costs and Technical Feasibility; Setting of the Discount Rate; Handling of Terminal Value; Identifying Risks; Understanding and Modeling Different Possible Outcomes; Example 1. Enabling Technology Valuation; Example 2. Trait Technology Valuation; Example 3. Probability Weighted Trait Technology Valuation
Appendix 1. Biotechnology Product/Technology Development Stages
Appendix 2. Payment Structures in Licenses and Other Transactions: Stock Equity Purchases; Royalty Payments; Upfront License Fee; Option Payments; Milestone Payments; “In-kind” Payments; Patent Cost Payments; Other Types of Payments; Other Contractual Elements Affecting Contract Value
Table: Table 1 Revenue and Costs for Corn Production in the U.S.; Table 2 Characteristics of Selected GM Products; Table 3 Comparisons between Agricultural Biotechnology and Pharmaceuticals; Table 4 Example of Benefits Derived from Technology; Table 5 Common Technology Acquisition Payments and Purpose; Table 6 Leading Entrepreneurial Agricultural Biotechnology Companies; Table 7 Risk Management Activities during Product Development; Table 8 Enabling Technology, Royalty on Net Trait Value; Table 9 Trait Technology, Royalty on Net Trait Value; Table 10 Probability-weighted Model for Valuation of Trait Technology
Figure: Figure 1 Grower Profit Equation: Traditional Value Creation Opportunities; Figure 2 Adoption of Genetically Engineered Crops Grows Steadily; Figure 3 Creation of Transgenic Insect Resistant Corn Hybrids; Figure 4 Plant Biotechnology R&D Product Development Stages; Figure 5 Funding during Plant Biotechnology R&D Product Development Stages; Figure 6 Corn Yield in Bushels per Acre, 1926-2006; Figure 7 Monsanto Seed Trait Stacking Pricing, 2006; Figure 8 Sharing of Value; Figure 9 Plant Biotechnology Product Development Stage Advancement Probabilities

Seed Trait Valuation: Value Creation Opportunities in Agricultural Markets

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