Monday, April 13, 2009

Monsanto’s business model relating to the INGARD® technology in Australia

In his very interesting post Tobias Thornblad, an IA/IP expert within Agrobio, deconstructs Monsanto’s commercialization of its INGARD® technology in Australia. This is an interesting example of a complex business model where the boundaries of the firm are replaced by contractual terms in an area where regulatory approvements makes or breaks businesses. I will describe Monsanto's business model in relation to INGARD®, based on Thornblad's analysis of the IAM/IPM system.

Monsanto's development and marketing of genetically engineered seed and bovine growth hormone, as well as its aggressive litigation and political lobbying practices, have made the company controversial around the world. I will not discuss the company or its methods as such, but focus on the business model I have seen in variations in different industries.

The most interesting part of the business model in relation to the INGARD® technology according to me is the use of Technology users’ agreements. Usually the seed market is a high volume low margin business but Monsanto has developed a business model in which it combines payment for seed with licenses for the technology itself to both external partners and end-users (farmers). The Technology users' agreement is both a source of revenues and other benefits for Monsanto, and a strong control mechanism enabling a financially sustainable model. I will end this post with a short discussion on how this method can be used in other industries.

Cotton is naturally vulnerable to pests and managing these pests is a major problem for many cotton farmers. Monsanto has developed a genetically modified cotton plant that expresses the Bt toxin, targeting pests such as cotton bollworm and budworm. Cotton containing a Bt gene has been commercialized in Australia by Monsanto under the trademark INGARD®.

External partners
The main challenge in business models relating to Agrobio is the overlap between public and private sector activities, and the need for relationships to provide support both for the cost of research and development and for the regulatory approval processes. Monsanto has, besides the farmers, three major external partners in its business model:
  • The Commonwealth Scientific and Industrial Research Organization (CSIRO) is the principal public sector research institution in Australia, with a wide range of activities and specific expertise in agronomy and plant biotechnology. More than 90% of Australia’s cotton is grown from seed developed by CSIRO. Varieties of cotton containing the Bt gene were developed by Monsanto, CSIRO and Cotton Seed Distributors (CSD). The research institution owns variety rights on cotton germplasm, necessary for Monsanto to develop new varieties of cotton bearing the gene for production in Australia. CSIRO is Monsanto’s main research partner in Australia and it has R&D contracts with Monsanto to undertake research using the BT gene and promoter sequences.
  • Cotton Seed Distributors (CSD) is Australia’s largest supplier of commercial cotton seed, a grower-controlled organization that has been developing new varieties of cotton since it was established in 1967. It has an exclusive license from CSIRO for its cotton varieties and a separate license from Monsanto to use the Bt gene promoter in cotton varieties and sells seeds to farmers.
  • Deltapine operates the oldest, continuous private cotton breeding program in the US and was the first company to introduce transgenic cotton seed featuring the Bt gene technology under license from Monsanto. It imports cotton varieties from overseas and has a local breeding program to develop varieties suitable for the Australian market. Deltapine also has a license from Monsanto to use the Bt gene promoter in cotton varieties and sells seeds to farmers.
Value recipients
There are four main value recipients in this model:
  • Farmers growing cotton
  • Development partners
  • Seed distributors
  • Australian society

Value propositions
For each of the value recipients, I assume the following value propositions:
  • Farmers - Monsanto primarily creates value for farmers lowering the risks of pests thus lowering costs and other harms related to toxic chemical sprays.
  • Development partners - Monsanto creates value by providing research and development resources, funding for regulatory approvements and rights to develop and commercialize cotton plants containing the Bt gene.
  • Seed distributors -Monsanto creates value by investments in marketing and by providing rights to develop and commercialize cotton plants containing the Bt gene.
  • Australian society - Monsanto creates value by reducing the need for toxic chemicals sprays.

Assets, Capabilities and Activities
The business model is primarily based on the technology developed and patented by Monsanto. The main activity performed by Monsanto is of course the major investment of resources in research and development since its first cotton plants with Bt toxin genes was developed in 1988. Another important activity performed by Monsanto has been to obtain the necessary regulatory approvals from the National Registration Authority, the Genetic Manipulation Advisory Committee and the Australian and New Zealand Food Authority. If any of these regulatory bodies had not approved the marketing of Bt cotton, Monsanto would not been able to commercialize its INGARD® technology according to this business model in Australia. Lastly, Monsanto performs license management and collection of data from farmers to comply with the regulatory approvals it has.

Cost structure
Monsanto's primary costs in relation to the INGARD® technology is most probably the approximately $100 million spent on research and development and approximately $5 million on product development and regulatory requirements.

Control Mechanisms
The main control mechanisms in relation to the INGARD® technology are the patent portfolio with key patent AU638438, the plant breeders’ rights for some new cotton varieties that use the Bt gene, the financial power to uphold rights, the different trademarks such as the word INGARD and the combination mark with word and logo, and the Technology users’ agreements.

Monsanto’s Bt-containing seed may only be used by farmers who have a signed an agreement which governs how the Bt technology has to be used. Any use of the technology that contravenes the agreement is subject to claims of patent infringement and/or breach of agreement. The Technology Users’ Agreement was developed in order to enable Monsanto to track how the crop is used and its impact on the environment. The agreement requires users to manage the technology, including applying a Resistance Management Plan in which for example the licensee must perform post-harvest crop destruction and removal of germinating volunteer cotton. This makes the licensee (farmer) dependent on buying new seeds every year.

Revenue/Benefit Model
Monsanto generates revenues from technology licenses, royalty payments from distributors and from Technology Users’ Agreement with cotton growers. Other benefits generated by the business model and Technology Users' Agreement is the technology improvement grant-back, Infringement reports from technology users and crop management data/records.

Similarities from other industries
The technology users' agreement share similarities with the contracts used primarily in the software industry. When you buy software in a store and install it in your computer you often accept a license agreement with the software developer with clauses on issues such as how you can use, copy, back-up or sell the software.

I have also seen end-user agreements controlling improvements and other issues, in more traditional industries such as manufacturing where technology developers license technology and IPR to companies manufacturing and selling products. When the products produced are being sold they are bundled with license agreements to the technology developers.

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