Chemical manufacturing giant DuPont (DD: Charts, News) suffered a major setback this week, after a federal jury ordered the company to pay a $1 billion patent infringement settlement to rival Monsanto (MON: Charts, News) over its genetically modified seeds technology. The jury found that DuPont knowingly infringed on Monsanto’s patent for its herbicide-resistant Roundup Ready seeds. These seeds, considered Monsanto’s flagship brand, are engineered to be resistant to Monsanto’s glyphosate-based herbicides, and are a critical part of its business strategy to simultaneously sell seeds and herbicides. The patent infringement settlement is the fourth-largest in U.S. history. Monsanto and DuPont are the two largest companies in the $34 billion commercial seed market. $13.3 billion of the seed market is now generated by genetically modified seeds.
The dispute started in 2009, after DuPont produced its Optimum GAT soybean seed, which was genetically modified to withstand glyphosate-based herbicides. DuPont claims that the Optimum GAT project, which combines aspects of its own genetic modifications with Monsanto’s, was abandoned last year and the seeds were never sold. However, Monsanto claimed that the project violated a 2002 licensing agreement between the two companies. This resulted in DuPont counter-suing Monsanto for anti-competitive practices. Monsanto also offered DuPont a chance to license its patented product, which the company refused.
Monsanto’s glyphosate-resistant trait is widely used in crops such as alfalfa, corn, cotton, canola and sugar beets. Roundup Ready is present in 95% of soybeans in the United States, and has generated $22 billion in sales over the past five years. Monsanto licenses its product to over 200 other companies as well. Monsanto’s Roundup Ready products are the main source of its annual revenue of $13.7 billion.
“DuPont strongly disagrees with the verdict,” the company stated. “There were several fundamental errors in the case which deprived the jury of important facts and arguments.” DuPont has stated that it will appeal the verdict. DuPont’s general counsel, Thomas L. Sager, believes that the $1 billion charge is “unjustified” since DuPont “never sold a single Optimum GAT seed and has no plans to do so in the future.”
DuPont also claims that Monsanto used”deceptive practices’ to initially obtain the seed patents, referring to the “mixing of patent claims from 1990 and 1994 applications” which masked facts that could have blocked the patent. DuPont asserts that Monsanto’s patent is invalid. Monsanto has since asked the U.S. Patent and Trademark Office to reissue the corrected patent.
Monsanto’s Executive VP David Snively was pleased with the ruling, stating, “This verdict highlights that all companies that make early and substantial investments in developing cutting-edge technology will have their intellectual property rights upheld and fairly valued.”
Although a payment of $1 billion is unlikely to hamper DuPont in the long run, the decision is likely to cap the growth potential of its seeds business segment, which is a major part of its Agriculture and Nutrition Segment. That segment, which accounts for approximately a third of the company’s revenue, posted a 17% increase in sales for fiscal 2011. The growth potential of DuPont’s seeds business stands out in comparison to its Performance Coatings and Pharmaceuticals segments.
Most analysts are still bullish on DuPont, which trades at 10.6 times forward earnings with a 5-year PEG ratio of 1.5. The stock is up nearly 7% since the beginning of the year but has been down 2% over the past twelve months. The stock pays a quarterly dividend of 43 cents per share, a 3.5% yield at current prices.
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