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Michael Pragnell of Syngenta: Green devolution
This spin-off of AstraZeneca and Novartis represents a whole new approach to the risky but potentially remunerative agricultural technology business. And it's growing like GM wheat.
At the start, Syngenta appeared to be a bad seed. In the late 1990s, just as pharmaceuticals giants AstraZeneca and Novartis were planning the spin-off of their agrochemicals and biotechnology operations in a joint venture, the Asian currency crisis wilted agribusiness worldwide. In early 2000, as the partners were preparing to formalize their union through an IPO, stock markets collapsed. When Syngenta finally did go public that November, it raised Sf383 million ($217 million) -- at the low end of expectations.
"We did the merger in the teeth of some unpleasant market conditions," recalls Michael Pragnell, CEO of Basel, Switzerlandbased Syngenta. "It's been something of a roller coaster for us."
Happily for Pragnell, who ran AstraZeneca's agrochemicals subsidiary before becoming Syngenta's first chief executive in November 2000, blossoms are finally appearing. The world's leading producer of herbicides and fungicides and its third-biggest provider of seeds, Syngenta boosted revenues by 6 percent last year, to $6.6 billion, reversing 2002's 2 percent decline. Sales jumped a further 15 percent year-over-year in the first quarter, to $2.3 billion.
The bottom line is growing just as vigorously. Syngenta's profits surged to $268 million in 2003, following a $27 million loss the year before.
Syngenta's stock has been among the best performers this year on the SWX Swiss Exchange and the New York Stock Exchange, where it trades in American depositary receipts. Through mid-July shares were up about 30 percent on both markets.
Such results would seem to vindicate the decision of the British AstraZeneca and the Swiss Novartis to launch Syngenta. The companies had been collaborating in genomics and other pioneering biotech research but were coming under increasing pressure from their shareholders to focus on "core businesses," says Pragnell, 57. "I spent most of 1999 trying to work out and construct the most attractive future from AstraZeneca's standpoint, and the answer was to merge with the Novartis business to create a true world leader."
The practical payoff, explains Pragnell, is that Syngenta gets to take advantage of economies of scale: The company's $700 million-plus R&D budget -- the target is 10 percent of revenues -- is the biggest in the global agricultural sector.
"We dealt with the cost base, streamlined the product portfolio and the organization and stayed committed to research and science -- it all adds up," says Briton Pragnell, who has a degree in modern languages from the University of Oxford and an MBA from France's Insead. He spent two decades at U.K. textiles maker Courtaulds before becoming CEO of Zeneca Agrochemicals in 1995.
Pragnell recently discussed Syngenta, world food supplies and the state of biotech with Institutional Investor Assistant Managing Editor Jeffrey Kutler.
Institutional Investor: Who are your customers?
Pragnell: The users of our products are millions of farmers. We have direct commercial relationships with big growers in huge markets like the U.S. and Brazil. Otherwise, we rely on distributors and dealers to reach and service the marketplace. Increasingly, however, their customers and their customers' customers -- major food companies like Nestlé or Unilever -- as well as food retailers are very important to us. The entire industry is responding to consumers who are health-conscious, diet-conscious and environmentally aware, who want to know where a product comes from, how it is produced, what it does for their health and lifestyle, and so on.
But you're an agribusiness, not a health food factory.
This industry is absolutely essential to global food production. Without technology -- what we do -- crop yields would be some 30 to 35 percent below what they are today. Farmers have been able to feed a global population that has grown from 2.4 billion in 1950 to 6 billion now with essentially the same amount of acreage under cultivation.
How do you answer those who consider genetically modified foods evil?
We wish we could bring them around. On this issue we have everything to be proud of and nothing to be ashamed of. Genetically modified foods -- we introduced the first GM product in Europe, a tomato paste, in 1996 -- were hugely successful until the European consumer movement began to push back. It's a comment on today's consumers. They have so much discretionary income and choice in the foods they eat; they don't think about how the technology they reject might increase the yield of the subsistence farmer in sub-Saharan Africa who is trying to scrape together a living for his family. It's bizarre that the same organizations that are supposedly fighting to feed the hungry in the developing world are fighting against GM technology. It's totally contradictory.
Is your stock price vindication of your merger strategy?
Our merger was a success because we delivered on or bettered all the promises we made. For instance, our original goal was to achieve $525 million in annual savings by the end of 2004, but we surpassed that in 2003 and will hit $625 million this year. New-product launches accounted for more than $500 million in incremental sales last year, and we're telling shareholders to expect $300 million more from those products over the next three years. But beyond that, we've created a cohesive organization and foundation on which to build for the future. Short-term results are all well and good, but if nobody trusted each other, people didn't work well together and there was no innovation, we'd be in trouble.
Given shareholder pressures, can you effectively plan for the long term?
You have to be tightly focused, operationally speaking, in the short term. The planting season in most of the northern hemisphere is brief; most of our business is done in the first six months of the year, so by June we pretty much know what our full-year results will look like. But in financial terms, the most significant operational decision we make is when we take an idea from research and put it into development. That's a minimum commitment of $70 million. It may take seven years for that product to come to market and three years beyond that for it to reach peak sales.
How do you sidestep the integration pitfalls of conventional mergers?
We did have legacy issues, as any merger does. There were regulatory complications because we listed on multiple exchanges. More important, we had to get antitrust clearance from the European Commission and Washington, which took 11 months. The advantage of that, paradoxically, was that we had 11 months to plan and prepare. Being able to have those debates without the pressure of simultaneously having to run the business and deliver on the merger was fantastically beneficial. We all got to know each other really well, and we reached agreement on all critical issues ahead of time.
How important were cost reductions to the merger?
Synergy savings were important, especially for driving short-term earnings and as a barometer of how we were delivering on the promises to investors. But the main rationale was to create scale to achieve leadership in our market and in scientific enterprise and research. We are outstanding in terms of product range, product pipeline and research capability.
Where does your R&D budget go?
We spend about $450 million on R&D for chemical crop protection. Two thirds of that is for regulatory compliance -- safety studies, for example -- to maintain our licenses to operate. We spend another $110 million to $120 million a year on germ plasm and seed development and $150 million on biotechnology. We view this as an investment in the reinvention of Syngenta, which has to take place about every decade.
Are you going into any new lines of business?
We've made a few acquisitions but haven't broken out of our crop protection, chemicals and seeds business lines. Might we? Well, yes, building on what we know and are competent at. Our enzymes research, on which we spend $50 million a year, has just resulted in the launch of our first animal feed product. Another emerging area, where we'll invest $30 million this year, is using plants as a medium for producing biopharmaceuticals, which is expected to be a $100 billion industry by the end of this decade.
What else is new in biotech that you find particularly exciting?
First is the scale-up of our [genetic] traits in corn, soya and cotton, which are very much focused in the U.S. market. We are trialing one trait for controlling rootworm pests in corn, for example. We are also working on a humanitarian project to fight vitamin A deficiency by enhancing the beta-carotene levels in rice. This is a way for us to demonstrate that technology can produce a product that is good for human health. Maybe that will start to turn the GM debate.