DEVGEN: Monsanto bullish on RNAi, moves lead to phase 3

During its annual R&D update, Monsanto announced that it is moving its corn rootworm III project into phase III. This project contains Devgen’s RNAi technology.

Our View:
During the presentation and conference call, Monsanto was very bullish on the obtained results and future opportunities this technology, citing several arguments:
1. It is the first agricultural application of RNAi. It targets rootworms with a novel mode of action that is outside of the class of BT proteins that have been used in all other insect control products. In fact, RNAi offers a mode of action different from the BT mode of action in the other Monsanto products.
2. Leverages Monsanto's genomic investments because it is based on the identification of key DNA sequences in insects and allows to tap into the naturally occurring machinery in the bugs to design new ways to target and control specific insects.
3. Monsanto is the first to move the application of this RNAi technology for insect control into advanced development and in addition to this first trait they also have the next round of RNAi actives in the pipeline demonstrating insect control. Just as importantly, Monsanto is continuing to look at broader product applications for RNAi and is building a broader intellectual property portfolio and further R&D capability to explore it.
4. Monsanto says that its regulatory experience and the advanced product development capabilities should allow them to move this product aggressively through the remaining development cycle. Compared to its current portfolio, the performance of development so far is unprecedented.
5. In terms of efficacy, data was shown suggesting that there is an even better control than Monsanto's dual mode of action SmartStax products. Given the headlines that there's been on rootworm control over the last few months, Monsanto sees this pipeline product as a gold standard in rootworm control and durability that will be a real game changer (for background info the issues with the BT technology, we refer to our 6 Dec. ’11 morning note)
Monsanto’s bullishness shows it sees a lot of opportunity in RNAi in terms of expansion to other crops and insects. Newto us was that Monsanto's Vistive soybean product in phase IV (prelaunch) contains also RNAi. It's unclear to us if this is based on Devgen's RNAi technology and if it is used for insect control, but should the soybean product be approved (expected soon),it will for sure be supportive for the corn rootworm III regulatory review. Given that RNAi is a new technology acting on the genetics of organisms, substantial safety data will have to be provided.

Conclusion:
Although the product/technology may be an important value driver for Monsanto, it is not easy to translate that into cash flow/value for Devgen because we do not know the royalty rate for Devgen, nor do we know in which crops (other than corn) Monsanto is developing the technology. However, Monsanto’s commitment to RNAi will strengthen the ties between the companies and on the short term we would not be surprised Devgen announcing an extension of its R&D collaboration. Rating/target reiterated.