Long-term global dairy demand cited for Elanco’s decision to purchase recombinant bovine somatotropin business from Monsanto.
By Dave Natzke
Elanco has been the international marketer of Monsanto’s recombinant bovine somatotropin (rbST) technology, Posilac, for a decade. Now they want to own it.
Citing growing global demand for dairy products, leaders of Elanco, the animal health division of Ely Lilly, announced an agreement to purchase the worldwide rights to Posilac, as well as the product’s supporting operations.
Dennis Erpelding, manager of Elanco’s government relations, public affairs and communications, said the acquisition will help extend and expand Elanco’s presence in the global dairy industry, a presence that includes both opportunity and responsibility.
Erpelding, who has traveled extensively internationally, most recently in China, Vietnam and Europe, noted U.S. dairy export growth is an indicator of a growing global dairy market.
“Right now, U.S. dairy exports are up dramatically, due to growing global demand for dairy products,” he said. “Exports were up 62% last year, to $3.06 billion, representing over 9.5% of the U.S. dairy industry production.
“China is trying to meet the dietary needs of its children and adults, and recently raised its recommended dietary guidelines for consumption of milk and dairy products from 100 to 300 grams per day,” he continued. “That’s for a population of 1.3 billion people, and we see that as an opportunity.
“I was in Vietnam in January, and they’re trying to increase dairy production,” Erpelding added. “They have people living on 25¢ to $3 per day. They’re looking at affordable products, and dairy proteins are one of the key sources and opportunities from a nutritional standpoint. There’s real opportunity to help meet human nutritional needs. The United States is a global dairy production leader and supplier, and it can step up on the international stage.”
Elanco president Jeff Simmons, who also brings a global perspective as the company’s former manager in Brazil and Western Europe, said Posilac was “a good fit” for his company.
“It’s a volatile and changing time in agriculture, and we’re center stage,” he said. “It brings opportunity for us.”
Simmons admitted Elanco officials held internal discussions questioning acquisition of Monsanto’s controversial Posilac business.
“From a strategic perspective, we first asked ourselves if this product was safe,” he explained. “As a pharmaceutical company, it’s one of the first things we ask. Second, we looked at was efficacy: “Is this product effective? Is the value proposition of this product sound? And third, do consumers and the marketplace want this product?
“We know this product is extremely safe,” Simmons said. “That is not the issue. And, it is extremely efficacious, and the value proposition is increasing. The need for milk is increasing, especially as you look at the global market. We’ve seen that in our experiences in Mexico, Brazil and South Africa. That fundamental need we believe so strongly in is one of the reasons which brought Posilac up front.
“When you get down to the consumer, and ask why we would touch this product, we’ve chosen this business, an innovative-driven, productivity, animal health-type company, and we believe strongly that we need to stand up for this,” Simmons continued. “If 70% of the solution to increase meat and milk production by 50% is innovation, the last thing a company like Elanco can do is back away. We believe we are bringing value to the food chain, and that value is going to be needed more in the future than ever.”
Two decades ago, Erpelding and Simmons were part of the Elanco team involved in early rbST research. But Monsanto was first –- and the only –- company to bring a product to market, making Posilac commercially available in 1994.
“We’ve been familiar with this product for more than 20 years,” Simmons said. “So when it comes to manufacturing, to public affairs, to marketing globally –- it is something we are very familiar with, from the science to the producers and the activist groups.
”We’ve been working in collaboration with Monsanto for some time,” said Simmons, who noted Elanco has been the exclusive international marketer of Posilac for a decade. “(Acquisition) has been on the table for some time. Given the value, and where we’re trying to go with this company internationally, it was attractive.
“Purchase of this business is strategic and financial, but it’s more than that,” he continued. “We have 2,000 employees globally, and there’s more to what drives us than trying to sell a product. If someone is going to bring innovation to help solve this global food shortage and address the economics of food in the United States, we need to be part of that solution.”
Simmons noted Elanco recently aligned with Heifer International, a nonprofit organization helping supply dairy animals to countries as a sustainable approach to address hunger. Elanco provides employees to help teach animal husbandry.
“It is very personal to Elanco employees, and part of a bigger cause, which is hunger,” Simmons said.
Simmons highlighted three core points behind the Posilac acquisition:
1) a commitment to a need for wholesome affordable dairy and food products. “In the next 40-50 years, we’ll need to grow dairy and food production 40%-50%. The (United Nation’s) Food and Agriculture Organization recently reported 70% of that growth will have to come from innovation. That trend is what’s driving Elanco and its stakeholder, Eli Lilly, to invest in the Posilac business.”
Simmons said Elanco’s investment in dairy took a large step five years ago, with the launch of Rumensin for dairy cows in the United States. “This investment is another signal we are serious about becoming a major global player in dairy, and we’re looking for that to continue.”
2) sustainability, science-based technology to enhance food production, while lessening the impact on the environment. Simmons cited a recent Cornell University study which showed Posilac lessened the environmental impact per unit of milk produced. “We believe it is not just the sustainability on the environment, but also on the farm and the food chain.”
3) safety. “We will not back off from the values of this company, which are about ‘safe food’ and enriching life with safe food.
“We start with regulatory bodies: Posilac was approved by FDA 14 years ago,” Simmons said. “Nineteen other regulatory bodies have approved it; the World Health Organization has supported it; Codex has supported it. We looked extensively at all the research. It is proven a safe product. Differences in milk, from a supplemented or nonsupplemented cow, cannot be detected. It’s a natural protein.”
Domestic vs. international markets
Simmons said that because the acquisition was still pending, he could not provide current information on the percent of cows supplemented with Posilac. He stressed, however, that there is market opportunity.
“We’ve done our diligence, and we’re looking at this globally and here in the United States,” he said. “We have marketed the product outside the U.S. for 10 years, and we see opportunity internationally.”
“Global food needs are growing, so growth opportunities will be in dairy industries abroad,” Erpelding said. “But, the capability to produce – using the genetics and management here in the United States, provides some of the best opportunity to capitalize on global dairy markets right now. Canada and the Europeans have supply management systems, so the U.S. can take technology, use it and become a true global supplier. In my travels, food supply and security are key issues. Many countries want to do some things domestically, but they’re also looking for reliable import suppliers and, reflecting on recent U.S. dairy export figures, the U.S. is seen as a reliable supplier.”
Moving forward with Posilac, “collaboration” will be key, Simmons said. That collaboration will include working with dairy processors and marketers who currently label dairy products as “rbST-free.”
“We’ve done initial assessments regarding ongoing legal actions regarding labeling,” Erpelding said. “We want to take some time to better understand the dynamics and visit with stakeholders in the whole chain to see what their interests are, so we can come to common consensus of how we can advance the issues together from a whole dairy industry perspective.”
“We will not be confrontational; we want a collaboration, and we want to understand what consumers want,” Simmons said. “We’ll be collaborating with regulatory bodies, retailers, fast-food chains, consumer groups -– whether supportive or not supportive of technologies we have. Collaboration has been an ingredient of our success; it’s what our employees and key customers want. With this product, we will have to do that more than ever.
“Second, we respect choices of consumers, retailers and producers,” he said. “It must be nutritious, safe and affordable. The affordability factor is important. After that, there are unique choices: favorite retailers or brands.
“Our company also offers ‘natural’ products, and it drives a value-based approach,” Simmons said. “We have to be able to communicate facts and specifics to influence the food chain and other constituent groups. The choice-driven strategy influences how we’re going to behave.”
Simmons admitted the acquisition of Posilac will increase Elanco’s profile as a potential target for anti-technology activists.
“We’ve chosen this business, and we’ve see this macro trend (increasing dairy and food demand) as more than financial,” he said. “There is a driving need for more dairy in the next 20-40 years than we can supply. Technologies like Posilac, as well as others in our pipeline, need to be a key solution. We understand there will be activists –- there already are against our other products –- and we believe we have the capability to address them. Our No. 1 approach will be to take a collaborative approach up front vs. a reactive approach afterwards. Our global experience with other technologies and other species will help advance our interests in the dairy industry.”
“We are going to have a discussion with processors and retailers,” Simmons said. “We have to learn the market segmentation of our customers’ customers. We’re in a new (era) of food safety, and it’s important to understand what the consumer wants. That’s an obvious one we have to understand.”
“If you look at the different segments of U.S. market, one thing we’ve seen in other species is that there may be different choices for different segments,” Erpelding said. “Especially if you look at escalating food prices right now – including the meat case and dairy case -– you have certain consumers who want the most affordable supply. You have others who are willing to pay a premium for certain production practices or systems. Our goal, as we work with the dairy stakeholders, is to understand the ‘choice’ option, to make sure we’re providing the maximum opportunity to the different segments – not only on the consumer side, but also the producer side – to capitalize on those different market opportunities.”
Erpelding said Elanco will also sit down with dairy co-ops and others “who have felt between a rock and a hard place on the ‘rbST-free’ controversy. “We need to put this in a global context and the true opportunities for the U.S. dairy industry,” he said.
“We will not go around producers or processors and try to influence consumers and retailers without being aligned with them,” Simmons said. “We’ve learned from experiences –- good and bad –- in Europe and other places, the more alignment we can get with the food chain, the better. To do a confrontational approach is dangerous. Also, trying to tell consumers they don’t understand what they want is another approach we will not take. We’ll respect consumer choices. We understand science will only go so far in today’s world, but we will never back away from that. We will be engaged; we will be proactive; we will continue to take risks, but we will do it in alignment with the food chain.”
Once the sale is completed, all employees for the Monsanto U.S. operations will be incorporated into the Elanco business. The manufacturing plant in Augusta, Ga. will become part of the Elanco business, as will its employees. At this stage, there will be no change in distribution.
“The first thing we want to do is reach out to the dairy industry and meet with key leaders of producer groups and hear what they think before we draw up or finalize a strategy,” Simmons said. “We will fine-tune what we have and test it with them, and that may include a relaunch or adjusted strategy from the course it is on now.
“I don’t want to get into a strategy six to 12 months down the road, but everywhere around the world Elanco has a technical marketing approach, and there are some nice complements (with the Monsanto technical field staff) when it comes to nutritionists and veterinarians and feed and health,” Simmons continued. “I think we will be able to be a global leader in having that technical background and expertise. When it comes to the productivity and health of a cow, we hope to have the best capability of any animal health company and be a global leader.”
Sale could be completed this fall
Just two weeks after Monsanto announced it would divest its Posilac business, Elanco, the animal health division of Eli Lilly, announced it had signed an agreement to acquire the worldwide rights to the dairy recombinant bovine somatotropin (rbST) supplement, as well as the product’s supporting operations.
Under the terms of the agreement, Elanco will acquire all rights to the Posilac brand, the product’s U.S. sales force and its manufacturing facility in Augusta, Ga. In return, Monsanto will receive a $300 million upfront payment, as well as contingent consideration.
The Posilac dairy business manufacturing and sales teams will be integrated into Elanco.
Under a previous licensing agreement, Elanco has exclusively sold Posilac outside of the United States for a decade. Posilac is approved and marketed in 20 countries.
The transaction is expected to close near the beginning of the fourth quarter of 2008, possibly by early October, contingent upon clearance under the Hart-Scott-Rodino Anti-Trust Improvements Act and other customary closing conditions.