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Interview: The DuPont assets deal has been a dream acquisition for FMC

Following the acquisition of assets from DuPont in 2017, FMC recorded growth in 2018 that helped it leap ahead of competition. Agrow’s Sanjiv Rana met FMC’s chief executive officer, Pierre Brondeau, and president and chief operating officer, Mark Douglas, to discuss the company’s plans pre- and post-acquisition, its growth strategy and current market conditions. The interview was conducted at FMC Tower – one of the dominating structures on the Philadelphia skyline.

Sanjiv Rana (SR): When and why did FMC plan to be a solely agriculture-focused company?

Pierre Brondeau (PB): When Mark and I joined the company in 2010, our vision was for it to be an agricultural, health and nutrition company, although we were clear that we would spin off the lithium business at some point. Towards that vision, we have made a lot of acquisitions in the ag space as well as in the health and nutrition space and by 2016, were ready to spin off the lithium business. But then we analysed the market and realised that our initial vision had become less relevant. That was because of two sets of events. The first was the development of organic and “clean” food. That began requiring a broader product line within the health and nutrition market. When consolidation began taking place in the ag sector, we began getting worried about our status as a hybrid company in the face of some formidable competition posed by the new companies that would emerge from the three big mergers and acquisitions. We had already started to increase our spending in R&D and were getting closer to discovery but were still mainly at a development stage. We needed to take a decision and decided to focus on ag by selling the health and nutrition business and using the money to buy divestments that would inevitably come out of the big M&As. Then the perfect deal came to us where we swapped the health and nutrition business for part of the crop chemical business of DuPont. So, it was an evolution of our vision.
SR: As you are focusing on becoming an ag-based company, would seeds also be an area of future expansion?

Mark Douglas (MD): We often get asked that question. Seeds are not on our horizon for two reasons. First, it’s a very concentrated market – there are three big players who have a lot of the row crops and then there are smaller niche players. To get into seeds at any point of time would have been incredibly difficult from a market access point of view. And then, there’s the technology perspective. We are spending 7% of our revenue on R&D today. We would have to cannibalise that to focus on seeds, and that would split the company. We believed in the chemical part of the industry and became a pure play synthetic, organic chemistry and biologicals company. We do not believe that you need to have seeds to sell chemicals.
PB: We do not find the seed business attractive from where we are at this point. The financial stress that it would put on the company would harm the focus that we have on our chemical portfolio.
SR: How has the acquisition of assets from DuPont been progressing in various geographies? Were there any lessons learned from the Cheminova acquisition, which helped you streamline the latest acquisition?
MD: Talking about the Cheminova acquisition in 2015, it was probably the worst time to buy a crop protection chemical company given that the industry was going into a downturn. So, the integration of Cheminova was very much a cost cut. The EBITDA [earnings before interest, tax, depreciation and amortisation] was declining because of the industry. We had to get our arms around a whole company and reduce the costs of that business. But then we come to November 2017, when we acquired the DuPont assets. We did not acquire a whole company. We acquired manufacturing assets. We acquired pretty much all their R&D on the crop protection side. So, the integration has been done in pieces, mainly by function. The front end of the business – commercial, marketing, customer services, technical services - was integrated within the first two months. Then in things such as R&D, we actually folded FMC’s R&D under the acquired R&D. Dr Kathy Shelton, our head of R&D, came from DuPont. So that was almost a reverse takeover in that sense. The areas that we are still integrating are big functions and supply chain. That is mainly because we ran two different SAP systems. So, we are moving to the latest cloud-based ERP - SAP S/4HANA. We go live with a big pilot in July in Brazil, and then, we bring on the first phase in October and the second phase in February next year. That’s caused some delay, but that was a planned delay. That has not held back the business, as you can see from our growth rate.
PB: Both acquisitions were quite different. Cheminova was more of a geographical expansion type of an acquisition. We needed more of a presence in Europe, and in Asia. That’s what Cheminova brought to us. It was also done at a time when many markets, especially Brazil, and the ag industry were experiencing a big downturn. We had to create a lot of cost synergies. It required significant cost savings and we had to eliminate some $160 million of costs. The DuPont deal is a growth acquisition. We received a wide portfolio with many patented molecules. We were in a growth mode from day one, unlike the Cheminova one where we were in a cost-cutting mode. The second acquisition definitely has been more fun.
SR: While the acquisition gave you the largest-selling insecticide globally, it also created a skew in your portfolio with insecticides making up more than half of sales. Do you view yourself as a dominant insecticide player or would you be making efforts to balance out the portfolio?

MD: Yes, we are around 57% insecticides, some 31% herbicides, and the rest is fungicides [7%] and plant health. It’s not a bad position to be in. As you mention, Rynaxypyr [trade-mark name of chlorantraniliprole] is the biggest insecticide. But it is also the second-biggest molecule after glyphosate. I believe we are number one in the world in insecticides. We have a very strong herbicide portfolio, built around some good molecules as pre-emergent herbicides, and then, we have a development pipeline, which includes herbicides as well as fungicides. So, I think over time, you will see us getting more balanced. But I’m not worried about the dominance of insecticides in our portfolio. The acquisition has been a dream acquisition for us.
SR: Talking specifically about Rynaxypyr and Cyazypyr [trade-mark name of cyantraniliprole], their patent protection would begin expiring within 3-5 years. Patent expiry for Rynaxypyr in markets including the US, China and India begins in 2022 while that for Cyazypyr in those markets begins in 2024. Patents in other markets including Brazil and the EU expire somewhat later. How do you plan to maintain your dominance? What are some of the strategies that a company typically employs in such a scenario?
MD: When you think about patent expiration, these molecules come off the primary composition of matter patents in the years mentioned, but these come off later in other countries, all the way through to 2026. The original composition of matter patent is not a cliff, it is more of a glide path. Built around that is a patent estate, which is very deep and very broad, relating to other products that go into the making of these molecules, manufacturing processes, formulations and application use. So, we have a very big suite of IP space. We intend to use that vigorously to defend these molecules. That is one piece of the strategy. The second piece that we employ depends on FMC’s strengths in formulation capabilities. It was one of the advantages of bringing the DuPont and FMC R&Ds together. The DuPont assets comprise world class research and discovery. The legacy FMC piece had world class formulation capabilities. We are going to apply those formulation capabilities to make different types of products and will fragment that market. So, formulating, IP space, manufacturing base and knowledge, those are elements of a broader strategy we will use to defend those molecules. But by defend, I don’t mean that we will just sit there. We intend to grow those molecules post patent. Also, they are highly complicated molecules to manufacture. So, if someone thinks, ‘I’ll go and make some Rynaxypyr’, well, good luck with that.

[FMC is targeting growth of around $600 million from its diamide insecticide business by 2023. Of that, some $370 million will come from growth in current markets where treated area is low, around 200 new registrations and expansion of current registrations will bring in some $130 million, and around $100 million will come from innovative formulations, product concepts and application technologies.]

PB: For us, diamides bring in some $1.4 billion of revenues. We are, and will be for a long time, the largest producers of diamides in the world. Consequently, our manufacturing cost will be lower than anyone else trying to manufacture their own products. It may be better for them to deal with us and for us to supply them the molecule than for them to try to manufacture it themselves at a great cost. That is one of the main differences between the agrochemical and pharmaceutical industries. There is a post-patent expiry cliff in pharmaceuticals, which you don’t see in agrochemicals.
MD: I’ll give you the example of sulfentrazone. It’s a pre-emergent herbicide. It came off patent ten years ago. We have continued to grow that product in the mid- to high-single digits. It’s worth around $400 million to us today and continues to grow. There are generic entrants into that market, but we hold that dominant position because of some of the strategies I mentioned. Another example is clomazone [herbicide]. The post-patent scenario is a major focus for us and we have teams working on that constantly. We will make sure that the franchise continues to grow after 3-5 years.

FMC’s historical post-patent performance

Active ingredient

Years since patent expiry

Volume growth since patent expiry (CAGR1)

FMC market share

Sulfentrazone

10

10%

> 65%

Clomazone

14

5%

~ 70%

Sulfonylurea herbicides

12

5%

~ 70%

1 compound annual growth rate.

SR: What has been the impact of the acquisition on your geographical sales break-up. Has that changed drastically as well?

MD: The acquisition was quite complementary geographically. Not only did we get R&D and technology, we also got manufacturing assets in different parts of the world that we did not have earlier. From a sales point of view, there were more sales of the acquired assets in Asia than anywhere else in the world. So, if you look at our regional break up now, we are almost perfectly balanced – around 25% of our revenue comes from each of the four regions around the world. That’s pretty unique and affords us great predictability. If you look at the first quarter, the weather in the US was wet and cold and everything was delayed. Yet, the weather in Europe has been spectacular. We still grew in the US, but we had a very strong Europe. There was very dry weather in Australia, so parts of Asia were not in good shape. But we grew in every region in the world. That geographic balance is very important for our future growth.
SR: What are FMC’s mid-term growth targets?
MD: In our five-year plan through to 2023, we have a revenue target in the range of $5.7-6 billion. That assumes a growth of mid-single digits [percentage], which is at least twice the market growth in the next few years. It’s a broad-based growth plan with three components to it. Firstly, there’s the core business, which we expect to grow by $700 million to around $1 billion. Secondly, there are formulations, which are in the $400-500 million growth range. And then there are new active ingredients coming out of the pipeline. They don’t really hit until the last couple of years of the plan and they are in $200-300 million range. The main point I would like to emphasise is broad-based sustainable growth on three fronts - geography, products and crops. We are probably one of the few companies that have an interest more in niche crops than row crops. By 2023, the shape of our portfolio will be that soybeans will account for less than 20% of the portfolio, corn [maize] 9%, cereals and rice 13% each - everything else is niche crops.

FMC’s growth plan to 2023 from current products

Product group

Approximate revenue in 2018 ($ million)

Growth to 2023 ($ million)

Diamide insecticides

1,450

450-550

Pyrethroid insecticides

300

100-150

Other insecticides

650

30-50

Herbicides

1,300

80-120

Rest of the portfolio

500

70-100

Total

4,200

700-1,000

FMC’s growth plan to 2023 from new formulations

Product group

Approximate revenue in 2018 ($ million)

Growth to 2023 ($ million)

Diamide insecticides

1,450

100-125

Pyrethroid insecticides

300

50-75

Other insecticides

650

40-60

Herbicides

1,300

100-125

Rest of the portfolio

500

100-125

Total

4,200

400-500

SR: Have we seen the end of the big M&As within the industry?
PB: If you look at the industry, there are five innovation-based companies: Bayer, BASF, Corteva, Syngenta and FMC. We have another, what I would call hybrid company – Sumitomo Chemical. And then you have generic companies. For the foreseeable future, we do not think that there will be any consolidation in the five innovation-based companies for the simple reason that the European Commission will not let further consolidation happen. But these things change. You could have a different political administration at the Commission a few years down the line and it could have a different view on anti-trust matters. But not in the foreseeable future. It’s hard to anticipate what Sumitomo will do. Japanese companies do not like to sell assets or consolidate. So, they will probably stay in a similar state. But I wouldn’t be surprised if we see more consolidation within the generic sector. Size matters for them, economy of scale matters. Apart from the consolidation of UPL and Arysta, there has not been a lot of movement there. I would expect to see in the generic sector what we saw happening in the innovation-based part of the industry. For FMC, we are unlikely to consolidate further as we don’t want to move into generics.
SR: Has FMC been impacted by the US-China tariff war and the general rise in prices for agrochemical products coming out of China in the last year or so?
PB: Government action in China last year led to great restrictions on industrial parks because of environmental issues. That has been impacting the agricultural industry because there was less manufacturing of active ingredients as a consequence. That was compounded by greater transportation costs. All that raised prices. We were facing about $140 million of extra costs due to this situation. This year, there was another problem because of an explosion that took place in March, which led the government to shut down the entire industrial park [the explosion occurred at Chenjiagang Industrial Park in Yancheng in China’s Jiangsu province]. All ag companies had production bases in the park and we had one of the big top processors impacted and shut down. We are tracking the progress but it’s a decision to be made by the Chinese. Then there is this whole tariff situation. We have a large part of our products made in China, which are despatched around the world. When a 10% tariff was imposed by the US Trump administration, it increased our costs by $10 million. If it moves to 25%, it’s going to increase them by another $10-12 million. So, we have been in a situation of rising raw material costs from China because of those two reasons.
SR: Ideas about sustainability and “natural” products have been putting pressure on the agrochemical industry. Do you see some kind of an existential threat to the industry? Are you taking any specific steps to come across as a “green” company?
MD: We are a chemical industry and it is a fact that we are feeling pressure from society. The reality of the situation is, you need chemicals, not only in the ag but in many industries. We do understand the pressure, but the notion of being green can mean many different things. The world will not feed 7 billion plus people going to 10 billion with organic farming. Our job as an industry is to get across the value of those chemistries. And from a research point, to bring out more targeted and softer chemistries where we focus on the environmental impact of our products. Biologicals play a role in that, not only as standalone products, but as sophisticated formulations with synthetics. Fundamentally, we are a chemical company and will face these challenges.
SR: What are your views on the buzz about digital agriculture? Is FMC working in this area?
MD: We have been watching this sector for some time. Last year, in October-November, we engaged with BCG [Boston Consulting Group] on a full-blown study of what precision ag is around the world, how it is developing, and how, or not, FMC should play in that space. We are coming to the end of that project and are arriving at the conclusion that we will be playing in that space. But we’re going to do it in a very measured way. We’re putting a team in place internally that will support the business and grow it. We already have some applications that we practise. We see the area developing in two ways. Firstly, there is the notion of an ecosystem. That involves companies that are building platforms. We will not do that. I don’t think we have the breadth of technologies to be able to do that. But we will engage with those platforms. Where those platforms are third-party based, we will provide crop protection chemistry and linking in to those platforms. Secondly, we will be making point-to-point solutions. For instance, in Europe, we have a pest detection process called Evalio, and that is an early warning alert for growers about pests in their crops. We then go in and recommend what to spray. We are going to expand those types of applications. We are not going to go in for major acquisitions in this area but will be making strategic investments in technology and people to help us provide those services to the industry.
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