UK Edition
Questor: Animal geneticist’s risks too great to be a cash cow
There is life after Picston Shottle. The top stud bull died in 2015, just months after being put out to grass. In 15 years’ service for Genus, the animal genetics company, Shottle became one of the first UK bulls to produce and sell more than one million doses of semen. He left an impressive legacy of 100,000 daughters in dairy herds across 22 countries – and a company racing to capitalise on new technology.
Genus breeds and sells genetically superior pigs and offers top-quality bull sperm to livestock producers. The world has billions of meat-eating mouths to feed and farmers operating at scale are keen to boost efficiency and profitability. Genus has a market share in excess of 25pc for pigs – excluding China – 25pc for beef and about 6pc of the dairy market.
Increasingly, though, investor focus is turning to the breakthroughs the company is hoping to make that could be transformative in the long term. It is already scaling up. Research and development costs rose by £6.2m to £21.9m in the first half of the year.
Gene editing has captured the most attention. By snipping and replacing strips of genetic code from an animal’s DNA, it is possible to breed disease-resistance herds that improve yields.
Genus has signed an exclusive global deal with US firm Caribou Biosciences to use its Crispr-Cas9 technology in pig and cattle breeds. In February, it announced that a project with the Roslin Institute – remember Dolly the Sheep? – had produced pigs that may be protected from PRRS (Porcine Reproductive and Respiratory Syndrome), which causes severe breathing problems and breeding failures at a cost to the European pig industry of more than £1.3bn a year.
Commercialising the science is five years out, according to Karim Bitar, the Genus chief executive and former president of Eli Lilly in Europe, who has injected some momentum into Genus since his appointment six years ago. There are regulatory and ethical hurdles to leap over.
Talks are ongoing with the US Food and Drug Administration over the design of trials. Much slower is the European Commission, which has long been considering options for the regulation of gene-editing – that promises to increase crop yields too – but its arm is being forced by France, which has referred the matter to the European Court of Justice. Some progress is due next year. And, even if it is legal, will everyone want to chomp through a gene-edited bacon sandwich?
A second advance has been mired in legal action. The company is expected to press on this autumn with the launch of its own bovine sexed semen product – which tilts the odds strongly in favour of producing female calves for dairy herds – despite fresh patent infringement proceedings being filed against it by US rival Sexing Technologies. Genus has been engaged in a battle to break its rival’s monopoly. By introducing its own platform, Genus should save £10m a year in royalties. Its third innovation is IVF for cows, after it bought control of the leading provider in this area, In Vitro Brasil, two years ago.
There is no saying that all of this activity will drop to the bottom line. While convinced there is “significant potential value” ahead, analysts at HSBC ascribe a 25pc chance of success to PRRS and 50pc to IVF. Meanwhile, the core business will carry on growing profits. N+1 Singer expects underlying group earnings to rise from £57.7m last year to £69.7m in 2019.
However, trading has been imbalanced lately. Pigs continue to bring home the bacon, reporting 7pc sales growth at constant currencies in the first half. Divisional profit margins are strengthening. It is a different story in bovine, where corresponding sales dropped 4pc because of the tough dairy market and increased competition. Here, barriers to entry are lower. Divisional operating profit tumbled 22pc and a new dairy chief has been drafted in to boost performance. Annual results are due in early September.
The problem is one of valuation. Genus shares have been directionless for a while, coming off 15pc from last September’s high. But they are still trading at 26 times next year’s forecast earnings. That makes them expensive, given how many uncertainties exist before these new technologies can become as reliably productive as the late Picston Shottle. Avoid for now.