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You may not have noticed, but until last week Monsanto (MON) was operating with a very noticeable omission in its research and development arsenal. It's a wonder it took so long to plug. Perhaps senior management was caught up with a failed bid for Syngenta and its pending merger with Bayer (BAYR.Y -2.25%). Perhaps the company was waiting for more clarity in the very public legal dispute over what MIT Technology Review called "[T]he Biggest Biotech Discovery of the Century." 

Whatever the reason for its hesitancy, Monsanto finally decided to announce that it licensed the gene editing tool known as CRISPR from the Broad Institute in Boston. The global license will give researchers at the company the ability to introduce new genetic traits -- or remove unfavorable ones -- from plants in record time and with unparalleled accuracy compared to previous and current methods.

Interestingly (and controversially), even though CRISPR results in what many consumers would consider to be a genetically modified organism (GMO), current laws don't always consider the gene-editing tool and method worthy of regulation. That means Monsanto could save years in the lab and within regulatory approval processes -- and at least $35 million per marketed trait in regulatory testing and registration expenses. But this development is full of twists and turns.

Does this affect the long-term value of Monsanto's pipeline, and therefore the decision to approve the merger with Bayer? Will the Broad Institute's ongoing legal spat with the University of California Berkeley affect the license? Could public opinion result in changes to how CRISPR is regulated and partially offset its cost advantages? 

To merge or not to merge?

I've been advocating against a Monsanto-Bayer merger for several months now. Some argue that the pending onslaught of industry consolidation will result in higher prices for struggling farmers, while others argue that innovation will suffer in the long term. I understand both concerns, but from a purely financial perspective it appears that investors are getting a raw deal. Monsanto has the best-positioned R&D pipeline and most intriguing upcoming platform launches in the entire industry. To sell for $57 billion, or $128 per share, seems like an awful deal considering the long-term potential. Investors don't appear to think the deal will go through, anyway. 

Does CRISPR add a significant amount of value to the company's formidable pipeline? Yes, in both time and cost savings. Wendelyn Jones from Global Regulatory Affairs at DuPont summed up the costs of developing a single agricultural biotech trait for GMO Answers

A survey completed in 2011 found the cost of discovery, development and authorization of a new plant biotechnology trait introduced between 2008 and 2012 was $136 million. On average, about 26 percent of those costs ($35.1 million) were incurred as part of the regulatory testing and registration process. The same study found that the average time from initiation of a discovery project to commercial launch is about 13 years.

CRISPR has the potential to lift a serious financial burden for Monsanto. In fact, this year an academic lab at Penn State University received USDA approval for a non-browning CRISPR-edited mushroom. So much for needing a giant R&D budget to innovate in agricultural biotech. 

Of course, that leads to an obvious point. While Monsanto will benefit mightily from CRISPR (and other next-generation) tools, so will everyone else. That makes the announcement of the license a moot point in the pending merger with Bayer. 

CRISPR legal battle

Books will be written and movies made about the ongoing legal dispute over the invention and use of CRISPR. Long story short, researchers from universities in California and Sweden were likely the first to discover the importance and potential of the system (borrowed from a bacterial "immune system"), but researchers at the Broad Institute in Boston were the first to file and be awarded patents covering broad applications of the invention. However, the patents were filed in the old regulatory system, which awarded on the basis of "first to discover." So now legal teams from two continents are poring over laboratory notebooks to determine which team discovered CRISPR's potential first.

There are billions of dollars in upfront licensing deals -- and billions more in royalties and milestone payments -- at stake over the outcome. If that weren't enough drama, CRISPR is widely expected to earn a Nobel Prize next year.

Monsanto investors have simpler problems. If the Broad Institute -- which holds major patents for CRISPR -- is deemed to have been wrongly awarded patents, what happens to Monsanto? Luckily, it should be easy enough to keep a licensing deal with whatever group ends up with the legal rights in the end. The three publicly traded biopharma companies pinning their futures to specific licenses won't leave nearly as unscathed.

Regulations could change...or not

Like it or not, the definition of a GMO is set by law, which means it's prone to lag behind scientific advances. That has allowed roughly 30 GMOs to escape USDA regulations because of the use of gene-editing tools. That's certainly an advantage, but it may not hold forever. The United States will soon update regulations governing GMOs to include recent biotech advances, which could push CRISPR-edited products into regulatory oversight. But change doesn't have to be a bad thing. 

We've grown a lot of genetically engineered crops since the first harvest in 1996. From that, we've learned that GMOs are inherently safe -- and perhaps even over regulated. While regulators hash out possible changes to legal definitions, they could also streamline the approval process for biotech products. Such a scenario would still likely result in net savings for companies using certain gene-editing methods compared to previous generation tools.

What does it mean for investors?

Monsanto investors should be excited about the announcement of a CRISPR license. While I suspect that the name on the dotted line may change to include a different legal owner of the intellectual property, the risks posed to the company across legal and regulatory spheres are minimal. Similarly, adding the new tools to the R&D arsenal shouldn't have an effect on the pending merger with Bayer (although I'm still against the deal).