Industrial biotech firms thrive amid financial downturn

Biotech lessons

18 August 2009 18:01  [Source: ICB]

Partnership and blockbuster technologies are the cornerstones of success in the current climate

BEING GREEN might be in vogue, but when it comes to proving to investors that your technology works in a cheaper and sustainable way, only those with good management strategies and long-term planning will survive.

This was the lesson being imparted from several industrial biotechnology companies that are thriving, even as financial backing in the overall biotechnology industry has dried up during the past year.

At the World Congress on Industrial Biotechnology and Bioprocessing conference hosted by the Biotechnology Industry Organization (BIO) in Montreal, Canada, from July 19-22, US consulting firm McKinsey & Company reported a significant slowdown in venture capital investment activity within the sector because of the global economic recession.

Patent activity in the sector also declined, noted McKinsey principal Bill Caesar.

"There is still money being spent, but not near the levels they were awhile ago," he said. "While the industry itself may feel resilient, there's reason to believe that funding issues are going to be significantly impacted over the next couple of years as gross domestic product [GDP] levels worldwide struggle to return to the levels they were a year ago."

The challenge, he added, is how companies manage themselves through this period.

On the sidelines of the BIO event, US-based companies Codexis, Verdezyne, Genomatica and NatureWorks all noted that their businesses are in good health, despite market conditions.

Codexis president and CEO Alan Shaw said the company has all the financing it needs at the moment. The company's technology, which focuses on proprietary biocatalytic processing using customized synthetic enzymes, is currently being applied in the pharmaceutical and healthcare sectors, and soon, in biofuels, carbon capture and water treatment.

"Unlike other biotechnology companies, financing is never an issue for us," said Shaw. "We have a strong balance sheet and more than what we need at the moment. The company is moving towards profitability."

Shaw emphasized partnerships with big companies as key to success. An example he cited is Codexis' partnership with Dutch oil company Shell in biofuels development.

"Our approach is to work with global leaders because they bring channels and distribution," said Shaw. "Although we've seen a slowdown in the industrial biotechnology sector because of a lack of financing, there's sufficient money for companies if they are smart and have a strong balance sheet."

NEWCOMERS WELCOME
Start-up firm Verdezyne notes the company's good growth over the last couple of years and expects another period of greater growth for the next two to three years.

Verdezyne, formerly called CODA Genomics, was founded in 2005 as a spin-out from the University of Irvine, California, US. The company designs and engineers enzymes, metabolic pathways, and microorganisms to produce chemicals and biofuels.

"Investors are confused on how they are going to get their returns"   Damien Perriman, vice president of business development, Verdezyne

Damien Perriman, Verdezyne vice president of business development, noted the company's transition in 2008 to a product-focus business from developing codon optimization tools and supplying genes to pharma and industrial biotechnology firms.

"Our goal is to improve the productivity of existing fermentation, enable cost-advantaged petrochemical replacements, and develop novel chemicals that are previously unattainable," said Perriman. "We've already achieved our proof-of-concept with our fermentation process and plan to have the validation study of that completed by the end of the year."

Verdezyne said it expects to have its ­ethanol process in the pilot plant early 2010, as well as a bio-­monomer in pilot production by 2011.

Genomatica CEO Christophe Schilling noted the financial climate as a time of opportunity. The firm has been delivering on not only its technical milestones and corporate development objectives, but also its responsibilities for cash management.

"Two years ago when we raised $20m (€14.1m) from venture capital groups, we had a very well-thought-out budget and case scenarios for how to handle different situations," he said. "We've been able to follow right on track with that plan and so we're comfortable about the current environment."

The challenge, Schilling said, is to deliver the cost-advantage potential of its renewable process technology in the marketplace and prove that it works.

Founded in 2000, Genomatica is focusing on producing the chemical intermediate 1,4 butanediol (BDO) from carbohydrates using novel microorganisms. The company plans to begin construction of a demonstration plant in 2010.

In order to attract more investors in the industrial biotechnology sector, both Genomatica and Verdezyne noted the need for a blockbuster technology.

"What this industry really needs is a significant win - not necessarily a breakthrough, but a real blockbuster success," said Schilling. "Having investors see examples of successful exits give them greater confidence to invest in this space."

Perriman added that investment money is not necessarily scarce. "It's just that investors are confused on how they are going to get their returns," he noted.

BIOPLASTIC PROFITABLE
While NatureWorks can already be considered a mature company when it comes to bioplastic development, bioplastic itself is still considered a niche, growing market.

NatureWorks said sales of its polylactic acid (PLA) resin Ingeo were affected by the economic recession last year, but have since rebounded back after January. Most of the recovery came from companies restocking their inventories, said NatureWorks CEO Marc Verbruggen.

In the second quarter of 2008, the company saw sales growth rates between 30% and 50%/year, attributed mostly to high oil prices and, in turn, petroleum plastic prices.

"After the rapid growth in the second quarter of 2008, the question now is if that is going to happen again, or are we going to see our bioplastic growth rates more in line with the depressed economy, which is somewhere in the 10-15% growth range? We don't know, and so we have to be flexible and put two business plans in place," said Verbruggen.

One, he notes, is an aggressive growth plan that assumes oil prices will go back up rapidly, and the other is a plan assuming the economy continues to grow in a low oil price environment.

"We are not saying that financing is not an issue, but we are in a very good position - not only because we are owned by Cargill, which is a large agribusiness company, but that we are not anymore a start-up firm," Verbruggen said.

"If you look at other bioplastic players who are trying to build plants and looking for capital, they are where we were in 2000. We are not in that stage anymore."

NatureWorks just doubled this year its Ingeo production capacity in Blair, Nebraska, US, to 140,000 tonnes/year. The company plans to have a second plant outside the US in the next three to five years.

Read Doris de Guzman's Green Chemicals blog

By: Doris de Guzman
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