The Biobased Chemicals Summit in San Diego wrapped up yesterday, and the topic that speakers and attendees kept circling back to was money. Is is available, how does my company get it, where should we invest it? I still have a mountain of material to sift through, but I pulled out a couple of key points in the interim:
- It’s a radically different IPO market than a year ago, and the outlook for those in the pipeline are uncertain.
A year ago, biochemical companies like Gevo and Amyris launched at the high end of their offer range and did well (initially at least; Amyris was at one point up 100% over its offer price). Companies that maybe would have waited to hit a milestone or two before registering raced to file, either to ride that early momentum or beat competitors (who could fail and forever tarnish public perception).
Speakers said that while it is too early to tell how successful those IPOs in the pipeline will be, what is certain is that they will have a tougher go of it than Gevo and Amyris. Investors now have the upper hand. Even in the overall IPO market, offer prices have been below range. This is likely to continue, particularly given ongoing macroeconomic uncertainty.
Oh, and IPO money is expensive. Bankers advise against using those funds as the majority financing for commercial assets.
- The dumb money is gone.
The biochemical industry has learned from previous mistakes and begun to mature. Investors have as well, and that means companies are under intense scrutiny and have to do all they can to derisk.
“Investors are looking for partnerships, joint ventures, a capital-light strategy, and off-take agreements,” says Sundeep Patel, managing director/investment banking at Barclays Capital (London) . Investors are wary about any uncertainty surrounding feedstock access, potential dependence on third party agreements, and high capital expenses.
Viable companies also have to demonstrate differentiated, protected technologies with a sustainable price advantage over time. An experienced management team is also key, as is a strong balance sheet.
But money is still available; LanzaTech announced earlier this week that it had raised $56 million in a Series C round.
- You better have all your ducks in a row.
Anyone speaking about a biochemical displacing a petrochemical in the market will provide a litany of attributes needed to succeed, the most important being ‘Don’t be new and definitely don’t be more expensive.’ But that doesn’t fill two days of panels, so many of the more established firms offered additional advice:
Don’t rely on subsidies to be cost-competitive. “The government giveth, and the government taketh away.”
Ink committed off-take agreements, showing potential investors that, if the first plant gets build, there are customers. Gevo has sold most of its initial isobutanol capacity to Sasol; Myriant’s CEO told attendees that most of its Lake Providence, LA succinic acid plant is sold out. Neither plant is online yet.
Don’t develop product-driven markets, develop market-driven products. The chemical industry wants biobased versions of familiar chemicals. If you’re producing a biobased chemical that can either be derivatized into a chemical already used in large-scale chemical manufacturing or can replace such a chemical—great. If your organisms/chemocatalytic process can produce it directly—-even better. For example, biobased succnic acid can replace petroleum-based succinic acid. It can be used in place of adipic acid in polyurethane production (no extra processing needed). Or it can be converted to 1,4-butanediol, itself a chemical with a large market in diverse applications.
Find a partner that brings something you need to the table, like downstream market knowledge. This may have felled bioplastics like PHA. Telles, a jv dissolved earlier this month, consisted of an agribusiness firm and a biotech start-up. Plastics manufacturers understand that thermoformers are cost-conscious and reluctant to switch materials Companies like Genomatica are partnering along the supply chain to bring in the competencies is needs; it has gained feedstock access knowledge through its partnership with Tate & Lyle; scale-up expertise from its deal with Mitsubishi, and understanding of downstream markets for packaging applications through its Novamont jv.
So, we need to talk. This isn’t working out. I’m taking the $300 million commercial-scale plant, you can take the intellectual property and vacation photos.
Archer Daniels Midland (ADM) told Metabolix earlier this week that it was terminating their Telles bioplastics jv−and ending production on its behalf−effective, February 8, 2012. The business isn’t delivering sufficient results now, nor is it expected to deliver sufficient results within a reasonable timeframe, ADM says.
Metabolic executives, clearly surprised and saddened, told analysts on a conference call earlier today that the company is evaluating alternative business models, but will be unable to meet customer demand in the near-term. All Metabolix technology that was used in the joint venture, including intellectual property rights, will revert solely to Metabolix.
Telles was formed in 2006 to produce resins based on polyhydroxyalkanoate (PHA), and a 110 million lbs/year PHA facility was brought online at Clinton, IA in late 2009. But path to commercialization was much more complicated than anticipated. The plant took more money and time to build than expected. Thermoformers were reluctant to make the necessary investments to switch to PHA. The recession hit, and the green consumers the companies expected would create a market pull for their product became less willing to pay the green premium.
Bioplastics was largely uncharted territory. Only Cargill’s Natureworks polylactic acid (PLA) jv proceeded Telles, and suffered similar growing pains. At $500 million, market development for Cargill’s resin was nearly twice as expensive as the cost of developing the technology and building the first plant. Cargill’s partners also had trouble stomaching ballooning costs and slow adoption. Cargill and Dow Chemical formed the 50-50 jv in 1997. Dow exited the venture in 2005, saying the unit had not performed as expected, and sold its stake to Cargill. Teijin bought a 50% stake in 2007, but exited the jv in 2009 amid poor economic conditions and portfolio restructuring. PTT Chemical (Bangkok) bought a 50% stake in NatureWorks in October, for $150 million.
While the innovative and entrepreneurial spirit behind PHA and PLA is often praised, the most recent class of biochemical/bioplastic firms appear to shun any molecule that’s not a drop-in replacement with large, existing markets. And if you’re not at price parity with the petroleum-based counterpart, don’t even bother pitching it.
If there’s any silver lining to be had here, it’s that Metabolix can now explore new business models, perhaps strategies that target smaller-volume, but higher-value markets. The company is also in a reasonably good cash position, and is not obligated to pay anything to ADM. Considerable investments have already been made in application development for PHA, so the company won’t be starting from square one with customers. The company also has a DOE biofuels grant for fuels produced from switchgrass, and a C4 chemicals development deal with Korean firm CJ CheilJedang.
Today’s news was disappointing. I hope Metabolix is down, but not out for the count.
Week 1 Review
The holiday hangover did not seem to curb Big Chem interest in all things biobased, with BASF and DuPont announcing investments before the first week of 2012 came to a close. BASF announced Tuesday that it was investing $30 million in cellulosic sugar company Renmatix, part of a $50 million financing round for the Kleiner Perkins-backed start-up. I spoke to Renmatix’s CEO, who told me an industrial-scale plant will likely be announced in the first half of this year. Renmatix’s technology breaks down cellulose through supercritical hydrolysis, a process by which heat and pressure are applied to a slurry until the chains of sugar break down into the smaller components usable by biofuel and biochemical producers. This is all done without enzymes and pre-treatments, etc., and seemed a bit too good to be true when I first covered the company in September. But a $30-million investment from the world’s biggest chemical company indicates Renmatix is definitely onto something.
Anyway, I wrote more about Renmatix in my previous post, so I’ll jump right to a roundup of other items from the week:
Sorghum. It’s so hot right now.
Efforts to develop high-biomass sorghum for biofuel/biochemical feedstock appear to be stepping up. Sorghum doesn’t need a lot of water/chemicals to grow, can be planted on land not suitable for food production, and produces “tremendous” amounts of biomass. DuPont announced it will collaborate with NexSteppe to develop sweet sorghum and high-biomass sorghum hybrids suitable for use as renewable feedstock. Under the terms of the deal, DuPont’s Pioneer Hi-Bred business has made an undisclosed equity investment in NexSteppe and will provide “knowledge, resources, and advanced technologies” to help the company accelerate the breeding and commercialization of the hybrids in the U.S. and Brazil.
Chromatin says it was awarded a $5.7-million DOE grant to develop new varieties of sweet sorghum for use as energy-rich, low-cost feedstock for transportation fuels. Major seed firms, including Monsanto, DuPont, Dow AgroSciences, Syngenta, and Bayer CropScience, have licensing deals for Chromatin’s gene-stacking technology.
Zeachem Starts Up Oregon Biorefinery
ZeaChem (Lakewood, CO) says it has begun operations at its 250,000 gallons/year demonstration biorefinery at Boardman, OR. The $28-million facility is being tested for the production of C2 chain chemicals, including ethyl acetate and ethanol from a feedstock of poplar trees and other non-food biomass. The technology, based on a hybrid biochemical and thermo-chemical process, will subsequently be applied to the production of a range of C3 through to C6 molecules including ethylene, ethylene glycol, and propylene, among other molecules.
For more on Zeachem, see Chemical Week’s in-depth interview with CEO Jim Imbler.
Rubber From A Desert Shrub?
Yulex Corporation, a Phonenix, AZ-based start-up with technology to extract latex and resin from guayule, says it has been granted a patent covering the cultivation, harvest, defoliation, etc. of the desert shrub and the subsequent chemical processes to produce latex. The company says its rubber is an ultra-pure, high-quality and high-performance emulsion and able to replace petroleum-based synthetics such as polyisoprene and polyurethane as well as tropical Hevea materials in medical devices and other products. Yulex is expected to bring a natural rubber production facility online at Chandler, AZ early this year.
Virent Increases Patent Protection
Biocatalysis firm Virent (Madison, WI) says it was granted five patents covering its catalysis platform, three of which relate to its ongoing development deals with Coca-Cola Company and Royal Dutch Shell. Virent’s para-xylene platform was recently chosen, along with Gevo and Avantium technologies, to help the beverage giant convert its supply chain to 100% renewable polyethylene terephthalate; Virent’s collaboration with Shell covers the conversion of biomass feedstock into gasoline. The additional two patents cover a “range of other industrial chemicals and chemical intermediates” using Virent’s BioForming process.
Verenium Launches Oilfield Services Enzyme
Verenium (Cambridge, MA) says it has launched its second enzyme product for oilfield services. The alpha-amylase, trade named Vereflow, removes filter cake in drilling operations and is effective over a wide temperature and pH range. Fermic (Mexico City) toll produces the enzyme, which Verenium says has an addressable annual market of $20 million in the U.S.
A cellulosic sugar start-up that says it can extract sugars from cellulosic sugars with just heat, pressure and water (and a year ago few knew even existed) announced this morning it has closed a $50 million financing round led by the largest chemical company in the world. BASF, which posted $63 billion in sales in 2010, invested $30 million in Philadelphia-based Renmatix. BASF says the technology could help it broaden its use of renewable raw materials and improve the cost of its supply chains.
Renmatix’ technology breaks down cellulose through supercritical hydrolysis, a process by which heat and pressure are applied to a slurry until the chains of sugar break down into the smaller components usable by biofuel and biochemical producers. The process does not use any of the pretreatments or enzymes companies like Codexis, Genencor, and Novozymes have been spending tons of cash developing.
The low cost and simplicity of Renmatix’ process has made it a front-runner in the cellulosics market, CEO Mike Hamilton told me earlier this week. “I think a lot of people fell in love with the biology of enzymes, but hardcore chemists like BASF recognized the importance of chemistry in solubilizing sugars. Our process is very elegant. There’s simplicity to it, and we learned how to drive the process efficiently.” Hamilton says the funds will be used to build its first industrial-scale plant, which should be announced in the first half of 2012.
Until recently, the Kleiner Perkins start-up had been “stealthy” (by it’s own admission). It opened a technology center at King of Prussia, PA in September, an event that featured technology VC superstar John Doerr and Amyris CEO John Melo, among others.
Hamilton says the also deal validates the company’s technology and follows a recent trend for big chemical companies to expand into renewables. “Big oil firms like Total and Shell took an early position in renewable startups,” he says. “Now we’re seeing interest from big chemical companies,” with billion-dollar deals like DSM’s acquisition of Martek Biosciences and DuPont’s recent purchase of Danisco.
“This is key because big chemical companies are going to drive adoption for these materials—not start-ups,” Hamilton adds. But whether the end product is a chemical or a fuel, “cheap sugar gives you an enviable position,” Hamilton adds.
Hamilton says Renmatix will also use the funds to optimize the process for other feedstocks. The company currently uses woody biomass at its demonstration-scale facility at Kennesaw, GA, and is building a technical center at King of Prussia, PA.
The dust has settled on the holidays, and my presents have been neatly divided into the “Keep” pile and the “For the love of God, I made a list, why didn’t they stick to the list!?” pile. The EPA issued its Renewable Fuel Standards, and I know what wasn’t under its tree: 490 million gallons of cellulosic ethanol. The 2012 RFS calls for 8.65 million gallons of biofuels produced from non-food sources be blended into U.S. transportation fuels in the coming year, less than 2% of the 500-million gallon target the Energy Independence and Security Act of 2007 (EISA) envisaged would be produced in 2012.
I’m not going to belabor the point; the fact that technology has struggled to bring down the cost of extracting sugar from plant wastes is not news to anyone, and there is no shortage of talent and cash being thrown at the problem. I’m merely making a point about managing expectations and setting realistic goals. EISA called for 250 million gallons of cellulosic biofuels in 2011, the EPA in late 2010 revised it to 6.6 million gallons, and as of June 2011 0 gallons had been available (EPA says data on the rest of 2011 is incomplete).
Complex supply chains are still developing, government policies remain uncertain, and costs still need to come down significantly. But it’s a step in the right direction.
Looking ahead, the EISA anticipated 3 billion gallons of cellulosic biofuels would be produced in 2015. In the spirit of unmanaged expectations, I’m going to assume by then biofuels will be powering the hoverboards Robert Zemeckis promised me when I was 6 (and will be on my 2015 Christmas list).