The Road Not Taken and Genomatica’s Renewable Chemicals Strategy
A few weeks ago, BP cancelled a $350 million project in Highlands County, FL, that was supposed to produce 36 million gallons of ethanol a year from “energy grasses” and other high-cellulose plants. In a statement at the time, the global energy conglomerate said it was refocusing its U.S. biofuels strategy on research and development—and on licensing its advanced biofuels technology.
Thus ended an ambitious effort that began with much optimism five years ago when BP disclosed a strategic partnership with Verenium (Nasdaq: VRNM), the industrial biotechnology company now based in San Diego.
“Everybody was doing advanced biofuels back then,” recalls Christophe Schilling, the CEO and co-founder of Genomatica, another San Diego industrial biotech. Crude oil prices soared to record highs in 2008, and rampant oil speculation dominated futures trading on the New York Mercantile Exchange. “There was high interest in biofuels in terms of energy security,” Schilling says. “We had this major issue.”
It was about that same time that Genomatica developed the strategy it has been following for the past five years—using the tools of biotechnology to genetically engineer bacteria to manufacture intermediate chemicals like 1,4-butanediol (BDO) in fermentation-based manufacturing processes. BDO is a high-value chemical, usually produced from crude oil, and an essential ingredient needed to make polyesters, polyurethanes, spandex, and biodegradable plastics.
For Genomatica, biofuels represents the road not taken, and that has made all the difference.
I recently met with Schilling and Genomatica CFO Michael Keane, and the outlook they describe sounds decidedly more upbeat than the anguished laments coming out of the biofuels sector. Just a few weeks ago, for example, J. Craig Venter declared that biofuels are dead unless the federal government adopts a carbon policy.
In developing Genomatica’s business model in 2007 and 2008, Schilling says the company chose a road that has skirted the biofuels bust. At that time, Genomatica also decided against building a commercial-scale facility and producing its own industrial chemicals from energy grasses and other sustainable raw materials.
“We were not going to be a chemical producer,” Schilling says. “We would be a chemical technology licensor,” comparable to UOP, a business now owned by Honeywell that holds thousands of patents in petrochemical cracking, processing, refining, and equipment design.
To advance its technology, Genomatica is looking to license its intellectual property, and the company has been forging strategic alliances with industry partners around the world. In July, for example, Genomatica signed a partnership with the Italian chemical giant Versalis and Novamont, an Italian company that specializes in making bioplastics from renewable agricultural raw materials, to produce butadiene—the raw material needed to make the synthetic rubber used in tires, footwear, and other products. “The focus really is to be the [sustainable] technology partner for the chemical industry,” Schilling says.
“What we did not know [five years ago] is that oftentimes to license technology, the licensor sometimes has to put up some capital to help build a pilot plant,” Schilling says. In another deal with Novamont, for example, Genomatica is making a minority investment in converting a lysine fermentation plant near Venice into a commercial-scale, sustainable butanediol production plant.
Still, Schilling says, “Since we don’t own and operate facilities, we don’t have these large expectations for [capital expenditures] and so the company requires less capital.” CFO Keane adds that as an industry partner, Genomatica’s disruptive technology poses less of a threat, “Because we’re in partnership with the chemical industry, we’re not looking to disrupt. We’re working to transform.”
A few months ago, Genomatica came to its own fork in the road—and decided to forgo its long-planned IPO and instead raise $41.5 million in a new venture round led by Versalis, with existing investors TPG Biotech, Mohr Davidow Ventures, VantagePoint Capital Partners, Draper Fisher Jurvetson, Alloy Ventures, and Waste Management joining in.
Without directly addressing the decision to remain private, Schilling acknowledges that Genomatica has been sensitive to market uncertainties and investor skepticism. Of six public industrial biotech companies (Amyris, Gevo, Codexis, Solazyme, KiOR, and Metabolix), Schilling notes that four have had major execution issues.
“We’re very mindful of that,” he says. “There’s a ‘Show me’ mentality. You’ve got to prove that the technology works at commercial scale.”
As a result, Genomatica is now focusing its resources on process improvements. The additional capital has enabled the company to focus on genetically improving the ability of Genomatica’s microbes to break down cellulosic plants like miscanthus, sawgrass, sweet sorghum, and energy cane, which can be grown at low cost. Extracting what Schilling calls C5 and C6 sugars from such plants can also produce impurities that are toxic, which poses another challenge the company plans to address.
“With biomass as feedstock, the hope is to reduce the cost of production maybe by 50 percent,” Schilling says. Genomatica’s existing technology for producing BDO compares favorably against the petrochemical industry’s current production costs, Schilling says, but the hope is to get even more efficient. “If we can develop our next-generation approach to BDO, we can dramatically lower costs—which would disrupt the market.”
And then there is Genomatica’s pipeline of other products.
“Our intellectual property portfolio covers over 20 basic and intermediate chemicals,” Schilling says. “So we have a lot of opportunities to go after besides BDO and butadiene. The company has a lot of depth in the strategy that we’ve laid out.”