Bioenergy PROFITS Principles: Reality, and Codexis

REALITY – How Broad is Your Customer Platform?

Bioenergy PROFITS Principle - Reality

Successful companies build core areas of content.  This may be a technology platform or a basic product upon which to expand. This core is the basic element though you may later customize your offerings,

What can you do to deal most effectively with reality, especially when you have other plans?

• Create the foundation
• Face facts
• Honker down to develop new potential offerings

What is your core capability?  Can you build upon it?  Are these core capabilities unique in your industry?

Create the foundation

All Blackberrys are PDAs and differ from an iPhone’s application.  Though there are many versions of Blackberrys, they all are built on the same data driven foundation.

Codexis and other biofuels companies that we’ve recently featured start with a technology that is applicable to pharmaceutical and bioindustrial/biofuel industries.  Though this may not be the initial plan, these companies are ahead of their competitors.  They are able to build upon a foundational platform and then add additional relevant processes for varied customers.

Codexis, for example produces intermediaries to make chiral alcohols, esters, nitrates and other products which serve to improve therapies, product safety and efficacy.

And companies do not have to do this alone.  Creating strategic alliances make good sense for the purpose of companies complementing their core competencies and forming a potentially broader customer base.  Codexis does this to optimize enzymes through its molecular breeding technology and creating biocatalyst pathways for pharmaceutical partners.  A senior executive states, as far back as 2006, “One idea behind acquisitions is to see if we can accelerate adoption by seeding the marketplace with off-the-shelf or wild-type enzymes that are easier for our customers to access.  Companies can then turn to us for more sophisticated optimization and process development.

The company’s technology platform includes millions of mutated enzymes and a dozen or more different reaction platforms.  They can screen compounds against actual enzymes and their own databases.  These bioinformatics capabilities allow Codex is scientists to accelerate its directed evolution process by producing the amount of gene shuffling and specific mutations needed along with the likelihood and length of time for reaching a target.

From there, pharmaceuticals in particular want to form strategic alliances and even help Codexis further its research using its own R&D resources.  For example, Codexis worked Pfizer with chiral hydroxynitrile, an intermediate in the synthesis of atorvastatin, the active ingredient in Lipitor.

And sometimes, the best of plans must stall until market conditions are more favorable.

Face facts

Companies, as well as individuals plan.  We all need a roadmap that directs us in setting and reaching our goals.  However, sometimes plans and reality do not mix well.  Each time there is a conflict between plans and reality…..reality wins.  We can say this builds character.  However, no matter what story we tell ourselves when faced with this dilemma, we must adapt and work with the reality of the market, our customers, our employees and our finances.

Codexis did not go forward with a planned IPO in 2008, even though it already signed papers with the Securities and Exchange Commission.  As disappointing as that was, Codexis realized that market conditions did not portend well for success.  Raising up to $100 million was not realistic in an economy where investors were bearish.  The company had already raised over $75 million in private equity, and included investors from BioOne Capital, Chevron Technology Ventures, CMEA Ventures, Maxygen, Pequot Ventures and Pfizer.

Other biofuel related companies, including Iowa-based Renewable Energy Group, a biodiesel producer, intended to raise $150 million and Seattle-based Imperium Renewables, also a biodiesel producer also set aside their IPO, which intended to raise $345 million.

Codexis CEO, Alan Shaw states, “I don’t believe that venture-backed companies can compete in energy,” he says. “The VC model doesn’t work in this space.”  As for Codexis, says Shaw, “We think our process will be up and running and making money for people by 2013.” In a partnership with Royal Shell, Codexis aims to be first to market with a next-generation biofuel. In 2006 and 2007, Shell invested $33.5 million for a 13% stake in Codexis; it made an additional equity investment (the amount was undisclosed) in March this year. Shell pays Codexis’ biofuels research costs and will pay a royalty upon commercialization.

Shaw says Codexis is on firm ground, in large part because of the Shell deal. It already has revenues–$50 million in 2008–from its biocatalyst and enzyme business with pharmaceutical companies like Pfizer.

Smart companies hedge their bets and bide their time, usually improving their existing processes and products, as well as streamlining and cutting costs.

Honker down and develop new potential offerings

Business cycles offer us the opportunity to focus our company internally and to sometimes focus on the external market and our customers.  Both activities are important. We may not always like the timing of the market and we may prefer to be market driven than to focus on improving our process.  Learning to adapt and developing flexibility presents us with the opportunity to be more innovative, financially prudent and streamlined as we learn new ways to customer oriented.

Cutting-edge chemical processes are expensive and have long development timelines.  Codexis, like other companies, can always become a better strategic partner through better research and development and marketing efforts.  Shortening process development and reducing costs also provide more time and financial resources to improve existing manufacturing processes.

During the current downturn, Codexis is expanding its product offerings to target the emerging market for carbon capture and storage, according to CEO, Alan Shaw.  Codexis plans to market an enzyme that helps captures carbon dioxide from smokestacks of coal-fired power plants. “Coal is not going anywhere fast,” Shaw said. “There’s an urgent need to take carbon dioxide out of coal-fired power stations.”

Coal-fired power plants provide about half of the electricity in United States, but account for about 80 percent of carbon dioxide emissions from domestic power generation, making them top targets for environmentalists.  Coal companies, governments and environmental activists are hoping for breakthrough technologies that will help trap, transport and bury underground carbon dioxide, the main greenhouse gas blamed for global warming.

Shaw said the company, which also counts General Electric Co and Pfizer Inc as shareholders, has successfully completed testing its product in the last couple of months and is looking to commercialize the technology.  ”We need a partner and are actively talking” to companies, he said, citing a huge interest in the market for such a technology. “The market is meeting us more than halfway.”

Codexis is seeking a partnership with an industrial equipment maker that would help engineer a system to introduce the enzyme to the carbon dioxide on the smokestacks.

A company like GE could be a great partner, Shaw said, but he declined to say if Codexis was in talks with the industrial conglomerate. Shaw said the company plans to aggressively scale-up its plans for the carbon market in 2010.

No commercial scale projects exist to demonstrate the carbon capture and storage technology, but the European Union has pledged to have 10-12 pilot plants in operation by 2015.  The U.S. Energy Department is also providing up to $408 million in funding for two projects aimed at developing clean coal technologies. “They have to put a price on carbon for it to truly work,” he said. The air sector has the most potential if concrete goals for carbon emissions are put in place at the international talks on climate change in Copenhagen in December, Shaw added.

In Summary:

Can you develop your abilities to create the foundation, face facts and

honker down to develop new potential offerings

Today’s topic, Reality is one of the seven Bioenergy PROFITS Principles.  This series highlights proven principles to running your business more effectively (from the newly released book, run Your Business Like a Fortune 100: 7 Principles for Boosting PROFITS, by Rosalie Lober, Ph.D.) and illustrates key points of the successful company, Codexis develops biocatalysts for the pharmaceutical and biodiesel industries. Its technology produces biofuel from plant material and is also working with other markets to use its technology to manage CO₂ emissions from coal-fired power plants and treat wastewater.

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