Resistance is futile: Codexis and the chase for low-cost cellulosic sugars

February 4, 2011 |

In California, Codexis yesterday announced a stunning 29% increase in revenue,  to $107.1 million, driven by a 77% increase in sales of pharmaceutical products, from $18.6 million in 2009 to $32.8 million in 2010, and increases in collaborative R&D and government grants. With operating expenses growing by only 2 percent, the company swung from a $7.3 adjusted EBITDA loss in 2009 to $9.9 million in adjusted EBITDA for 2010.

What’s driving the numbers in Redwood City?  “We achieved our technical milestones with Shell, we made our first shipments of two important enzymes to Merck and we saw substantial progress in our efforts in carbon capture and chemicals,” said CEO Alan Shaw.

The company also announced its first product move into the world of renewable chemicals and bio-based products, where it can capitalize on the technologies which it has developed in its fuels partnership with Shell. The target? The $4 billion detergent alcohols field – with demonstration of its technology expected this year and a rapid drive towards commercialization underway before year end.

But, as is always the case with Alan, our conversation after the earnings calls centered less on the achievements and earnings of the company in its new public company mode, but on the foundational future of the industry. Shareholders are getting some serious happy, with profits beginning to flow from the company (CDXS shares rose 13 percent at the opening bell this morning), but I suspect that Alan will never really, really be satisfied, short of planetary domination – maybe throw in Mars. He has to be a murderous opponent in a game of RISK.

The forces of light and darkness descend upon Brazil for the grand battle

It seems like the Digest is always burning his chaps just a little – and lately, because  in our assessment of Shell, and our take on the oil giant’s jettisoning of its algae investment, and its focus on Brazil via the Shell-Cosan JV, which is now awaiting shareholder approval before becoming a reality – we cast the battle for Brazil as between the forces of Total and Amyris, vs the forces of Shell-Cosan and Virent.

“There are a lot of new applications and technologies for making all sorts of speciality chemicals and materials, as well as fuels. But today, Jim, sugar is trading at around $700 per ton, and you get at best a yield of 66 percent – the waste is CO2, and the best that anyone really does is around a 50 percent yield. Where does that put you in terms of the economics? With ethanol selling at around $750 per ton, it’s upside down. If you are in the business of sugarcane, at these prices, you are going to be selling into the sugar market, and converting it into ethanol where there is a mandated market. ”

Sugar is the new oil

“Sugar is the new oil,” Shaw continues. “There are companies that want it for food products, for fuels, for bio-based products. Where are they going to find the sugar? It’s the elephant in the room. You can have any great technology you want to convert sugars into products, but what is any of them worth if you do not have low-cost sugars, which you are only going to get in the long run by developing a path to sugars from biomass?”

“The future has to be cellulosic sugars, where you can be looking at costs of $70 per ton, not $700 per ton. And then having a partner like Shell who has the capital and the expertise to scale the processing technology, and the downstream markets.”

Now, that’s around 3.5 cents per pound of sugar – as much as half off the lowest target price we have heard about from companies like Comet, Qteros, or HCL Cleantech, that are also chasing low-cost cellulosic sugars. We’ll have to see how that battle shakes out, in terms of who hits which price milestone, when.

The Organization of Pretty-Low-Cost-Cellulosic-Sugar Exporting Companies

But what is to prevent the cost of cellulosic sugars from becoming commoditized, and tracking the price of oil – just like waste greases have started to do, and just like municipal solid waste might one day also do? Why would anyone sell a cellulosic sugar for $70 per ton to a processor, or why would anyone sell a cellulosic feedstock to a company that can make cellulosic sugars for $20-$50 per ton, when the value that is being created is so high?

“Jim, you have to think about who controls the technology. Companies like Shell have come in, focused on the fuels market, and we have developed a cellulosic platform with them that unlocks the value of the biomass. The biomass isn’t worth a premium unless you have the technology to unlock the value, and I don’t see that companies like Shell letting the costs of feedstocks get commoditized as long as a small group of companies have control of the technology and are aimed at making low-cost fuels.”

“So I would have agreed with your article more, if you had identified Shell and Codexis as they keys to Brazil, because we are the key technology for unlocking new values in Cosan, Virent and Iogen. Iogen and Virent need the low-cost sugars, and with Cosan we have targeted bagasse – along with wheat straw – as the primary products that we want our enzymes to work with.”

Wheat straw, and bagasse? A coincidence of the feedstocks that Iogen and Cosan want to work with?

“We are feedstock agnostic. But we look at the BRIC countries, to use the Goldman phrase – Brazil, Russia, China, India – look at the massive amounts of sugar cane bagasse and wheat straw there. Those are the growing economies that have the feedstock and the internal markets for fuels and bio-based products. Wheat straw also works very well in North America, for instance in Canada with Iogen.”

What about woody biomass?

“Absolutely, we are very interested in woody biomass,” Shaw says, “the whole pulp and paper value stream, and also municipal sludge, and rice hulls. Those, along with cane bagasse and wheat straw, form the five great global feedstock sources that we think we can apply our enzymes to.”

Khosla agrees

It’s a powerful message – cheap cellulosic sugars. And Alan Shaw has agreement from, at the very least, Vinod Khosla, who wrote in his most recent assessment of the space:

“The early best answers in my opinion, based on operating costs, flexibility and scalability are sugar and gas-phase fermentation for specialty molecules, and direct-to-liquid thermochemical conversion for fuels. The fermentation pathways are excellent for producing specific chemicals and custom-designed hydrocarbons (sugars: Gevo, Amyris, LS9, Solazyme; gas-phase: LanzaTech, Coskata), and can thrive in high value markets that offer tens of multi-billion dollar markets. Some generic fermentation technologies that go after fuels directly will struggle with costs. The sugar fermentation pathways will have to wait for low cost cellulosic sugar technologies like the one HCL Cleantech is developing and a few years of experience with yield and cost optimization to go after the larger scale fuels markets.

“Though sugar fermentation is a powerful production method, I personally don’t believe that food-based sugar fermentation technologies can scale adequately to meet fuel demands. However, the sugars need not be food-based; there are several competing enabling technologies that take cellulosic biomass and convert it via hydrolysis to sugars that are pure enough for fermentation. HCL Cleantech hopes to be able to deliver $0.08 to $0.12 per pound sugar, quite competitive given the price range of mostly 10 to 25 cents per pound for the last five years.2    This type of technology unshackles sugar fermentation processes from the negative perception of the food vs. fuel-debate, and delivers more diverse, lower cost, and scalable feedstock sources, with lower price volatility.”

So what about platforms like algae?

“Well, we are not all that crazy about algae over here, to be honest,” said Shaw. “I’m an industrialist, not a venture capitalist or a scientist, and I just don’t see the economics.  I like the direct fermentation route of a company like Solazyme – that model can work – but they have the same Achilles heel as anyone else, they need the low-cost cellulosic sugars.”

Shaw’s vision  leaves open the question of the viability of direct thermochemical conversion of biomass – technologies such as we see from the Pyromaniax we have written so much about in the past year or two – KIOR, Anellotech, Ignite Energy, the technologies being developed at Mississippi State’s SERC center – but its a powerful question that Shaw poses. Just exactly how are the global biofuels technologies going to work if sugar is truly the new oil, and everyone is chasing it, unless there are companies that develop a means to unlock the value of cellulose, and by operating as a sort of technology cartel, keep the value from being passed completely through to the feedstock companies in the form of $700 per ton woody biomass, or $700 per ton municipal sludge, or $700 per ton bagasse.

To that point, exactly why is Shell pouring something like $70 million per year in milestone payments into Codexis – what does that say about Shell’s vision, and what does it say about the progress that Shell is making?

2011: Choose your partner, or swing your partner?

So I asked Alan, will 2011 be one another year of organizing the dance – an array of off-take agreements, technology partnerships, research consortia, and milestone payments – or is the year in which the industry will begin to really dance?

“Dance”, said Shaw, simply.

Of course, not much is all that simple with Alan Shaw, as befits a company chasing a target – low-cost sugars – that has proven to be the Everest of advanced biofuels (with algae oil extraction as K2, and better titer, rate and yield in hydrolysis as Annapurna). There’s a raftful of strategy at Codexis we don’t hear about – as at a couple of other companies that are positioned themselves at some of the key points along the path to the top – selling ladders at the Khumbu ice falls, oxygen at 25,000 feet, or instructions for the Hillary step.

Resistance is futile. You will all be assimilated.

Who will reach the summit? Of course, Alan might just tell you that the summit is already littered with Codexis flags – the game is over, the rest of the companies can go home now. Resistance is futile. We will all be assimilated by Shell.

Of course, Total may care to differ, and BP may snicker, and ExxonMobil and Conoco may not still care enough to even show up at the dance, much less fill out a dance card. And Chevron may think that there will be enough cheap cellulosic sugar around in the end to make the key technologies in the conversion of sugars to oils.  Companies like Qteros, and HCL Cleantech will take the view that it is hardly yet the time for everyone else to pack up all their marbles and go home, when it comes to developing the lowest-cost cellulosic sugars.

Time will tell as the year unfolds. But the summit gleams in the distance, and we surely wonder, if it is not already achieved and we are just awaiting the radio transmission from the top – who will indeed get there, and what value will accrue to the adventurers who first bring home a 5-cent cellulosic sugar? And what will happen to those who are inside the magic circle with access to all the low-cost lollies, and what will become of those who are on the outside?

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