Evolva acquires Allylix in $59M all-share transaction: what’s the impact for industrial biotech?

There’s been quite a bit of press surrounding the idea that “sugar is the new oil”, once famously described by Dr. Steven Chu as the “glucose economy”, and while the jury is still out on the economics, the technology has come along nicely.

But in the meantime, it appears to be an open-and-shut case that “new sugars” are the new sugar — and specifically that stevia might be the new sugar.

Supporters of the idea that synthetic stevia might be the big winner in the multi-billion sweetener market got a big boost this past week when Evolva acquired Allylix, one of the most interesting companies in all of industrial biotechnology and #10 on this year’s 40 Hottest Small Companies in the Advanced Bioeconomy.

The purchase price in the all-share transaction was $59M, and Cargill (Evolva’s partner on its stevia program) will invest USD 4 million in Evolva shares in support of the transaction. The transaction is expected to close before year-end.

The deal structure and rationale is not radically different from the acquisition of Abunda Nutrition in 2011, which was developed by Simon Waddington as an entrepreneur-in-residence at Burrill & Company in the mid-2000s. Evolva and Abunda had collaborated on the development of Abunda’s next-generation nutritional ingredients since 2009.

One part of this collaboration, using Evolva’s proprietary technology, succeeded in making the key components of the natural high intensity sweetener Stevia via fermentation in yeast. This process bypasses the complex logistics associated with the traditional cultivation, processing and refining of Stevia plants, and allows pure Stevia sweetness components to be produced.

The skinny on stevia

As Evolva observed in 2011 at the time of the Abunda transaction, “The value of the global sweetener market is currently estimated at $70 billion p.a., with sugar the dominant product. Within this market, Stevia-based sweeteners are the fastest growing segment, with demand driven in part because Stevia extracts have 200-300 times the sweetness of sugar, but also because of increasing consumer demand for health, wellness, and performance products that are low-carbohydrate and low-sugar. By enabling the introduction of new sweetener products with compelling health, taste and other benefits for consumers, pure fermentation-derived Stevia components can potentially take an important part of the overall sweetener market.

Stevia — no doubt about it — packs a punch, especially when you consider the global problem of “diabesity”— the combination of diabetes and obesity which is skyrocketing medical costs as well as being a health crisis, and is ultimately tied back to excessive intake of calories and carbs, particularly sweeteners.

More about Evolva

Evolva uses biosynthetic and evolutionary technologies to create and optimize small molecule compounds and their production routes. Evolva’s technology is built around modifying yeast cells such to make existing compounds in disruptively new ways, or make new compounds that were previously out of reach.

Evolva employs about 100 people globally. 2/3 of them are working within research. Evolva has a proprietary, fermentation-based platform that allows radically different approaches to the production of ingredients for the food, beverage and consumer health sectors. Products include Resveratrol, Stevia, Saffron, Vanilla, Pomecins and EV-035.

The French Paradox

You might have read somewhere that, as Evolva puts it, “mortality from coronary heart disease is relatively low in France despite relatively high levels of dietary saturated fat and cigarette smoking, leading to the idea that regular consumption of red wine might provide additional protection from cardiovascular disease.”

The magic ingredient might well be Resveratrol, a natural compound produced in grapes and that occurs in red wine.

Which gives you a basic idea of Evolva’s strategy — find good compounds that are difficult to source economically in nature, and use yeast fermentation to produce them via industrial biotech.

Which, of course, was the Abunda strategy ( though the company aimed at cardiovascular health as well as supporting development of compounds like stevia ingredients). Hence the Abunda acquisition.

And it was the Allylix way as well — leading to this transaction.

The immediate “Why?”

According to Evolva, the deal Improves global competitiveness of Evolva’s next-generation stevia product. Evolva gains know-how and issued patents that enhance Evolva’s proprietary position and substantially improve stevia manufacturing efficiencies. Evolva’s next-generation stevia ingredients, which include Reb D, Reb M and other steviol glycosides, will significantly improve the taste, affordability, supply-chain integrity, and environmental footprint of this sought-after zero-calorie sweetener.

Allylix’s alluring portfolio

Adds two new ingredients that Evolva will market in 2015, together with the capabilities needed for global commercialisation.

Nootkatone –an aroma molecule that occurs in grapefruits. Commercially valuable as a flavour and fragrance, its greatest promise may well be as a safe and effective skin and home protectant against noxious pests such as ticks, mosquitoes, and bed bugs. US Centers for Disease Control research has demonstrated that nootkatone is a highly effective, rapid-acting natural agent against pests such as the ticks that transmit Lyme Disease.

Valencene –an orange flavour and fragrance used in food and drinks, personal care and household products, as well as an intermediate. It takes over 1 million kilos of oranges to extract 1 kilo of valencene. Fermentation production provides a more sustainable, economical, and reliable supply chain, creating broad new applications for this ingredient.

Evolva CEO, Neil Goldsmith said, “Allylix has developed a product line that is uniquely complementary to Evolva’s, starting with nootkatone and valencene. Furthermore, its technical expertise and IP suite will give us additional competitive advantages in the global stevia market. Since both companies are focused on the production and sale of high value ingredients made from yeast, there are significant synergies at all stages of R&D, manufacturing and marketing. The combination creates a true powerhouse in yeast based fermentation technologies.”

Longer-term broad product portfolio opportunities

Expands product pipeline. Like Evolva, Allylix has a pipeline of high-value ingredients made by brewing, with commercial applications in flavours, fragrances, cosmetics, food protection, household products and other industrial markets. For example, Allylix is developing a brewed version of sandalwood oil, a highly sought-after fragrance that is now in short supply because its natural source (the tropical sandalwood tree) has largely disappeared due to overharvesting and illegal logging.

Evolva also noted that the transaction accelerates development of the Evolva pipeline particularly terpenes such as saffron and agarwood, while adding 160 patents and applications across 25 patent families, with more than 100 granted. Evolva noted that it will conduct a review and potential realignment of its R&D portfolio as a result of the transaction, expected to complete in Q1 2015.

Was Allylix bought on the cheap?

The transaction makes a whole lot of sense, but it didn’t come, as we understand, at a premium to the venture round that Allylix completed in 2013.

At the time, BASF Venture Capital invested $13.5 million in leading a $18.2 million financing round, joined by existing investors Tate & Lyle Ventures, Avrio Ventures and Cultivian Ventures.

That followed a $9M Series C round in 2010, Middleland Capital joining previous investors Blue Grass Angels, Life Science Angels, Tech Coast Angels, Pasadena Angels and Tate & Lyle Ventures. At the time of its 2010 venture round, the company said that the financing would allow the company “to commercialize its initial three products for the flavor and fragrance industry, and allows it to advance other products in its already mature pipeline.”

And commercialize two they did, but not three, and it’s still “two in the marketplace and a number in the pipeline”, and clearly the investors were seeing that the company needed a new home to realize its considerable potential. The company had, as of last month, raised $2.5M on a planned $6.2M capital raise first disclosed last May.

Hence what looks like a discount to the $75-$100M valuation that observers of the company had expected in an acquisition.

Not that Allylix was the only bargain on the books this year. Mascoma’s yeast business went to Lallemand in a deal that looked pretty good for Lallemand shareholders.

Looking at Allylix beyond flavors and fragrances

For some time, we have been following with great interest the application of the terpenes that Allylix has been exploring to high-end “superfuels”.

In August we observed:

Much has been written about terpenes in the area of flavors and fragrances. But they have astonishing properties for super high-density jet fuels in the 130,000-140,000 BTU range.

Valencene, premnaspirodiene, and b-caryophyllene. Now, we get into an interesting range of molecules. Think, for example, valencene, premnaspirodiene, and b-caryophyllene, which Allylix and the Naval Air Warfare Center have been working on.

Neoclavane. One candidate molecule is neoclovane. Harvey and colleagues noted “a fuel composed of only neoclovane would be expected to have a density of B0.92 g mL1, with a calculated volumetric NHOC of nearly 141 000 Btu gal.” That’s definitely in the JP-10 range, and this research is based on the afore-mentioned real-world fuels development at Allylix.

Why interesting? These are generally in the range of the fuel spec known as JP-10. It’s also known as rocket fuel, used in very small quantities because, made from petroleum it costs $25 per gallon.

We wrote in June: “Imagine, for example, taking a Boeing 777 and extending its (full passenger and cargo load) range from 9,000 to 11,500 miles  — and being able to fly non-stop between any two cities in the world. Or F-18A/F Superhornets being able to add significant weapon loads, or fly faster , or add up to 30% to flight range. It’s like getting a new generation of aircraft without the multi-billion price tag.

As a team of researchers from the Naval Air Warfare Center at China Lake and NIST, headed by Dr. Ben Harvey, observed a few months back in a journal article we summarized here:

“Renewable fuels with densities that exceed those of conventional jet fuels by up to 13% can be generated from multicyclic sesquiterpenes. This advance has the potential to improve the range of aircraft, ships, and ground vehicles without altering engine configurations. In addition, as strategies to efficiently convert lignocellulosic biomass into sugars improve and organisms are developed that can utilize these sugar mixtures and convert them to sesquiterpenes, these fuels can be produced on a scale that would help supplant significant quantities of petroleum.”

The Bottom Line

In Allylix, Evolva picks up another attractive subsidiary using its public capital for the transaction — snapping up a promising company that, based on the valuations we are hearing, had begun to struggle to find the larger rounds of capital at “upround” valuations and for which an M&A transaction was in the cards. A good home for Allylix in its flavorings applications. We hope to see that those fuel applications continue to be pursued in partnership with China Lake.