The Uber Model for industrial biotechnology, on display at REG Okeechobee?

January 26, 2017 |

BD TS 012717 REG cover sm

The REG Okeechobee facility is now “open for business” as a contract manufacturing site, and that’s a fascinating development worth exploring, even if you don’t have a microbe you would like to manufacture without the expense and hassle of building your own fermentation capacity.

From Europe to the United States, we’ve seen the rise of a new class of company that lies in between the traditional we-make-our-own producer and the traditional third-party manufacturer (also known as a “tolling operation”) — that new class, let’s call the Biotechnology Services Organization.

The Uber Model

You could also call it,  the Uber-model for industrial biotechnology. Shared resource, on demand. Reducing costs, capex demands, spreading efficiency – just as Uber (and Lyft) do for the passenger market.

In the traditional model, producers built up a manufacturing expertise and a process expertise and a biology expertise. You had to develop a metabolic pathway that could produce meaningful concentrations of a target molecule, then develop a process that would run that production at scale, and then develop and operate the fermentation capacity necessary to make the product.

You could vary the formula for a non-organic catalytic process. Develop the catalyst, develop a process, and construct and operate the fluidized-bed or other equipment necessary to make the product.

Rewind on REG

REG? Hitherto, it’s been a practitioner of the traditional model, and is now the largest biodiesel producer in the US. But along the way they acquired LS9, which became REG Life Sciences. With it they acquired a mothballed demonstration-scale unit in Okeechobee, Florida that ran LS9’s process, to make target molecules such as surfactants. Under REG’s ownership, the facility has been brought back to life. We reported about that striking facility here.

Now, companies with demonstration-scale capacity have, for some time, received approaches through the industrial biotechnology science community to “borrow” the facility when it was not being used to run campaigns. ZeaChem’s facility in Boardman, Oregon runs so many of these that it has become a cash-generating small business for the company. REG Life Sciences was no exception — requests came in, and on the “friendly, word-of-mouth” basis, they’ve run a number of campaigns for other companies. Proterro is one that we reported on, here.

The tolling operation

The REG Okeechobee facility in Florida.

The REG Okeechobee facility in Florida.

What do you get? It’s pretty impressive. At REG Okeechobee, there’s two tank sizes for tolling: 1,000 gallon and 35,000 gallon, they can do both aerobic and anaerobic fermentations, They can facilitate use of conventional sugars (e.g. dex 95) and/or crude glycerin.. Interestingly, they can run bacterial, algal and yeast strains.

Beyond tolling, there’s expertise

But wait, there’s more. There’s the expertise.

And companies like REG and Amyris are edging towards a new truth about the value of their companies. Think, “Services”.

You see, scaling-up a process, optimizing a microbe, and running ti at scale — these are, each of them, significant businesses with a customer base that ranges wide from pharma to fuels.  Ginkgo BioWorks has discovered that there’s a real appetite for designing custom microbes for customers, and Zymergen has discovered that there’s real demand for optimization of existing “production microbes”. Each of them has picked up huge support from Silicon Valley in the form of venture finance rounds north of $100 million each.

And think of traditional giants like Johnson Matthey and their catalyst development services. CRI, too.

And, for a long time, there have been organizations that provide process development services on a fee-basis. DMC has been in that space, among newer companies.  Think Process Design Center, too, in the Netherlands.

But just about everyone needs somewhere to run the process, with the gee-whiz microbe or catalyst, when it is time to take it past the bench and start to scale-up. After all, that’s where the real costs start to kick in, and the Valley of Death becomes a trans-galactic Death Zone. How many companies have built scaled-up facilities only to find themselves embroiled in 24-36 months of “optimization”. How many companies haven’t even yet been able to assemble to capital to build a commercial-scale facility.

Where do you go?

In short, where do you run the process?

Sure, there are tolling operations and many of them are excellent, and affordable. But, what if you need something a little more robust than rent-by-the-campaign capacity?

After all, we’ve seen some tremendously successful scale-ups, and one of them is the Genomatica scale-up at Loudon, Tennessee a few years back. The campaign produced millions of pounds of product in a six-week run and proved to the world that Genomatica not only had a great headquarters building and cool science, you could actually make real money running their process. Two things about that scale-up — they assembled a world-class team inside Genomatica, and partnered with a world-class facility in Loudon where the original scale-up of DuPont’s PDO (propanediol) biotechnology had taken place several years back.

It’s no accident that Genomatica focused on Loudon, even though there was other fermentation capacity available around the world. The expertise, that was critical.

Companies have noticed that the tricks of running complex microbes at scale — well, they will scale faster and more successful when partnered with a company that is expert at that.

The Partnership Rings

In recent months, we’ve seen Amyris partnered ever more closely with Gingko (and Gen9 and Arzeda, too) – generally for that reason. Amyris provides the industrial scale and can-do expertise for the production molecules that are coming out of Gingko.

So, it’s a contract manufacturing organization, called a CMO, but it’s more than that. It’s a service organization designed to support scale-up.

For our money, that’s where the industry is headed, and companies like Amyris and REG Life Sciences have the jump. We see an end coming for many of the vertically-integrated business models — yes, there are fewer partner to enrich and you gain efficiencies of time and information through vertical integration, as Standard Oil famously exploited in its path towards world domination a hundred years ago.

But you lose capital efficiency by building out capacity, and the return on investment is reduced because of the risks and the timelines associated with the scale-up step. And, ahem, even oil & gas is one heck of a lot less vertically integrated than Standard Oil used to be. Back in the day, Standard Oil used to pump out the molecule, transport it, refine it, and market it. Companies divested their retailing operations, in almost every case, some time ago, and there are upstream, midstream and downstream specialists everywhere you look in the petroleum business.

Service companies vs manufacturing companies

Here’s another thing.

Markets place more value on service companies than manufacturing companies. Ask yourself why the US has jettisoned much of its manufacturing capacity and transformed into a service economy, and you’ll probably find yourself embroiled in an elongated political discussion about currencies and global trade deals.

But there’s more to it than that — because that’s the top-down, macro-discussion that most people are comfortable having.

There’s the bottom-up discussion, though — the kind you have with people who are actually in the business of investor relations and capital-raising and investing. They’ll tell you, hands-down, that companies with a service model will get a higher valuation multiple on their cash flow than manufacturers. In some ways, it’s a recognition that growth comes faster and cheaper for service companies.

I don’t know what valuation REG would have as a service organization instead of as a manufacturer, but it should be higher because the earnings multiple would be higher. So, we’ll see how that evolves.

Services, Service, Services

Not long ago, I found myself at the Red Star Yeast facility in Dothan, Alabama chatting with Antoine Baile, who is CEO of French yeast and fermentation giant LeSaffre Group, and I can assure you that when the conversation turned to the potentials for companies in this sector to grow into service organizations and potentially capture a higher earnings multiple, the lights went on — clearly something he’s been thinking deeply about, as have most forward-thinking CEOs in the space.

How’s it going to work, who’s going in that direction? It’ll be small steps for now, a giant leap later when the giants figure out exactly how to get it done on favorable economic terms.

Will major producers continue their manufacturing operations? Sure they will. We’ll see the new model existing side-by-side with the old vertically-integrated model for some time to come.

But we see big things ahead for the new Uber-biotech companies. Stay tuned.

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