netrashetty
Netra Shetty
Verenium Corporation (NASDAQ: VRNM) is a biotechnology firm that produces enzymes used in industrial processes and agricultural feedstocks. The company also does U.S. Army funded research on antibodies for potential biological weapons like SARS and anthrax. Verenium has been receiving a lot of attention recently because it has developed enzyme processes that break down biomatter to produce cellulosic ethanol, a developing, expensive source of fuel that gained strong government backing with the passage of the Energy Independence and Security Act of 2007.
Verenium's current main product is Phyzyme phytase, which helps livestock to get nutrition from wheat-based diets by improving their absorption of phosphorus, and the market for this enzyme is growing steadily in both domestic and international markets. The market for cellulosic ethanol, however, is much more volatile. Though the U.S. government is supporting cellulosic development through research grants and subsidies to the tune of $1.18 per gallon, the world's current dependence on oil makes a transition to ethanol very difficult. Competing with Verenium in the cellulosic market are companies like Bluefire Ethanol, VeraSun Energy, and Pacific Ethanol.
Business and Financials
Verenium, formerly known as Diversa, is a biotechnology company that develops enzymes used in a variety of applications:
Contents
1 Business and Financials
2 Trends and Forces
2.1 Legislative Support for Cellulosic Ethanol Means Verenium Gets Government Money for R&D
2.1.1 Rising Commodities Prices Make Cellulosic Ethanol More Attractive as a Fuel Source
2.1.2 Verenium's Current Plans for Cellulosic Ethanol are Lucrative, but Aim Low
2.1.3 Without a Shift in the Auto Industry, Cellulosic Ethanol is Just a Good Idea
2.2 There is Strong Growth Potential for Phyzyme phytase in the International Market
3 Competition
4 Notes
Energy: Verenium recently became heavily involved in researching enzymes to produce cellulosic ethanol, and will soon start construction of a 1.4 million gallon-per-year pilot plant in Louisiana and a 1.4 million liter-per-year pilot plant Osaka, Japan[1]. The company hopes to start construction in early 2009 on a 30 million gallon-per-year plant in the Southeast U.S.
Industrial Processes: Verenium develops enzymes to be used in industrial process; examples include an enzyme that aids in the process of bleaching paper pulp, eliminating the need for costly, hazardous chemicals.
Health and Nutrition: Currently, Verenium's most lucrative product is the enzyme Phyzyme phytase, which is used in agricultural feedstocks to help animals process phosphorus more easily, reducing the need for costly nutritional supplements. Other Verenium projects in this segment include antibody optimization to fight diseases like SARS, Anthrax, and CD3.
Verenium Financial Breakdown ($ Thousands)
2007 2006
Revenue 46,273 49,198
Phyzyme(TM) phytase 16,237 8,869
All Other Products 9,738 6,998
Collaborative 17,581 30,014
Grant 2,717 3,317
Product Gross Profit 6,160 2,953
Product Gross Margins 24% 19%
Total Operating Expenses 152,008 89,773
(Net Loss) (107,585) 39,271
Source: Verenium 4Q07 and FY 2007 Earnings Release[2]
Despite the fact that the Phyzyme phytase enzyme earns almost twice the revenue as the rest of Verenium's products combined, the company is receiving most of its investor and media attention due to its enzymes that synthesize ethanol by breaking down cellulose. Cellulosic ethanol differs from traditional ethanol because traditional ethanol is produced using corn. In the past few years, the strain that ethanol production has put on corn production has caused a landslide of negative effects across a range of industries. Essentially, corn is needed for too many products, and there isn't enough production capacity in the U.S. for corn farmers to meet the demand. Because demand is so high, corn prices have gone through the roof, making traditional, corn-based ethanol more expensive and, to many, socially irresponsible because of its effect on food prices. Verenium (and the U.S. government) hope to make cellulosic ethanol mainstream, taking pressure off of corn prices while creating a new source of sustainable fuel.
The "Collaborative" segment refers to business collaborations for enzyme research and production that Verenium is engaged in with such corporations as DuPont (for cellulosic ethanol), Danisco (for Phyzyme phytase), Bayer (for animal antibodies), and the U.S. Army (for anthrax, SARS, and other disease antibodies).
Verenium formed in 2007 when Diversa merged with Celunol Corporation; this added roughly $42 million to the company's research and development expenses, explaining the company's higher expenses during 2007.
Trends and Forces
Legislative Support for Cellulosic Ethanol Means Verenium Gets Government Money for R&D
In June of 2007, Verenium announced that it had successfully won a bid for Department of Energy funding - $4.6 million over five years to do research on developing enzymes to break down biomatter into biofuels[3]. This doesn't represent a large portion of the company's R&D budget, but it is indicative of the subsidy flood that may be to come. The company is poised to benefit from a number of legislative measures supporting ethanol production:
In August, the Department of Energy announced that total funding over the next few years for research into commercializing enzyme-based production of cellulosic ethanol would read around $68 million[4].
In December 2007, Congress passed the Energy Independence and Security Act of 2007, which mandates that renewable fuels production in the U.S. should increase from 2007 levels of around 4.7 billion gallons per year to 36 billion gallons per year by 2022 - 21 billion gallons per year of which should come from cellulosic ethanol and other "advanced biofuels"[5].
A Cellulosic Ethanol Tax Credit became effective on January 1st, 2008, which gives a total government subsidy of $1.18 (for large producers) to $1.28 (for small producers) per gallon of cellulosic ethanol produced[6]. Since current ethanol prices are approximately $2.00 per gallon[7], and Verenium currently produces at a cost of $3.00/gallon, if the company is considered as a large producer, it would see a subsidized margin of $0.18 per gallon. Currently, the CEO has stated that its first generation of manufacturing plants will target production costs of $2.00 per gallon[8]. If Verenium is successful in reducing its costs, with current subsidies its margins will increase to $1.18 per gallon.
Rising Commodities Prices Make Cellulosic Ethanol More Attractive as a Fuel Source
Since the Energy Policy Act of 2005, ethanol has been pushed as the next big biofuel. With oil prices shooting up in recent months, reaching $100/barrel at the New Year, consumer and government demand for alternative fuels has been increasing. As oil prices have risen, however, so too have corn prices; as an example, ethanol company VeraSun Energy's average payment for a bushel of corn rose from around $3.32 in the second quarter of 2007 to $4.60 in the new year[9]. Rising corn prices, aside from making ethanol much less cost-efficient, cause prices for many other foods to rise - corn is a major animal feedstock, forcing meat prices up, and corn syrup is a sweetener found in pretty much every other food product. Corn prices haven't just shot up on their own, however; petroleum is used as a corn fertilizer, making corn's price directly related to oil's price. Furthermore, demand for corn went through the roof because of the emerging ethanol market; it was the increased production of corn-based ethanol, demanded by the Energy Policy Act of 2005, that lead 20% of all corn produced in the U.S. to go to ethanol production in 2006 - and even more in 2007[10]. Verenium's cellulosic ethanol isn't food based, and doesn't use oil in its production, making it a much less volatile source of energy. Right now, Verenium's technology isn't as cost-efficient as gasoline (even with sky-high oil prices), but the company is investing heavily in research and development (as is the U.S. government) to remedy this problem.
Verenium's Current Plans for Cellulosic Ethanol are Lucrative, but Aim Low
Verenium hopes to have a 30 million gallon-per-year plant up and running by 2010, however, and if we assume that ethanol prices stay fairly constant (however unlikely that may be), we can guess that the plant will earn Verenium $60 million per year - almost four times as much as Phyzyme phytase currently earns the company. Furthermore, legislative mandates require that by 2022, 21 billion gallons of cellulosic ethanol should be produced every year in the U.S. - a $42 billion industry, assuming ethanol prices stay around $2 per gallon. Verenium's planned production by 2010 of 30 million barrels per year is barely a drop in the sea of ethanol that is planned on being produced; the company will have to greatly increase its production capacity if it is to take full advantage of the market's potential.
Without a Shift in the Auto Industry, Cellulosic Ethanol is Just a Good Idea
Currently, American cars can run on a mix of 90% gasoline and 10% ethanol, though there isn't nearly enough corn-based ethanol being produced at the moment to meet this capacity. Part of the goal of the government's support of ethanol is to increase ethanol production and use to a scope well beyond that of the standard 10% blend. E85, a blend of 85% ethanol and 15% gasoline, is the big hope for the biofuels industry, as its use would greatly reduce greenhouse gas emissions and help to meet the new energy standards that have been placed on the U.S. through the Energy Independence and Security Act - all while greatly increasing demand for sustainable, non-food biofuels. There are, however, a number of blockades to the widespread adoption of E85 in the U.S.:
E85 cars have been shown to run with an almost 50% reduction in miles per gallon - though this is measured in miles per gallon of E85, not of total gasoline[11].
There are over 247 million cars in the U.S.[12], but very few of them are "flex-fuel" vehicles, which are compatible with E85. The prospect of replacing all of these with flex-fuel vehicles is staggering, and the automotive industry is dragging its feet at the idea of having to develop cost-efficient vehicles that are E85 compatible.
Without solutions to these obstacles, ethanol and cellulosic ethanol have no hope of being considered "replacements" for petroleum.
There is Strong Growth Potential for Phyzyme phytase in the International Market
Currently, Verenium earns $16.2 million per year in revenues from Phyzyme phytase - nearly double that of all its other enzymes. The growth that the company experienced in the Phyzyme's revenues this past year can be attributed to the late 2006 approval of Phyzyme Phytase by European Union regulators; essentially, once the enzyme was approved in the new market, sales shot up. The enzyme is appealing because it increases phosphorus absorption by 20%, so ranchers don't have to spend extra on phosphorus supplements, since phosphorus is necessary for bone development. Furthermore, phosphorus that is excreted by livestock can filter into groundwater and lakes, causing algae and cyanobacteria to bloom. Aside from releasing hepa- and neurotoxins into the water, these blooms can also remove nutrients and block sunlight from the water, causing everything in the lake to die[13]. Phyzyme phytase decreases phosphorus secretion by 30%, making livestock more environmentally friendly[14]. When the product went online in 2004, it earned $2 million for the company; in 2005 it earned $5.2 million and by 2006, it was earning almost $9 million[15]. All this revenue growth occurred in the U.S. alone. With the introduction of the enzyme to the EU and the emergence of the Asian agriculture market, Phyzyme phytase's growth potential is much less volatile than the other market Verenium is betting on: cellulosic ethanol.
Competition
In the field of biotechnology, there is a wide range of competition. Few companies focus on the same problems that Verenium does, however, as agricultural enzymes are not as lucrative to the pharmaceutical industry and the company's collaboration with the U.S. Army crowds out many firms researching anthrax and other cures for potential biological weapons. Some players in the biotechnology industry include:
Xencor - Xencor is a biotech company that engineers antibodies to treat a range of illnesses, from autoimmune to arthritis.
Maxygen - Maxygen engineers enzymes to treat problems like hepatitis C, internal bleeding, and pulmonary fibrosis.
Evotec AG - Evotec's proteins have a variety of uses, from the treatment of Alzheimer's to aiding with smoking cessation, insomnia, and post-op pain.
In the field of ethanol, Verenium competes with:
Bluefire Ethanol - Bluefire uses "acid hydrolysis" to convert wood waste, green waste, paper, urban trash, rice and wheat straw, and other feedstocks that would generally be thrown into a landfill into cellulosic ethanol.
VeraSun Energy - VeraSun's production of corn-based ethanol, at 340 million gallons per year, represented 4% of the total U.S. production as of February 2007[16].
Pacific Ethanol - Pacific Ethanol won $24.32 million from the Department of Energy to build the first cellulosic ethanol pilot plant in the Northwestern United States. The plant is expected to have a capacity of 2.4 million barrels per year - a full million more than Verenium's pilots'[17]. Currently, Pacific Ethanol is the largest manufacturer of corn-based ethanol on the west coast.
Nova Biosource Fuels and ConAgra - ConAgra has agreed to have Nova use its animal wastes to produce biodiesel, and will purchase 130 million gallons of this biodiesel each year from the companies' joint venture to sell on international markets[18]
Verenium's current main product is Phyzyme phytase, which helps livestock to get nutrition from wheat-based diets by improving their absorption of phosphorus, and the market for this enzyme is growing steadily in both domestic and international markets. The market for cellulosic ethanol, however, is much more volatile. Though the U.S. government is supporting cellulosic development through research grants and subsidies to the tune of $1.18 per gallon, the world's current dependence on oil makes a transition to ethanol very difficult. Competing with Verenium in the cellulosic market are companies like Bluefire Ethanol, VeraSun Energy, and Pacific Ethanol.
Business and Financials
Verenium, formerly known as Diversa, is a biotechnology company that develops enzymes used in a variety of applications:
Contents
1 Business and Financials
2 Trends and Forces
2.1 Legislative Support for Cellulosic Ethanol Means Verenium Gets Government Money for R&D
2.1.1 Rising Commodities Prices Make Cellulosic Ethanol More Attractive as a Fuel Source
2.1.2 Verenium's Current Plans for Cellulosic Ethanol are Lucrative, but Aim Low
2.1.3 Without a Shift in the Auto Industry, Cellulosic Ethanol is Just a Good Idea
2.2 There is Strong Growth Potential for Phyzyme phytase in the International Market
3 Competition
4 Notes
Energy: Verenium recently became heavily involved in researching enzymes to produce cellulosic ethanol, and will soon start construction of a 1.4 million gallon-per-year pilot plant in Louisiana and a 1.4 million liter-per-year pilot plant Osaka, Japan[1]. The company hopes to start construction in early 2009 on a 30 million gallon-per-year plant in the Southeast U.S.
Industrial Processes: Verenium develops enzymes to be used in industrial process; examples include an enzyme that aids in the process of bleaching paper pulp, eliminating the need for costly, hazardous chemicals.
Health and Nutrition: Currently, Verenium's most lucrative product is the enzyme Phyzyme phytase, which is used in agricultural feedstocks to help animals process phosphorus more easily, reducing the need for costly nutritional supplements. Other Verenium projects in this segment include antibody optimization to fight diseases like SARS, Anthrax, and CD3.
Verenium Financial Breakdown ($ Thousands)
2007 2006
Revenue 46,273 49,198
Phyzyme(TM) phytase 16,237 8,869
All Other Products 9,738 6,998
Collaborative 17,581 30,014
Grant 2,717 3,317
Product Gross Profit 6,160 2,953
Product Gross Margins 24% 19%
Total Operating Expenses 152,008 89,773
(Net Loss) (107,585) 39,271
Source: Verenium 4Q07 and FY 2007 Earnings Release[2]
Despite the fact that the Phyzyme phytase enzyme earns almost twice the revenue as the rest of Verenium's products combined, the company is receiving most of its investor and media attention due to its enzymes that synthesize ethanol by breaking down cellulose. Cellulosic ethanol differs from traditional ethanol because traditional ethanol is produced using corn. In the past few years, the strain that ethanol production has put on corn production has caused a landslide of negative effects across a range of industries. Essentially, corn is needed for too many products, and there isn't enough production capacity in the U.S. for corn farmers to meet the demand. Because demand is so high, corn prices have gone through the roof, making traditional, corn-based ethanol more expensive and, to many, socially irresponsible because of its effect on food prices. Verenium (and the U.S. government) hope to make cellulosic ethanol mainstream, taking pressure off of corn prices while creating a new source of sustainable fuel.
The "Collaborative" segment refers to business collaborations for enzyme research and production that Verenium is engaged in with such corporations as DuPont (for cellulosic ethanol), Danisco (for Phyzyme phytase), Bayer (for animal antibodies), and the U.S. Army (for anthrax, SARS, and other disease antibodies).
Verenium formed in 2007 when Diversa merged with Celunol Corporation; this added roughly $42 million to the company's research and development expenses, explaining the company's higher expenses during 2007.
Trends and Forces
Legislative Support for Cellulosic Ethanol Means Verenium Gets Government Money for R&D
In June of 2007, Verenium announced that it had successfully won a bid for Department of Energy funding - $4.6 million over five years to do research on developing enzymes to break down biomatter into biofuels[3]. This doesn't represent a large portion of the company's R&D budget, but it is indicative of the subsidy flood that may be to come. The company is poised to benefit from a number of legislative measures supporting ethanol production:
In August, the Department of Energy announced that total funding over the next few years for research into commercializing enzyme-based production of cellulosic ethanol would read around $68 million[4].
In December 2007, Congress passed the Energy Independence and Security Act of 2007, which mandates that renewable fuels production in the U.S. should increase from 2007 levels of around 4.7 billion gallons per year to 36 billion gallons per year by 2022 - 21 billion gallons per year of which should come from cellulosic ethanol and other "advanced biofuels"[5].
A Cellulosic Ethanol Tax Credit became effective on January 1st, 2008, which gives a total government subsidy of $1.18 (for large producers) to $1.28 (for small producers) per gallon of cellulosic ethanol produced[6]. Since current ethanol prices are approximately $2.00 per gallon[7], and Verenium currently produces at a cost of $3.00/gallon, if the company is considered as a large producer, it would see a subsidized margin of $0.18 per gallon. Currently, the CEO has stated that its first generation of manufacturing plants will target production costs of $2.00 per gallon[8]. If Verenium is successful in reducing its costs, with current subsidies its margins will increase to $1.18 per gallon.
Rising Commodities Prices Make Cellulosic Ethanol More Attractive as a Fuel Source
Since the Energy Policy Act of 2005, ethanol has been pushed as the next big biofuel. With oil prices shooting up in recent months, reaching $100/barrel at the New Year, consumer and government demand for alternative fuels has been increasing. As oil prices have risen, however, so too have corn prices; as an example, ethanol company VeraSun Energy's average payment for a bushel of corn rose from around $3.32 in the second quarter of 2007 to $4.60 in the new year[9]. Rising corn prices, aside from making ethanol much less cost-efficient, cause prices for many other foods to rise - corn is a major animal feedstock, forcing meat prices up, and corn syrup is a sweetener found in pretty much every other food product. Corn prices haven't just shot up on their own, however; petroleum is used as a corn fertilizer, making corn's price directly related to oil's price. Furthermore, demand for corn went through the roof because of the emerging ethanol market; it was the increased production of corn-based ethanol, demanded by the Energy Policy Act of 2005, that lead 20% of all corn produced in the U.S. to go to ethanol production in 2006 - and even more in 2007[10]. Verenium's cellulosic ethanol isn't food based, and doesn't use oil in its production, making it a much less volatile source of energy. Right now, Verenium's technology isn't as cost-efficient as gasoline (even with sky-high oil prices), but the company is investing heavily in research and development (as is the U.S. government) to remedy this problem.
Verenium's Current Plans for Cellulosic Ethanol are Lucrative, but Aim Low
Verenium hopes to have a 30 million gallon-per-year plant up and running by 2010, however, and if we assume that ethanol prices stay fairly constant (however unlikely that may be), we can guess that the plant will earn Verenium $60 million per year - almost four times as much as Phyzyme phytase currently earns the company. Furthermore, legislative mandates require that by 2022, 21 billion gallons of cellulosic ethanol should be produced every year in the U.S. - a $42 billion industry, assuming ethanol prices stay around $2 per gallon. Verenium's planned production by 2010 of 30 million barrels per year is barely a drop in the sea of ethanol that is planned on being produced; the company will have to greatly increase its production capacity if it is to take full advantage of the market's potential.
Without a Shift in the Auto Industry, Cellulosic Ethanol is Just a Good Idea
Currently, American cars can run on a mix of 90% gasoline and 10% ethanol, though there isn't nearly enough corn-based ethanol being produced at the moment to meet this capacity. Part of the goal of the government's support of ethanol is to increase ethanol production and use to a scope well beyond that of the standard 10% blend. E85, a blend of 85% ethanol and 15% gasoline, is the big hope for the biofuels industry, as its use would greatly reduce greenhouse gas emissions and help to meet the new energy standards that have been placed on the U.S. through the Energy Independence and Security Act - all while greatly increasing demand for sustainable, non-food biofuels. There are, however, a number of blockades to the widespread adoption of E85 in the U.S.:
E85 cars have been shown to run with an almost 50% reduction in miles per gallon - though this is measured in miles per gallon of E85, not of total gasoline[11].
There are over 247 million cars in the U.S.[12], but very few of them are "flex-fuel" vehicles, which are compatible with E85. The prospect of replacing all of these with flex-fuel vehicles is staggering, and the automotive industry is dragging its feet at the idea of having to develop cost-efficient vehicles that are E85 compatible.
Without solutions to these obstacles, ethanol and cellulosic ethanol have no hope of being considered "replacements" for petroleum.
There is Strong Growth Potential for Phyzyme phytase in the International Market
Currently, Verenium earns $16.2 million per year in revenues from Phyzyme phytase - nearly double that of all its other enzymes. The growth that the company experienced in the Phyzyme's revenues this past year can be attributed to the late 2006 approval of Phyzyme Phytase by European Union regulators; essentially, once the enzyme was approved in the new market, sales shot up. The enzyme is appealing because it increases phosphorus absorption by 20%, so ranchers don't have to spend extra on phosphorus supplements, since phosphorus is necessary for bone development. Furthermore, phosphorus that is excreted by livestock can filter into groundwater and lakes, causing algae and cyanobacteria to bloom. Aside from releasing hepa- and neurotoxins into the water, these blooms can also remove nutrients and block sunlight from the water, causing everything in the lake to die[13]. Phyzyme phytase decreases phosphorus secretion by 30%, making livestock more environmentally friendly[14]. When the product went online in 2004, it earned $2 million for the company; in 2005 it earned $5.2 million and by 2006, it was earning almost $9 million[15]. All this revenue growth occurred in the U.S. alone. With the introduction of the enzyme to the EU and the emergence of the Asian agriculture market, Phyzyme phytase's growth potential is much less volatile than the other market Verenium is betting on: cellulosic ethanol.
Competition
In the field of biotechnology, there is a wide range of competition. Few companies focus on the same problems that Verenium does, however, as agricultural enzymes are not as lucrative to the pharmaceutical industry and the company's collaboration with the U.S. Army crowds out many firms researching anthrax and other cures for potential biological weapons. Some players in the biotechnology industry include:
Xencor - Xencor is a biotech company that engineers antibodies to treat a range of illnesses, from autoimmune to arthritis.
Maxygen - Maxygen engineers enzymes to treat problems like hepatitis C, internal bleeding, and pulmonary fibrosis.
Evotec AG - Evotec's proteins have a variety of uses, from the treatment of Alzheimer's to aiding with smoking cessation, insomnia, and post-op pain.
In the field of ethanol, Verenium competes with:
Bluefire Ethanol - Bluefire uses "acid hydrolysis" to convert wood waste, green waste, paper, urban trash, rice and wheat straw, and other feedstocks that would generally be thrown into a landfill into cellulosic ethanol.
VeraSun Energy - VeraSun's production of corn-based ethanol, at 340 million gallons per year, represented 4% of the total U.S. production as of February 2007[16].
Pacific Ethanol - Pacific Ethanol won $24.32 million from the Department of Energy to build the first cellulosic ethanol pilot plant in the Northwestern United States. The plant is expected to have a capacity of 2.4 million barrels per year - a full million more than Verenium's pilots'[17]. Currently, Pacific Ethanol is the largest manufacturer of corn-based ethanol on the west coast.
Nova Biosource Fuels and ConAgra - ConAgra has agreed to have Nova use its animal wastes to produce biodiesel, and will purchase 130 million gallons of this biodiesel each year from the companies' joint venture to sell on international markets[18]