Issue Date: January 15, 2007
Back To Basics
During the first four years of the decade, Genencor was an industrial enzymes producer with high aspirations: It wanted to parlay its biotechnology skills into success in the lucrative pharmaceutical industry.
But everything changed in early 2005, when Danisco, a Danish food and feed ingredients company and one of Genencor's two large shareholders, struck a deal to buy out Eastman Chemical, the other big shareholder. Danisco then snapped up Genencor's publicly traded shares and turned the firm into a wholly owned subsidiary.
One of Danisco's first acts after completing the transactions was to exit health care. It sold most of the business to Cambridge Antibody Technology for $14 million.
Tjerk de Ruiter, Genencor's chief executive officer since last year, was on Danisco's executive committee at the time. As he diplomatically explains, the pharmaceutical push made technological sense for Genencor. "But health care for Danisco was not a good fit," he says.
Lars Topholm, a stock analyst at the Danish investment bank Carnegie, is far more blunt, calling Genencor's former health care strategy "ridiculous."
"Genencor was a leading player in enzymes, potentially one of the most interesting growth markets of any industry," Topholm says. Instead of exploiting that strength, the company pursued a field in which it was hopelessly outgunned by larger, more experienced firms. "I think Danisco has done Genencor a great favor," he says.
Now, Danisco is harnessing Genencor's biotech know-how for decidedly different purposes. "We could see clearly that the future of ingredients for food and feed is in biotechnology," de Ruiter says. And Genencor is taking Danisco into new industrial arenas such as laundry detergent enzymes and the race to derive fuels and chemicals from renewable resources rather than petroleum.
Danisco seems to be reshaping Genencor without slowing its enviable growth rate. In 2004, its last year as an independent company, Genencor posted sales of $410 million, an 8% increase over 2003. By the 12-month period ending in June 2006, all under Danisco control, Genencor had sales of $440 million and, again, 8% growth.
De Ruiter attributes the easy integration to Danisco's knowledge of Genencor as a major shareholder. But now that it has control of the company, the Danish firm wants to better tap Genencor's potential in the ingredients market. The goal is to combine Genencor's protein engineering and process development capabilities with Danisco's applications know-how and access to big ingredients customers.
As a 42% owner, Danisco had been calling on Genencor's skills for some time. In 2001, in fact, the two firms formed a $20 million R&D collaboration to accelerate the development of enzymes for the food industry.
De Ruiter explains that this collaboration intensified in early 2005, when Genencor was acquired. Danisco went a big step further last September, reorganizing its ingredients operations and folding its own enzymes activities into Genencor.
Fruits of that first 2001 collaboration are starting to hit the market. In 2005, for example, Danisco launched a new glycolipase enzyme intended to help dough retain its shape in industrial bread baking. And last fall, another new enzyme was introduced that reduces crumbliness in breads and extends their shelf life.
Food and feed ingredients have long been Danisco's bread and butter, in more ways than one. The company figures that at least every fourth loaf of industrially made bread worldwide contains its ingredients, be they enzymes, emulsifiers, texturants, or sweeteners.
But for Genencor, the hottest market today is fuel ethanol. The opportunity, at least near-term, is selling enzymes such as amylase and amyloglucosidase to producers of corn-based ethanol, who use them to break down cornstarch into glucose before fermentation into the alcohol.
Ethanol plants are popping up all over the Midwest, and all of them require enzymes. De Ruiter won't say how fast the ethanol market is growing for Genencor, but he does point out that strong demand led the company to cancel previous plans to close an enzymes plant in Beloit, Wis.
Beyond basic production needs, the ethanol industry is looking for enzymes that improve the efficiency of the corn-to-fuel conversion. Over the past 18 months, de Ruiter notes, Genencor has introduced products such as Fermgen, a protease that hydrolyzes protein found in the corn kernel, and Stargen, a starch-hydrolyzing enzyme that lets ethanol makers eliminate a costly cooking step.
Indeed, Carnegie's Topholm sees the market for such enzymes growing faster than ethanol itself. When competition starts heating up, he expects ethanol makers to turn to enzyme-intensive process improvements to lower their costs. "The optimal way to play this market could be through an enzymes producer," he says. "As ethanol costs go down, enzymes consumption will go up."
The business isn't risk-free, however. Last summer, Genencor had to pull one of its ethanol enzymes, the amylase Spezyme Ethyl, from the market after a U.S. court ruled it was infringing a patent owned by its main enzymes rival, Novozymes. Genencor promptly launched a replacement, Spezyme Xtra, and Danisco declared that the court ruling wouldn't materially affect its enzymes business.
While it reaps the benefit of the corn ethanol boom, Genencor has been getting ready to ride what could be the next ethanol wave: so-called biomass ethanol made from inedible cellulosic raw materials.
In 2000, Genencor and Novozymes launched separate R&D projects with the Department of Energy's National Renewable Energy Laboratory aimed at reducing the cost of cellulase, an enzyme that breaks down cellulose into fermentable sugars. In 2004, Genencor claimed a 30-fold cost reduction. Although the effort seemed to stall at that point, last month, Genencor and the start-up company Mascoma unveiled plans to build a $20 million biomass ethanol demonstration plant near Genencor's Rochester, N.Y., headquarters.
The State of New York provided $14.8 million for the facility, which the partners say will be complete 10-12 months after permits are received. To support the project, Genencor will invest in its Rochester enzymes plant, de Ruiter says.
Paper sludge, wood chips, switch grass, and corn stalks all could be used as feedstock, but de Ruiter is most bullish on forestry biomass such as paper industry waste that can be easily gathered from the state's pulp mills. The new plant will use Genencor cellulase to degrade the feedstock into sugars. Mascoma will provide a microorganism, Thermoanaerobacterium saccharolyticum, bioengineered to convert the hard-to-ferment sugar xylose into ethanol.
Beyond food ingredients and ethanol, de Ruiter sees many new industrial applications for enzymes. Last year, for example, Genencor launched Prionzyme, an enzyme-based sterilization product that eliminates prions from medical instruments.
The company also won a $2 million contract from the Department of Defense to develop an enzyme-based decontamination product for chemical and biological warfare agents such as mustard gas, anthrax, and ricin. A previous DOD contract yielded Defenz, a line of enzymes that break down organophosphate materials, including the chemical warfare agent sarin.
Even enzymes' biggest and most mature market, laundry detergents, still has life in it, de Ruiter maintains. Although enzymes are added to detergents mainly for stain removal, he says they could eventually replace high-volume detergent ingredients such as bleaches and surfactants.
Topholm points out that the potential market is huge: The typical detergent formula is about 40% surfactants but only 3-4% enzymes. He hears that both Genencor and Novozymes are actively working on surfactant replacements—a lipase at Novozymes and a protease at Genencor.
To Topholm's thinking, blockbuster enzymes, not blockbuster pharmaceuticals, are what Genencor should have been concentrating on all along. "Under Danisco, the enzymes business has come much more into focus," he says.
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