Verenium, Shorn of Biofuels Business, Returns to San Diego and its Diversa Roots
It felt like something was coming to an end last July, when energy giant BP said it was paying $98.3 million to acquire the cellulosic biofuels business of Cambridge, MA-based Verenium (NASDAQ: VRNM). But as Verenium consolidates its headquarters and remaining operations in San Diego, incoming CEO James Levine told me in so many words that what happened was not the end, but perhaps the end of the beginning for the industrial biotech.
Selling the cellulosic biofuels business and giving up Verenium’s goal of building an ethanol plant “surprised a lot of people,” Levine conceded when we met. “I think it was such a focus of our story that we knew it was going to take some time to let people understand the gem that we remain.”
Levine, who became Verenium’s chief executive after serving two years as its CFO, says the company is now “at a sort of inflection point—where we are an independent company and we’re kind of getting the word out about what we are.”
Verenium was created amid great expectations in 2007 with the merger of the ethanol biofuel expertise of Cambridge, MA-based Celunol and an enormous collection of enzyme samples and expertise amassed at San Diego-based Diversa. A year later, Verenium forged a crucial partnership with BP to develop cellulosic ethanol production facilities throughout the U.S. BP later provided an additional $45 million toward construction of a cellulosic ethanol plant near Tampa, FL.
But Verenium’s plans faltered during the Great Recession as the company sought to raise the roughly $400 million needed to build the Florida ethanol plant. Federal energy loan guarantees needed to finance the project failed to materialize, and Levine says, “We had great technology, and we had a great partner. But without funding we had to sell the business and let BP build the plant.”
Today Verenium has about 90 employees at its San Diego facility, which will become the company’s official headquarters on June 1, after Levine moves his family here from Boston. As a reorganized public company, Verenium has outgrown the role of a technology-developing startup that incurs regular losses. But it isn’t exactly a robust operating company, either. Verenium posted a $13.5 million operating loss in 2010, and has almost $75 million in debt. It also has nearly $88 million in cash left from its deal with BP.
“We’re in this spot where there is really only one way to go,” Levine says. “We have to go forward to profitability.”
For the coming year, Levine has set a number of goals: broaden and diversify the company’s line of industrial enzyme products, sign two new corporate partnerships, improve Verenium’s manufacturing through limited investments, control expenses, get at least two new products submitted for regulatory approval, and continue to address the company’s outstanding debt.
Levine’s prime directive is to refocus Verenium on “the incredible enzyme technology that Diversa created, and to make money from it.”
Diversa, which was founded in San Diego in 1994, has amassed billions of industrial enzymes, created by mining the genomes of organisms collected from deep sea thermal vents, Arctic tundra, soda lakes, and other far-flung corners of the world. Such enzymes are typically used as catalysts that act in highly specific ways to make certain biochemical reactions and processes possible.
Diversa had begun to develop a broad industrial enzyme business at the time of its 2007 merger with Cambridge, MA-based Celunol. But the enzymes Diversa had developed for breaking down cellulosic biomass were considered the crucial part of the deal, and they still are. Levine says BP got rights to the cellulosic enzymes—along with a copy of the entire Verenium enzyme library as part of its $98.3 million buyout of Verenium’s biofuels business.
So what’s the difference between Verenium in 2011 and Diversa in 2006?
“Diversa had a business model that aspired to be a products business,” Levine said. “But when you look at their revenue streams, it was largely from contract research.”
Today, Levine says Verenium is generating 90 to 95 percent of its revenue from nine products, industrial enzymes developed for target markets in animal health and nutrition, grain processing (into biofuels or beverage alcohols), and oil seed processing for edible oils. Such sales amounted to $50.3 million in 2010—double the $25 million that Verenium generated from product sales in 2007.
Levine, a former Goldman Sachs banker, is taking a pragmatic approach that recognizes Verenium’s technology and vast enzyme library has enormous potential value—but it can only be realized by building a commercial operating business that targets existing markets for industrial enzymes. Though last year’s deal with BP did not preclude Verenium from moving back into the cellulosic biofuels business, “I’d rather come up with the next big thing in animal health and nutrition, where it’s a $400 million or $500 million market,” Levine says. “I can double, triple, quadruple our revenue without having to touch markets [such as cellulosic ethanol] that don’t exist today a whole lot faster and with a whole lot more certainty.”
So it’s back to the future for Verenium, which has returned to its original focus on developing industrial enzymes. When we talk about our technology, we still say it’s very much about enzyme discovery in nature,” Levine said. “It’s very much about using the libraries that Diversa went out and created, and we continue to create libraries. But we no longer have the luxury of talking about ourselves as a platform technology developer, even though we are. We cannot move backwards. We have to move forward to being a profitable and sustainable enzyme seller.”