Jamie Levine - Chief Executive Officer
Verenium Corporation (VRNM) Jefferies 2012 Global Industrial and Aerospace and Defense Conference Transcript August 7, 2012 10:30 AM ET
Hi, everybody. We could get going to the next presentation here. I’d like to introduce the present CEO of Verenium Corporation, Jamie Levine, and we’re gong have a breakout session in the [Gilliard] room following this presentation.
Thanks everyone in the room and listen by the webcast. I’m Jamie Levine, CEO of Verenium Corporation. I’ll be making some forward-looking statements today and we just advise you to look at our statement here and in our SEC fillings for the associated risks of making those statements.
So I’d like to start with just a brief overview in term of what we are as a company and then a bit about our industry, our products and our future. If look at Verenium today at a glance. We have a sole focus on industrial enzymes market and I’ll talk about what that is in a moment.
But for us, it’s very much about brining a unique and patented enzyme discovery and evaluation platform, which allows us to create highest preforming products, which is a proven model.
We sold $55 million of our products in the last 12 months and in the short-term the focus is on selling more of those products and in the medium-term, it’s about commercializing products out of our pipeline.
When you look at the industrial enzymes market, it really is in-product that touch the average consumer everyday, whether its E10 or in this case C85, the gasoline going into your car, whether its around animal feed, detergens, backing, sweeteners or even within the oil and gas industry, there are applications for enzymes in our host of different products, typically, there are not the end product, there are part of a process.
And for Verenium, our focus is on taping into more and more of the current industrial enzymes market with unique high performance products. And so you can see today its around $4 billion market, but it’s been growing at 6% to 8% per year, depending on the individual segment and there are new opportunities to brings products into new industries that we also think is gong to drive growth, and I’ll talk about our oil and gas product in that regard in a few minutes.
When you look at the structure of the industry, this is one of the exciting things for company like Verenium. What our technology has shown with the eight commercial products we sold -- we sell today is that, we can differentiate our products against the competition and in part is because, there isn’t a lot of competition.
When you look at the broad based enzyme players, people looking to bring products, a whole series of different industries, we really do focus on Novozymes and the Genencor division of Dupont. When you look at the other players they tend to be focused in areas like animal feed or other sub segments but not necessarily broadly across the market.
What we bring is choice. We bring an alternative to the two players that are in the market. And what we focus on our markets where product performance in terms of differentiation is both measured and rewarded, because we are going head to head with a couple of very large players, and for us, it means we need to pick our markets carefully. We need to know that if we bring a higher performing product, it’s going to be rewarded because it’s going to be measured.
So taking a step back in terms of what make us different, I’ll talk about our technology briefly a bit later. But fundamentally it’s about our starting points. It’s about the efforts that happened in the 1995 to 2005 timeframe to look for extreme files in hostel environment, about going to undersea volcanic event, about seeing what’s in a paddle in Sakhalin Island off the East Coast of Russia.
Of understanding what’s in Baja, California undersea volcanic event. When you start with genetic materials from really hostel environment, you can find industrial enzymes suited for use in really hostel environment.
And that hostel environment can be defined as significant pH fluctuation, they can be defined as high thermostability, when I’m talking about differentiation, it’s really very much about making sure that we created an enzyme that works in somebody’s existing process.
As appose to requiring them to change the process, change the temperature, change the pH to satisfy the need of the enzymes operating environment. This is where our products come from.
So looking at those products, today we focus on three industries for selling our products. Our lead product Phyzyme phytase is in animal health. We have products for the green processing industry and also for the oil field services industry and I’ll go through those each in turn.
I’d like to start with, what is the unmet need? Why do we have a product for animal health and nutrition? And this case it’s because phosphorus is a key nutrient that required for born strength and born growth in animals. And when you look at the poultry market, when you look at swine market is one of the critical nutrients.
However, most of the feed that used in these markets like corn and wheat tend to be low in phosphorus content. So when you end up doing is you have a few choices. One, you can add dicalcium phosphate, you can look to boost the amount of phosphorus that is in the food, but then you end up having associated issues like the animal doesn’t observe all of it. It ends up going through, you end up with certain pollution issues, also it can expensive, because you having to mine it, sometimes in North Africa and bring it into the poultry farms that in the U.S.
So what we have is alternative and we’re one of several phytases on the market, but we have a very high performance phytase that unlocks the phosphorus from the phytase that’s already in the corn.
So in the animal grain and the grain that you are already feeding to the animal there is phosphorus, the animal can’t access it, and so in order to allow that access, you add an enzyme rather then adding dicalcium phosphate, and so in a ton of feed instead of supplying a 25 pound bag of dicalcium phosphate, you are adding a teaspoon of phytase enzyme, unlocking the phosphorus already in the grains.
It’s about finding that unmet need and bringing a product that has not only financial benefits to the customers but also environmental benefits, while all of our products have an environmental angle we don’t sell on the green profile alone. We always have to sell starting with the point that we have a product that’s going to improve the efficiency or reduce the cost of your process.
Moving to the next market and looking at Grain processing, our lead product Phyzyme phytase is one of the significant products we sell to the market -- sorry, I said Phyzyme phytase. Under lead product, Fuelzyme, is our alpha-amylase that we sell through the market and in this case, corn ethanol plants run using enzymes.
When you bring the mash in you need to reduce the viscosity in order to allow to flow through the process and you need to make distributors available in the final step to the yeast in the fermentation process.
What we designed was an alpha-amylase that’s more thermal stable that has higher pH with a lower pH resistance. In order that the plant doesn’t need to modify the pH of its mash, we’ll reduce the temperature of its process or double dose in order to have the enzymes survive.
So we said, how do we create an alpha-amylase that’s survives the existing process rather than asking people to dose before jet cooker and after jet cooker because other alpha-amylases are deactivated in high temperatures.
So, while we are charging a higher cost to [procevo], we are always able to show our customers that they save money on our product versus competitor’s products because of the intrinsic characteristics of our enzyme. The way we look at it is we are competing head-to-head Novozymes and Genencor, Genencor being the division of Dupont.
If we can show our cost savings against our competitors, we are typically not going to win the business. So we go in, we do a two-week trial on site and demonstrate how we are going to save a plant money by running our Fuelzyme alpha-amylase from one of a series of characteristics of our enzyme that creates an improvement in the process, that’s how we are winning business.
Looking to the third category in oilfield services, today we sell our product, Pyrolase which is a cellulase used in the hydraulic fracturing process. Here this is an industry that not only is getting a lot of attention from an environmental perspective but is also looking for solutions depending on the down hold conditions of the well that they are looking to fracture.
So very briefly when you are looking to fracture well, you are typically putting down a guar mix with water, which on the picture that you see is the left side. That’s the gel and the reason you are using the gel is because you put sand in it and the sand then gets transported in the gel like fruit and jello and gets down into the well where you wanted. So when you fracture the rock, the sand remains and props open, is literally called the propane. It props open the fractures you create.
But once you’ve done that you need to get the guar our, you need to get the guar out, you need to get the gel out or else you’ve plugged your well and that’s where the enzymes come in because guars are being -- it’s growing in India. It’s a starch that’s what creates the gel that you see and liquifying it in the after side of our picture is our liquifying starch and that’s something that enzymes are very good at.
We have an enzyme, Pyrolase that’s approved for use and we’ve just announced within the last few weeks that we have a next generation product that is hyper-thermostable, so more thermal stable than our Pyrolase product to bring to market in the second half of this year.
Again, in talking to customers we’ve said that we are in discussions with the big players in this industry and a number of the middle tier players in this industry that are doing hydraulic fracturing.
They said, we have an unmet need between about 140 degrees Fahrenheit and 250 degrees Fahrenheit where we don’t necessarily have the guar breakers that will -- we are doing in order to the guar, fund the gels of liquid and so we started with our Pyrolase products suitable for up to 180 degrees Fahrenheit and now we are introducing the next-generation suitable for up to 225 degrees Fahrenheit, bringing new solutions to the industry.
We say that this doesn’t eliminate all of the environmental concerns of the industry may have, but it’s certainly a good start. We are selling it today. It’s been used for now several years in one company system. We haven’t necessarily said which one? And so we now the product course, so now it’s about driving adoption, about gaining attention and we feel that we are getting traction in this industry given the focus they are getting.
And where we think about what market we get, it very much has to do with the down hold conditions. What is the temperature, what is the pH of the gel that someone is using? And so you need to think about, how does our enzyme fit into someone’s process? And so again, the robustness of these enzymes means that we can be applicable in more people solutions, in more people’s guar fracturing process.
So those are the commercial products. And now I’d like to talk about the slides that we put out yesterday for the first time in our earnings release that relates to our product pipeline. And what you can see on the slide is that we have a series of products that we are bringing to market and as the slide indicates both the estimated market size in the 2016 timeframe.
What we think is the approximate launch date as well as our targeted position within that market, within our Animal health and nutrition, our Grain processing and our oilfield services sectors.
The top two products on the slide, we have partnered with the major industry player in the animal feed business Novus International to bring those products to market. It doesn’t make sense for Verenium to try to target 180 countries as a small company looking to do this in one product.
But Novus already has the sales infrastructure. Novus already has the customer relationships in a channel and so it makes a lot of sense for us to use Novus to bring this next generation products to market.
And when you look at the range of the introduction time table for example for our next-generation Phytase product 2013 to 2015, the range isn’t because we are not certain when we are not certain when it’s coming out. It’s more about in different markets, the regulatory approval process takes different amounts of time. And so this will be a stage rollout over that horizon.
We also announced several new products that we’re bringing for the green processing industry, the reason being that right now we sold two products to that industry. We sold the alpha-amylase and the glucoamylase, which are the two enzyme that the industry requires. We have a next-generation glucoamylase. It’s in our pipeline and we also have several process enhancing enzymes.
Corn ethanol industry in the U.S. is facing a challenging environment right now. And as we look at it, we have several process enhancing enzymes. They are not going to be significant -- as significant in the market as over the products. But they give our sales force something new to sell.
They give us a reason to get into plants and something new to add that helps the customer’s profitability. That’s the reason for driving the two products you see there is very much about bringing solutions for customers and giving a good reason for us to get into a plant.
And finally on the oil field services side, we are thinking still about what to be our next generation breaker. The first product under oil field services, we announced has gotten approval and we expect to launch later this year. The one underneath is because we are learning more as we deal with customers about what their unmet needs are. Is it more pH stability, is it more thermal stability and we can design products to our evolution technology to meet those challenges.
But that’s not the end of the story. Those are the products that are well defined, well advanced and processed with a launch date. What we’re also doing is taking that platform that I referenced at the very beginning and thinking how can we use this in other areas besides the top three on this chart.
We can bring new products that aren’t in the pipeline yet into the animal feed business but we can also bring products into baking, into sweeteners, into detergent, into personal care. What we said last night is we’re in discussions with over a dozen companies, leaders in their field with products and most homes in America about how we bring our unique enzyme platform into the process or their products.
And these are the four areas that we considered worth talking about at this stage because we feel we’re sufficiently fall along in this discussions that we feel these are going to be a part of our pipeline and our product portfolio in the medium term. So when you look at the impact on us, we see in 2012 what are current revenue looks like, where we are addressing a $1 billion in market with $55 million in sales.
We have room to grow with our high-performance products. But in the medium term, the products that I showed you in the pipeline, well defined launched date schedule addressed an additional $400 million worth of opportunity brining our total opportunity to $1.4 billion and when you add in with under late stage discussion with potential partners that’s where we see those expansion pipeline taking us to more than half of the $4 billion industrial enzymes market in the areas that you see listed on the slide.
So why are people interested in talking to us? How do we go into companies that are frankly and on this global and say we have something new to offer relative to what you may have heard from other competitors we have in industrial enzymes? And we really do lead with the technology but more important, it’s that we bring the full suite of capabilities, we have a deep track record in competing with larger companies and showing we can create higher performance.
Our partnering history has been very successful for us and for our partners. We’re small and flexible and frankly you don’t have a lot of alternatives. If you’re a big company and you’re looking to have an important impact and you’re looking to be able to frankly create the structure that you’re looking for, we offer the full suite of capabilities and the flexibility that a small company can bring.
And we have shown that we’re able to do that. And this light simply shows the validation that we’ve had for our technology. BP cellulosic business we sold to BP two years ago is based on the Verenium Enzyme Technology. DSM came and bought products from us at the end of the first quarter, products that only we could create. And so as you look again and again, we show that we validated the technology.
When you look at where we manufacture and I’ll talk about this just prior to going into technology. When you look at where we manufactured, that is the critical piece of the equation. Contract manufacturing of enzymes is not something one can just go out and get any where in the world. It’s a specialized process. It’s a complicated process. We manufacture through a very close relationship with a family-owned business in Mexico City.
We have 390,000 liter fermentation tanks, 190,000 liter is world scale. Typically, you’re working between 150 and 200. So we feel that we have the manufacturing scale. We know that we can improve manufacturing. And so we’ve talked previously about investments we’re making and as Janet said on the call last night, we are seeing improvements in our manufacturing results as a result of that focus.
But we bring the full suite including full commercial scale of manufacturing. So I’d like to spend a minute now, just two slides on the technology because in some ways what’s most interesting about the technology isn’t what we’re going to do but it’s what we’ve done. And when you look at the process of bringing an enzyme to market, you start as you see in the upper left side, identifying what’s the unmet need and what’s then the ideal enzyme that will facilitate the process.
But what we try to do is look at the development options across the bottom. We think we have an absolutely unique set of discovery and evolution processes, patents that we use in industrial enzymes, that’s not where we start because the fastest to market is to take one of the eight products we sell today, which we would call product adjacency and sell it into a new market.
So that way there is virtually no development time. There may be some regulatory time and we’re already manufacturing. So we don’t have bioprocess development. The second place that we go is really the focus of that expansion pipeline that I talked about before, which is our enzyme collection.
The company has been around for 15 years. Diversa was our name previously. We had partnership agreements with dozens of companies. And over the course of those funded efforts where we did was create an enzyme collection of about 4,000 unique enzymes. These are not variance on each other but these are 4,000 unique starting points that are in bottles in San Diego. And so, as I said last night on the earnings calls when we are talking to a partner and they are looking for unique amylase or they looking unique lipase, we don’t start by saying we can run a full discovery and evolution process for you to get your ideal enzyme.
We say whey don’t we ship U-10 in bottles, which we can achieve very quickly. Try it in your process, try it against your application parameters and see if we have a hit. If we have something close, may we’ll do a bit of evolution to get at the rest of the way across the finish line.
So as I say while we practice our full discovery and discovery and evolution technology today, which is far more interesting. They are saying what can we pluck out of our enzyme collection because it’s faster time to market and it frankly is one of those offers that people just can’t really refuse. You say let us send you 10 lipase and see if it matches you need. Let us send you 200 if you have the room to test them, usually they don’t. But those types of starting points from the 4,000 unique enzymes is a really powerful pitch.
And the reason that we have those kinds of starting points, the reason we have the biodiversity is shown on this slide. And I’ll highlight to those looking to learn a bit more we have a webinar on our website that gives you the 15 minute MBA version of how our technology is different.
But in simplistic form, we take an environmental sample and we do something fundamentally different in the competition because of our IP position, because of our capabilities. We create a microbial DNA library, which we can then screen for an active biomolecule. What’s different is we don’t culture.
Anyone can go around the world and pick up samples, the biodiversity agreements may not be so easy to get these days. We have biodiversity agreements with 30 countries under which we created our portfolio but people can pick up the handful of dirt frankly from your backyard, which we will have enormous biodiversity.
But when you culture, when you look for organism that you can transfer to a laboratory setting and culture and see what enzymes of genetic material is available you only get about 0.1% of the biodiversity in a sample and very often you are culturing the same things because the things they grow well in lab environment are often the same even across different samples from different geographies.
So what we do is by extracting microbial DNA, we take that 0.1% that you would see if you’re culturing process and take it to a 100%. It’s a complicated process, we don’t have the organism. We don’t know because we never cultured it where the material may have come from. But what we can do to our experience is figure out once we’ve identified it, how to screen it, using ultra high throughput screening processes and then how to express the enzyme which means plugging it into a new organism and training it to express that enzyme in fermentation process.
So it’s a really different way of approaching the industrial enzyme business but that what gives us the biodiversity and that’s what gives us the unique high performance products.
So looking at the financial results, in the first -- sorry, in the second quarter of this year we proud to day that we paid off our debt that was a challenge for the company without mincing words. But you can see at the bottom that the $44.2 million of debt that we had in the second quarter of 2011 is now gone. The company is debt free as of the end of the quarter.
So we are appropriately capitalized for the company at our stage of development and that’s the focus going forward. As you can see on this slide, we’ve set goals in terms of what our targets are for this year in 2012 on a guidance perspective but at the very bottom of the slide you can see the most important goal from my perspective, which is targeting operating profitability in 2014.
And that’s on the back of effectively these four pieces, which is growing and diversifying our revenue from our current commercial products. It’s about bringing the products from that pipeline to market on schedule. It’s about improving our manufacturing base and by that, I’m not necessarily even saying it requires installing new tanks or adding capacity.
We recently moved into our new facility in San Diego and that was about three months ago and the key part of that is we now have access to our own pilot plant rather than relying on BP for their pilot plant. A pilot plant is where you do small scale experimentation to improve your fermentations that yields directly to more products for fermentation reduced cogs per fermentation. And so being able to do that on our site continuously improve the manufacturing of our current products is what we can now do more flexibly given our own pilot plant that we have.
And then finally, it’s about focus on growth opportunities. How do we announce the partnerships that are going to drive us into those new industry areas that I highlighted around the expansion pipeline. So I think those are my comments. We have a breakout session schedule for downstairs but I think I have 45 seconds left. So happy to take any questions if anybody like to do so here.
Okay. We will stay down for the breakout session. Thanks everyone.