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Verenium Deal Shows Big Interest in Biotech

BASF SE’s purchase of San Diego-based Verenium Corp. represents a strategic play in the global race to acquire biotechnology assets in a quickly changing chemical industry.

German multinational BASF, the largest chemical company in the world, paid $51.2 million in cash for Verenium in a deal valued at $62 million when outstanding debts are taken into account. At $4 per share, Verenium was acquired for a nearly 60 percent premium; its shares were previously trading at $2.51 and have since shot up to $3.99 as of Sept. 25.

BASF (XETRA: BASF SE) said in a regulatory filing that it plans to continue operating Verenium’s laboratories in Torrey Pines, where it employs about 90.

Verenium (Nasdaq: VRNM) genetically engineers bacteria and fungus so they excrete enzymes that are useful for industrial, agricultural and biofuel processes. Traditionally, such substances have been developed in chemical laboratories, but a move to biological production could be safer and more cost-effective, said Brent Shanks, director of the National Science Foundation’s Engineering Research Center for Biorenewable Chemicals at Iowa State University.

Large chemical companies have robust infrastructures and distribution channels, and great expertise in pure chemistry — but very little in biotech, where new advances in chemical development are coming every day, Shanks said.

“What you’re seeing with BASF and Verenium is how these large chemical companies are closely watching these sorts of startup companies and making acquisitions to essentially bring that kind of expertise into their organizations,” Shanks said.

Competition Stiffening In Enzymes

By acquiring Verenium, BASF is gaining access to a vast and unique intellectual property portfolio and enzyme library; it can exclusively use some 4,000 substances with about 750 patents. Verenium has been curating a library of unique microorganisms, often found deep in volcanoes and rainforests, with properties that have yet to be explored. They’ve been found to enhance the performance of substances like sweeteners, detergents, animal feeds and oilfield chemicals.

Jefferies & Co. analyst Laurence Alexander believes the deal will “enhance the growth profile of BASF’s enzymes franchise,” which could herald a “significant longer-term shift in the competitive landscape” of industrial and agricultural enzymes.

This, he said, includes Delaware-based based DuPont Co. and the Danish Novozymes A/S, two chemical giants that have been the prime players in the $3 billion industrial enzyme market. It’s expected to grow to a $6 billion market by 2016, according to Massachusetts-based market research firm BCC Research.

Money Moving In Biotech Niche

There’s been a string of acquisitions and investments in this niche biotech sector, with San Diego synthetic biotech companies like Verenium, Cibus Inc., Genomatica Inc. and Allylix Inc. partnering with large chemical companies or selling assets to them.

For example, Allylix, which develops enzymes that can create fragrances for the food flavoring and perfumery industry, received $13.5 million in funding last year from BASF’s venture capital arm. The company reached out to Allylix two years ago and keeps up an active partnership in enzyme product development, Allylix CEO Carolyn Fritz said.

Meanwhile, Verenium, founded in 2007, has been strategically divesting itself of assets. In 2010, Verenium sold a portion of its biofuels business to BP Biofuels North America for $98.3 million. At the time, it employed 230.

In 2012, it sold its food and oilseed processing unit to Netherlands-based life sciences company Royal DSM N.V. — another major player in the chemical market — for $37 million.

While neither Verenium nor BASF would comment on the recent acquisition, Verenium CEO Jeff Black said in an April interview that the company’s strategy at the time was to “engage in partnerships that will allow us to exploit and develop beyond our core market.” He said at the time that Verenium’s technology platform enabled it to broadly develop potential solutions to simplify industrial processes but that it lacked the infrastructure to grow quickly enough.

“We’re very bullish on our product; we offer products second to none,” Black said. “But we don’t have any visibility as to where the end users are.”

To grow the oilseed processing unit, for example, the company would have to make significant investments to the company’s distribution channels, particularly in China where the oil processing market is gaining momentum, Black said. But the small research and development company didn’t have the funds to grow in this manner. Instead, it made a neat profit from BP and DSM, and now from BASF.

Organisms More Efficient Than Factories

Randal Kirk, chairman and CEO of biotech Intrexon Corp., speaking at the recent BioFlorida conference in Tampa, said industry followers should “think beyond health care” because the most rapid growth in biotechnology is going to occur in the consumer, industrial and agriculture sectors.

Maryland-based Intrexon (NYSE: XON) was one of the most successful in this year’s spate of biotech initial public offerings, raising $160 million in August. Holding shares of more than 50 percent of the company, Kirk netted $1.5 billion in the IPO and is widely considered one of biotech’s savviest investors.

Biotech companies have typically focused on low-hanging fruit, avoiding the big picture, which would be to sidestep pharma and work on an industrial scale instead.

“Living organisms do things so much more efficiently than chemical factories do,” he said.

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