It was only a matter of time. Last month BASF (NASDAQOTH: BASFY ) , the world's largest chemical company, announced three separate developments that will thrust it from being a mediocre player in industrial enzymes to a dominant force. BASF acquired Henkel's detergent enzyme technology, licensed the C1 biotechnology platform from Dyadic, and befriended Direvo Industrial Biotechnology from Germany for a next-generation animal feed enzyme.
The company will now compete more readily with industry leaders Novozymes from Novo Nordisk (NYSE: NVO ) and Genencor from DuPont (NYSE: DD ) . However, the biggest effects could be felt at Codexis (NASDAQ: CDXS ) , which has also licensed the cutting-edge host organism from Dyadic. Will BASF's push into industrial enzymes, specifically using the C1 platform, vindicate Codexis or shove it out of the way?
There are numerous advantages to the C1 platform that make it an easy choice. First is the host organism itself, the fungus Chrysosporium lucknowense, for which the platform is named. (Fungi are responsible for breaking down cellulose in nature, thus making them optimal commercialization targets.) Novozymes and Genencor utilize Trichoderma fungi and both feel entitled to enzymes developed from the microbes. Simply Google "Genencor Novozymes lawsuit" to see the pile of legal battles fought over their similar technology platforms in the past decade.
Dyadic's novel host organism is openly licensed, which has thus far skirted costly courtroom appearances. Additionally, the enzymes produced from its spores have demonstrated superior performance at wider ranges of pH and temperatures. It is also equipped with better genomic tools and -- as if it couldn't get better -- has shorter filaments, which yield significant benefits for large-scale commercial production of enzymes (less viscous, better flow).
Dyadic also lets licensees produce enzymes wherever they want, whereas Novozymes and Genencor insist on shipping bags of enzymes to customers on a contract basis. That is particularly bad news in the enzyme business, where enzyme activity and efficiency can be greatly impaired the longer a product sits on the shelf (or in a rail car). No wonder Dyadic has courted world-class companies such as Codexis, Abengoa, Sanofi-Pastuer, and BASF for applications in biofuels, pharmaceutical intermediates, animal health, nutrition, biopharmaceutical production, paper products, and more.
How does this affect Codexis?
Codexis was among the first companies to license the C1 platform and has turned the potential into performance -- likely turning others onto the possibilities. The company has dramatically improved efficiency and lowered manufacturing costs since developing its first strain for CodeXyme cellulase enzyme production in early 2009.
Despite all of the progress Codexis has yet to find a commercial partner for its cellulase enzymes since being dropped by Shell last year (10 months and counting now). Does BASF's dash to the C1 platform somehow vindicate Codexis' ambitious goals? I suppose one could see it that way, but I wouldn't get too excited. The company is developing enzymes for animal and human nutrition "among other markets". So while the move may once again prove the industrial importance of the C1 platform, it is unclear if developing cellulase enzymes for the economic production of bio-based chemicals is a goal.
What if it is?
In the worst case scenario, Codexis and BASF would be competitors. Given that the world's largest chemical company has a market cap over 1,000 times larger than the developmental stage industrial biotech firm, I'm in no mood to party. There may be some good news. BASF has a massive financial reach, but Codexis got this far on the budget of one of the largest oil companies in the world -- not that of a tiny start-up. So it won't be easy to leap into the lead. Besides, directed evolution -- the biologic tool used to develop enzymes -- only works so fast.
In the best case scenario, BASF could tap Codexis as a partner or force another company to make such a move. The company isn't a major player in fuels, but it did invest $30 million in Renmatix early last year for its thermocatalytic platform for producing cellulosic sugars. It wouldn't necessarily make sense to develop its own biocatalytic process when Codexis is already 4.5 years ahead of a base strain, unless Dyadic provides an enhanced base strain to work with.
Foolish bottom line
Having the most mature platform in the industry is the biggest selling point Codexis management has at the bargaining table with potential partners. Can it lure in BASF? It would certainly help the company's prospects, but I wouldn't speculate. There are plenty of fuel-focused companies that seem to be a better fit at this point, although there a bigger opportunities in high-value specialty chemicals. Unfortunately, the waiting game continues for investors.
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