Codexis Becomes Target For Suitors Seeking Enzymes, Chief Says

Codexis Inc. (CDXS), the U.S. enzyme maker that has worked with Royal DSM NV and Royal Dutch Shell Plc (RDSA), said it is a potential takeover target as chemical companies expand in higher-margin markets such as biofuels from plants.

DuPont Co.’s $6.4 billion acquisition of Danish food-enzyme maker Danisco A/S this month makes Codexis more valuable because it has reduced the number of independent enzyme makers available, Codexis Chief Executive Officer Alan Shaw said from the headquarters in Redwood City, California.

“Ultimately someone will run a slide rule over the numbers and say it might make sense,” Shaw said in a phone interview yesterday. “They’ll have the resources to leverage it.”

The Danisco deal heightened interest in biotechnology and its uses in the $3 trillion chemical industry as Middle Eastern and Asian petrochemical suppliers seek to expand toward end consumers, descending on markets that were traditionally the domain of western rivals.

Codexis, which is unprofitable and 16.5 percent owned by Shell, is developing enzymes that accelerate the production of biofuel made from wheat straw and bagasse, the residue from sugar cane. Remaining an independent company in the long term is not viable, Shaw said. The cost of building a 100 million-gallon cellulosic facility would extend to hundreds of millions of dollars, he estimates.

‘Undervalued’

The shares have dropped 31 percent since its listing last year that valued the company at about $440 million. The business is worth $1 billion, and investors are failing to pick up on its potential, said Shaw, who has bought 100,000 shares in the past two weeks because they are “incredibly undervalued.”

Governments in Europe and the Americas are encouraging development of so-called second generation biofuels which don’t compete with food crops, because they use plant waste and grasses. Shaw said Codexis later this year will scale up its cellulose technology for use at a test facility in Ottawa owned by Iogen Corp. and Shell that’s capable of producing a million gallons of ethanol per year.

A “world-scale” facility capable of producing 100 million gallons won’t be ready until at least 2015, he said. While currently contributing nothing to earnings beyond research funding, biofuels are poised to transform the company’s fortunes in the future, he said.

Ethanol Production

Brazil has the potential to double ethanol produced from sugar cane if it would also use bagasse and leaves as feedstock, according to Shaw.

“In 2020, this will be a significant piece of our business. The revenue potential of the products and projects we have in hand today exceed a billion dollars,” Shaw said. “By 2020, the revenue of this company will be billions of dollars, and this fuel thing will be at least 50 percent of that.”

Last year’s IPO bolstered the balance sheet and reassured pharmaceutical clients including Pfizer Inc. of the long-term viability of Codexis. Shell is set to transfer its 16.5 percent stake in Codexis to Raizen SA, a joint venture with Cosan Industria & Comercio, the world’s largest sugar-cane processor.

In October, Codexis purchased the intellectual property rights from its former parent company for $20 million, allowing its enzymes to be applied to the production of chemicals.

DSM Alliance

Codexis is now in the process of securing a partner for this field, referred to as white biotechnology, as variants of the same molecules used in biodiesel and drugs can be applied to consumer goods like shampoo, replacing traditional chemicals, Shaw said. The transaction makes Codexis a good fit with DSM, among others, said the executive.

Codexis on Jan. 12 signed an agreement to supply DSM with enzymes that accelerate the manufacture of ingredients used in pharmaceuticals. Heerlen, Netherlands-based DSM has emerged from a decade-long transition from cyclical chemicals to additives derived more from enzymes other than oil. Like Codexis, it develops biofuels.

The Dutch company is “actively” seeking acquisitions with more than 2.5 billion euros ($3.6 billion) to spend, and is at various stages of assessing targets, Chief Financial Officer Rolf-Dieter Schwalb said in an interview this month. He didn’t name targets. Spokesman Herman Betten declined to comment when contacted by telephone today.

“I see DSM as a strong player in the space and I see synergies between our companies and I could see areas of mutual cooperation,” Shaw said.

Codexis is close to forming an alliance, said Shaw, who declined to identify potential partners. The company is looking to announce a comprehensive partnership this year, rather than a non-binding memorandum of understanding, he said.

“To do a deal well, it actually takes longer than you think,” said Shaw. “We’ll do the right deal and it’ll be a deal that’s good for both sides.”

To contact the reporter on this story: Andrew Noel at anoel@bloomberg.net; Alex Morales in London at amorales2@bloomberg.net.

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net.

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