Welcome to the Feature article of this newsletter for the month of November where I try to go deep into one subject. I interviewed the founders of Solugen awhile ago and based on some other start-ups I’ve seen out there it got me thinking about what a chemical company of the future would look like and who might try and disrupt the status quo. I think we have the beginnings of that future taking hold.

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Capital is the lever, catalysts are the fulcrum, and the market is pushing

The modern chemical industry has been tied to oil, natural gas, and coal since the early 1900s. The chemical industry gets many of their feedstock materials from a finite supply of carbon that is sequestered in the ground. Oil companies are very good at removing and refining oil and chemical companies are good at transforming refined oil into useful products that we rely on every day.

One important thing to consider in chemicals is how profitable the company is at any given time. Oil prices have always factored into profitability of any chemical company and the former Dow Chemical CEO Andrew Liveris’ biggest achievement during his tenure at Dow Chemical was decoupling the company’s stock price from oil market fluctuations. Whenever oil prices went down, so did the stock price of Dow Chemical back in 2014. Liveris changed this by pushing into specialties.

“The oil overhang is in our past. When we were a pure commodity company, there was a lot of view that commodity companies would go down in profits if oil prices dropped … Firstly, we are a very different type of company. Secondly, we have assets all around the world, like Europe, where a low oil price actually helps our margins. And thirdly, a low oil price is a massive discount to the world’s economy. Like a tax break,” said Liveris.

The world of chemicals has changed significantly through mergers, acquisitions, and divestments over the past seven years with the rise and split of DowDuPont and the fragmenting of Hexion. Most chemical companies are pushing into “pure plays,” in an effort to return more value to shareholders in being able to “fine tune” their portfolios. Dow Chemical is back to being a commodity chemical company now and DuPont is a specialty chemical company. I’ve been told that a simple metric to follow is that in commodity or commoditized chemicals a 10-15% EBITDA margin (a way to measure profitability) is typical and anything higher than 15% is notable. In specialty chemicals 15-20% EBITDA margin is typical and anything higher is also notable. Industrial chemists and chemical engineers are typically trying to improve that EBITDA margin by hitting risk adjusted home runs via incremental innovation, but are mostly constrained by raw material prices, energy prices, and efficiency.

The chemical industry, while intrinsically tied to oil right now, also has another problem in that it takes a significant amount of energy to do chemical transformations. Steam cracking ethane to ethylene for instance takes place at very high temperatures and pressures. This means chemical companies need a massive amount of energy and they also need to permit their emissions, much like how an airport gets an air permit. Right now, living next to a chemical plant is not viewed as a good thing, but as a potential hazard. I wouldn’t want to live next to a busy highway or an airport just as much as I wouldn’t want to live next to a chemical plant.

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So what does the future look like for chemical companies?

If we re-examine the themes that I’ve laid out in writing this newsletter, the first theme is sustainability and how large chemical companies are not incentivized to take on the risk to disrupt their own status quo. Chemical start-ups are where the risk is right now for Innovation and I think it is from a start-up we might see what I would consider the chemical company of the future.

Solugen - A Chemical Company Of The Future

I believe in sustainability more than most, but perhaps I’m cynical too because I do not think sustainable chemistry or green chemistry will ever become widespread enough unless there is a clear economic advantage to being sustainable. As I was writing this article COP26 has come and gone and I suspect that things will mostly continue as they have been until the next global meeting of world leaders. I suspect that if we do intend to avert the worst of climate change it will come from the private sector and the flywheel of capitalism.

One company that caught my eye this year was Solugen. I read about them from Mike McCoy in C&EN here and here and then even from CNBC here. What I took away from the articles was that Solugen was probably somewhat similar to Novozymes, but a leaner and cheaper version, or at least that is what I wrote on Twitter.

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@aryelipman I'm actually working on something with @solugen and @Novozymes as a comparison. My current hot take is that Solugen is very similar to Novozymes, but they might be able to take it a step further if they get some IP granted.

Gaurab chimed in so we got together with his co-founder Sean Hunt, we spoke for 30 minutes, and I got a more clear story of what Solugen is actually trying to do. I think a good place to start is from a place of economics and it ties into what Andrew Liveris was trying to do with Dow Chemical that I wrote about earlier. The idea of starting from oil can be a disadvantage.

What if there were even higher margin chemical companies that could deliver lower costs than we have now?

When we start with oil as our feedstock things only get more expensive from there. The key is finding a lower cost feedstock than oil, even better, what if someone paid you to use your feedstock so instead of starting at the price of whatever oil costs, a company is starting by getting paid to take waste material at a slight profit and then building on those profits by doing chemical transformations. This is the concept of what I’ve been calling a reverse logistics company.

Solugen ultimately aims to have this be part of their business and they are not alone as LanzaTech and Mango Materials are pushing for similar models where carbon dioxide and methane are feedstocks of the future.

Solugen’s differentiator to LanzaTech and Mango Materials is that they are not really a biotechnology company, but they are a chemical company that uses biologically based catalysts, which are called enzymes. Solugen uses CRISPR to engineer microbes to produce way more enzymes than a microbe is typically capable of producing, they isolate the enzymes, and then uses their enzymes as a catalyst to turn chemicals such as sugars into gluconic acid and hydrogen peroxide, two of Solugen’s early products and a current revenue generator for water purification.

To me, this enables Solugen to have a lot more flexibility around how they produce products. They get the best of both worlds in a sense of being able to use enzymes (what microbes do) and they are also in a sense free to use the best of traditional synthetic organic chemistry. Further, Solugen has vertical integration around enzyme fermentation, which enables them to have even greater control of their supply chain as opposed to being beholden to a select few enzyme producers.

Solugen does these chemical transformations using a well known synthetic technique known as enzymatic catalysis. Instead of using an immobilized enzyme (classic Novozyme’s business) Solugen uses free enzymes in the reaction system to take advantage of the shorter cycle times. Sean Hunt told me that their reaction productivity is at 50 grams per liter per hour while traditional fermentation (biomanufacturing) techniques are at 10 grams per liter per hour, a 5x in productivity. In addition, because Solugen is using free enzymes they do not have the downstream processing issues that traditional fermentation techniques require and they can just filter out their spent enzymes. This might seem like a low production rate compared to traditional synthetic chemistry reactions, but there is an energy component to consider too.

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Enzymatic reactions happen at room temperature or near room temperature under essentially ambient conditions. Traditionally, chemistry has always required the heating of reactions, and this requires a significant amount of energy, typically in the form of steam or oil in either coils or heated jacket reactors. Steam is often generated on-site through boilers and is energy intensive when compared to an enzymatic reaction, which in theory needs no steam. If Solugen gets their feedstocks from biomass or even waste carbon from a steel mill then their whole moniker of carbon negative chemicals starts to make sense.

Further, enzymes give the ability to have stereoselectivity and regioselectivity. The classical chemistry way around yielding these things has either been in catalyst development, protection/deprotection chemistry, or just throwing the problem over to your chemical engineers to solve through separation. For very specific chemicals where stereochemistry matters or where costs are high due to traditional chemistry routes, abundant and low cost enzymatic catalysts could become deflationary.

Enzymes can also work in both directions. For example, lipases are known to cleave lipid bonds and proteases are known to cleave protein bonds, but if you put these enzymes into specific solvents you can reverse the reaction from cleaving bonds to forming bonds. Cleavage of bonds with enzymes can also be good in doing ring opening polymerizations too without solvents. This means that whatever enzymatic reaction we can think of moving in one direction as in nature, we can also get it to move backwards.

You might be thinking, “well if enzymes are so great, then why don’t more people use them?” It’s a good question and I suspect the answer is that traditional enzymatic catalysis has been pricey due to fermenting and engineering enzymes to do what we want. The high cost of enzymes led to doing heterogeneous catalysis, i.e. putting enzymes on porous polymeric beads so that they can be recovered post reaction and re-used. Immobilization is also not that easy and can incur significant costs. The other issue with heterogeneous catalysis can also be one of mass transport where the catalysts need to come into contact with all of the reactants and can lead to longer reaction times.

When modeling out the economic effectiveness of a chemical reaction we often think of atom economy, temperature, and how much effort goes into isolation (distillation, columns, washing, etc). Reaction time or “cycle time” is important to consider because if a reaction has historically taken 24 hours to achieve, but it can now be done in 12 hours or less then consider the cycle time reduction as doubling the potential output of that specific reactor with no capital expenditure.

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Solugen’s free enzyme approach essentially eliminates the mass transfer problem, which leads to faster reactions, and they side step the whole heterogeneous enzymatic catalysis approach (Novozymes) because they have lowered the cost of their enzyme production significantly. They have further integrated their enzyme production. Instead of a contract manufacturer extracting a 50%+ margin to manufacture enzymes for Solugen they can now capture a minimal pass through margin internally and use their enzymes in a single use fashion.

Solugen is also seeking the flexibility to use the best of what is currently available in transition metal catalysts with their enzymatic catalysis platform per a recent patent filing. The diagram below is from their current patent application specification. You can read it here.

The big thing to think about here is if Solugen can successfully activate carbon dioxide or methane at really low costs. This could be in the form of adding carbon to carbon dioxide or oxidize methane to either methanol or carbon monoxide. If this process less energy intensive and cheaper than what is possible now then they are set to capture a gigantic amount market share and big margins. I believe there are some interesting electrochemical reactions being done in this space too that I need to spend some time trying to understand, but I’m bullish on the enzymatic route due to lack of needed energy inputs.

If you are really interested in enzymatic catalysis and how enzymes can be used to do chemistry on hydrocarbons I would start with this review with Bergman. Methane is abundant here on Earth, but it is also abundant out in space and on other planets. If you want to live in the Elon Musk dream of being interplanetary there is no plastic waste or oil in space that we know about, but there is methane. Apparently, it even rains methane on Titan. I digress.

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Target Selection

Solugen has raised a bunch of money and I suspect that they are trying to figure out their next target while they also try to figure out how to use a wide variety of different feedstock chemicals. Picking their next target is going to be important and I think they will eventually be looking at monomers and feedstocks for polymers. After thinking about this for a while I would point them at the old mnemonic for dicarboxylic acids, “Oh My Such Good Apple Pie.”

Oxalic
Malonic
Succinic
Glutaric
Adipic
Pimelic

If Solugen can make those six diacids and keep going to higher order diacids, their corresponding diols, and even the omega-hydroxy acid versions through a cheaper route than what is currently possible with oil then they have a big chance to capture a bunch of different end markets. They can either decide to move vertically into those markets or just sell to the current buyers of these molecules at significantly higher margins than the incumbent players do now. They key is showing the high margins, but at a deflationary price compared to what is possible now.

For instance if adipic acid costs $1/pound right now and it is a commodity chemical (10-15% EBITDA margin) and Solugen is able to come into the market at $0.90/lb, but capture a EBITDA margin 30-35% then it’s really just a matter of how fast can they build out capacity to gain all of the volume. Supposedly, adipic acid is going to be a $8.0 billion market by 2024 with a CAGR of 4.7%. The use of adipic acid is primarily in making nylon and specialty polyesters.

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The big problem Solugen might face if they can demonstrate continued viability for their platform is meeting the potential demand. Bioamber was founded on the idea of just making succinic acid through a sugar fermentation route, but they ultimately folded. I suspect Solugen can do succinic acid and much, much more.

Plants use enzymes to convert carbon dioxide into higher ordered carbon molecules all the time. We have known that using enzymes could be economical, but I suspect that CRISPR will enable ambitious start-ups like Solugen to produce a wide array of engineered enzymes at a significantly lower cost than was once possible due to not needing the high energy inputs. As I have written before, small and/or private companies want Innovation while big companies want innovation.

I think Solugen has the potential to be a chemical company of the future where their production facilities are located close to their customers and potentially even close to residential areas. Solugen could change the perception that living next to a chemical plant is dangerous because they have the potential to output significantly less or 0 emissions and when compared to the large chemical companies we have now that is a big bet to be making. The upside if that bet pays off is gigantic though.

Tony

PS. I don’t own any stock in Solugen, but I would if they were public.

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The Polymerist

The Chemical Company Of The Future