Monsanto invests in Sapphire

Monsanto recently announced a strategic equity investment in algal biofuel developer Sapphire Energy, along with a joint R&D agreement. Several aspects of this deal warrant further analysis:

1. Sapphire has licensed the round-up gene from Monsanto and incorporated it into their algae, which gives Monsanto royalties+Roundup® revenue. It is reasonable to assume that other Monsanto genes and chemical applications will be useful in algal biofuel monoculturing. If Sapphire succeeds and scales to fuel production size, then they’ll be one of Monsanto’s biggest customers in the world. In fact, they could well become Monsanto’s biggest customer. This combination is creative, logical and accretive from a strategic partnering/investing perspective for both companies.

2. Sapphire appears to have found a way to generate near-term revenue from their pilot/demo scale operations without having to change their target product and pursue nutraceuticals, oleochemicals, or any of the other higher-value products being pursued by algae companies. Monsanto will be paying Sapphire to conduct research in screening for and testing genes in their algal biotech work that could have broader agricultural applications for Monsanto. So Sapphire will continue to pursue their biotech work and algae production work with fuels as the target product, but generate revenue through the identification/screening/testing of genes for Monsanto.

Jason Pyle, the CEO of Sapphire, said in a January interview that they’ve refused to attempt to commercialize anything but fuels, and that “once you make lipstick you become a lipstick company”. In other words, once you are generating profits in one business model and once you’ve designed your production system around those outputs, it will be difficult moving the business toward fuels, especially if further fundraising and production re-design are required. We also know from their patents that they’ve designed an extraction process that hydrolyses all of the algal biomass, freeing up the metals and other heteroatoms to be recycled to the growth media as fertilizer inputs (closed system), and hydrogenating the remaining C,H, and O content to make a crude substitute. So Sapphire really can’t target outputs other than crude oil. They get higher oil yields by converting all of the C and H in the algae to oil (as opposed to just extracting triglycerides), but they won’t be marketing co-products.

And so through this agreement, Sapphire may have found a way to stay focused on fuels, push forward with their production/technology system as currently imagined, and still generate near term revenues as they work to commercialize their business.

For a link to an article on Monsanto’s investment, click here.

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