| This article is from Progressive Investor, our monthly sustainable investing newsletter. It provides on-going analysis of clean tech investment opportunities: renewable energy, fuel cells, organics, forests and emerging areas on the private and public sides. |
When we imagine what a model sustainable company might look like, we see a company that functions the way nature does – developing products that support life functions without exploiting natural resources or leaving a footprint. Rather than simply extracting from nature to make products, the company would view nature as its mentor. It would study nature’s models and then imitate or take inspiration from those designs to develop products. Bill McDonough, leading green architect and sustainable systems designer, has been promulgating this “cradle to cradle” approach for many years. Biomimicry and “Natural Capitalism” are other terms that describe a similar approach to creating products that work with nature.
This seems pie in the sky, and it still is for most companies. But one publicly traded company bases its entire business model on it – Novozymes A/S (NZYMb.CO). Based in Denmark, Novozymes is the world leader in biotech-based industrial enzymes and microorganisms. “We find biological solutions to industrial problems anduse tomorrow’s sustainable technology,” says CEO Steen Riisgaard.
What Novozymes Does
What’s a biotech enzyme?! Enzymes are found in every living organism from humans to microorganisms. They are nature’s tools – biodegradable proteins that speed up all vital biological processes. For example, enzymes in our stomach cut food into smaller pieces so it can be transformed into energy. When enzymes are finished with their work, they degrade and are absorbed back into nature’s cycle.
Novozymes’ enzymes are working their way into many everyday products including laundry detergents, bread, olive oil, wine and even the turf on your local golf course. Why, for example, would manufacturers use enzymes to clean clothes instead of synthetic chemicals? Enzymes perform better. They make the manufacturing process more efficient and less expensive. Clothes can be cleaned at lower temperatures. In the paper and pulp industries, enzymes can replace chlorine. They are completely biodegradable, which reduces the company’s waste stream and the need for undesirable chemicals.
Where do these enzymes come from? Novozymes finds enzymes by growing microorganisms like bacteria and fungi. They are the easiest to grow and handle and produce the most enzymes, all of which are completely harmless. But finding the enzymes isn’t easy. Novozymes scientists analyze bacteria and fungus samples from around the world to find a microorganism that produces a huge amount of enzymes and is easy to grow. This is where biotechnology comes in: since the perfect microorganism is so hard to find, scientists combine the best traits of more than one organism. Using three dimensional computer techniques, scientists can adjust DNA sequences to make new enzymes.
The main markets for Novozymes’ enzymes are detergent, starch and textile industries; the food industry (baking and brewing) and the animal feed industry.
Company Facts
In 1989, two Danish pharmaceutical companies merged to form Novo Nordisk A/S (NVO). Novozymes was the “enzyme business” division of that business until they were spun off in November 2000.
Novozymes quickly established a solid position. With a global marketshare of 44%, they are by far the dominant company in the field, twice as big as their nearest competitor Genencor (GCOR). The company is profitable with strong positive cash flow and a very solid technology foundation. Its products are an excellent example of clean technology that is increasingly used around the world. Enzymes can be used in every industry, giving Novozymes lots of room to grow. Novozymes employs 3700 people, 20 percent of which are in research and development. About 11% of revenues go into research. With very few exceptions, the company is behind every major discovery in the field over the past 40 years. This sophisticated and expensive technological capability makes it difficult for new competitors to enter the field.
Novozymes is known for its commitment to the triple bottom line of financial, environmental and social performance. They wrote their first environmental policy in 1975, and have been producing environmental reports since 1994. The company is also known for its extensive stakeholder involvement, addressing the full range of relevant issues including animal testing and gene technology.
Explains CEO Steen Riisgaard, “Initially the investment in operating this way is higher but in the long run we have no doubt this is the only way to operate. We’ve shown that within a short number of years the investment you make in improving environmental performance is paid back in savings in raw material, water and electricity and other resources.” The company is known for its outreach to NGOs – they are invited to visit the company’s facilities each year to discuss how they are doing and what they should be doing.
In 2002, Novozymes’ social goal was to develop standards to evaluate suppliers on human rights and labor standards. In 2003, purchasers were trained to assess suppliers based on the standards. In 2003, this program covered 35 percent of their most important suppliers.
Novozymes’ dedication to corporate sustainability is carried through management remuneration. All directors and vice presidents stand to receive a cash bonus for 2004 based on achieving all 13 environmental and social targets published in its 2003 annual report.
For the fourth year in a row Novozymes placed as number one in the biotech sector globally in the Dow Jones Sustainability World Indexes, and in the Europe indexes. Scientific American recognized the company as one of the 2003 ?Scientific American 50,? as “Business Leader in Chemicals and Materials” for its research in lowering the cost of enzymes used to convert biomass into ethanol. And in 2004, the company was awarded the “best workplace with more than 1000 employees” in Denmark.
Where Novozymes is Going
Although enzymes for industrial use will be the core business going forward, Novozymes’ expansion strategy is to apply this technology base to other industries. “We’re just taking one industry at a time,” says Riisgaard. The goal is to achieve a growth level of 10% per year, by growing the internal business and through acquisitions. The company is expanding into new areas including biomass to ethanol, pharmaceutical applications, and industrial treatment.
In the pharmaceutical sector, Novozymes is developing new kinds of antibiotics – peptides (small proteins) that can be used to treat infections. And pharmaceutical companies are using Novozymes’ fermentation technology to produce pharmaceutical proteins, a process that is much cleaner, faster and higher yielding than conventional methods. Novozymes acquired BioGaia Fermentation based in Sweden- now Novozymes Biopharma – to gain a foothold in this field.
In 2002, Novozymes created a division to focus on biological solutions for wastewater treatment and cleaning. They acquired three U.S. companies that are now part of Novozymes Biologicals, based in Virginia. They produce microorganisms to maintain dr
ains, septic tanks, industrial biological treatment plants, and animal feed.
Novozymes wrapped up a three year US$14.8 million research contract from the U.S. Department of Energy’s Biomass Program aimed at developing enzymes to jump-start the biorefinery industry. A team of 25 scientists at Novozymes Biotech, the California-based research subsidiary, dramatically reduced the cost of converting plant waste material (biomass) to ethanol and other fuels (from the current US$6 a gallon to $1.50).
The U.S. ethanol market is growing by about 20% a year, providing a huge potential market, especially to replace the hazardous gasoline additive MTBE. Conservative estimates suggest that biomass supplies in the USA are sufficient to produce over 20 percent of all the gasoline sold in the U.S. Since biomass (agricultural waste) is everywhere, the new technology would allow ethanol to be produced anywhere.
Joel Cherry, the research project leader, sees even bigger possibilities. “We are making glucose from cellulose. Glucose can be used as a chemical feedstock to produce specialty chemicals, solvents and bio-plastics.”
Our Take on Novozmes’ Performance
Novozmes has been on Progressive Investor’s SB20 Top Sustainable Stock list for all three years. In the June 2004 issue of Progressive Investor when we announced the SB20 companies, each of our partners expressed confidence that Novozymes is truly one of the world’s most sustainable companies.
The stock gained 45.6% in 2003 and continues to beat analyst estimates in 2004. Novozymes raised the outlook for 2004 full year results by 11% despite exchange rate movements. For the first three quarters of 2004, after tax profit rose by 13% and earnings per share increased 16%, while reducing water and energy use by 16% and 13% respectively. Novozymes has consistently raised its dividend and is continuing to use excess cash to buy back shares.
Novozymes is likely to grow revenues at a minimum of 10% annually into the foreseeable future as enzyme use increases in scope and spreads to other industries, such as pharmaceuticals, cosmetics, dairy and fuels. A ban on MTBE in the U.S. would be a boon for Novozymes. China is also emerging as a growth market for fuel ethanol.
There couldn’t be a better case for sustainable business and profits going together!
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Learn more about biomimicry.
Biomimetic Buildings: Understanding & Applying the Lessons of Nature
Cradle to Cradle: Remaking the Way We Make Things
| Rona Fried, Ph.D., is President of SustainableBusiness.com, the online community for green business: daily sustainable business news, Green Dream Jobs, and Business Connections. SustainableBusiness.com also publishes Progressive Investor, which provides ongoing analysis of clean tech investment opportunities. |
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