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Biopesticides: the new Biotechs?

Posted in Investors, Sustainability by David Mott on Fri, 3 Feb 2012

A dwindling pipeline of new technology; major companies threatened by blockbuster products coming off-patent, an increasingly stringent and constraining regulatory environment. Sound familiar? Not the pharma sector, but the high growth sector of biocontrol.

 

A dwindling pipeline of new technology; major companies threatened by blockbuster products coming off-patent, and by the loss of efficacy of tried and trusted brands; an increasingly stringent and constraining regulatory environment; and major players looking to partner with smaller, nimbler companies to broaden their  portfolio and  develop novel, more targeted and potentially more effective treatments.

Sound familiar? But in this case I’m talking not of the pharmaceutical industry, but of pesticides: a global industry worth around US$40bn, but one which is under pressure; pressure from many of the same factors, like those listed above, which ‘big pharma’ was facing some ten years ago.

Once upon a time in pharmaceuticals…

In the case of big Pharma, many readers will of course be familiar with the paradigm which has generally been adopted as a solution to that crisis. Faced with diminishing pipelines of new products, rising costs of development, and an increasingly burdensome regulatory environment, at a time when many ‘block-buster’ treatments were shortly to come off-patent and face competition from generics, most of the world’s major pharmaceutical firms have been forced to down-size their own R&D operations. Instead, they have pursued a policy of partnering, in-licensing and purchasing of fast-moving biotech firms, which have been better placed to develop a new generation of healthcare products often targeted towards smaller, better-defined patient groups.

Pesticides : big players are struggling to maintain competitiveness

Today, many of the world’s biggest agro-chemical firms are facing a remarkably similar set of challenges. Some of the industry’s most successful products will shortly be facing tough competition from generics as their patent-protection expires: some 35 major pesticide products are due to come off-patent in the UK and EU over the next five years. Many of these same companies are also facing up to the reality that their biggest products are simply not working as well as they used to, as their target pests or weeds begin to develop resistance, following years of over-use by farmers (Over 500 species insect pests have resistance to one or more insecticides, and there are over 200 species of herbicide-resistant weeds). At the same time, the use of traditional chemical-based pesticides is also coming under considerable external pressure; from consumers and retailers, demanding safer, cleaner, more environmentally friendly food; and from regulatory agencies, which are adopting increasingly stringent regulation, and taking a critical look at some of the older products currently on the market. The charge is being led by the EU, whose 2009 Sustainability Directive is likely to lead to hundreds of commonly used products being banned, with UK farmers being particularly affected.
It is a truism of course that crises create opportunities, and as the world’s major chemical companies look for solutions to their current woes, new approaches will come to the fore.

Enter Biopesticides…

A number of smaller biochemical firms have for some years been developing novel approaches to pest control which use natural products – plant chemicals, insect pheromones, and microbial toxins –  to tackle insect or plant pests.  Some of the technology has been available for many years (the best known biopesticide, Bt toxin from the bacterium Bacillus Thuringiensis, was discovered near the beginning of the century and first marketed in the 1950s). But the combination of  pressures now facing the traditional chemical manufacturers may mean that the biopesticide market, which has been smouldering for years as an interesting but tiny arm of the enormous chemical pesticide industry, could be about to ignite.

Oxford Capital in the market – our perspectives

As one of our three ‘super-growth’ themes, Oxford Capital Partners aims to be a key player in the sustainability sector, so the opportunities for better, more targeted and more environmentally-sustainable solutions to pest control offered by biopesticides are of course of great interest to us. Oxitec, one of our portfolio companies, has developed an exciting new genetic technology to control mosquitoes and other insect pests. Another of our portfolio companies, Exosect, is exploiting the unique electrostatic properties of a natural plant wax to develop both chemical and pesticide formulations which stick to insects, delivering more targeted, more effective, and more efficient control.
Recent market research suggests that the bio-pesticides market, currently valued at around $1bn (or about 3% of the wider pesticide market) is due for rapid expansion – 15% CAGR in the EU. It’s exciting for us that some of our portfolio companies stand ready to exploit this growing opportunity.

Of course, there are considerable barriers still. Firstly, there’s the fact that farmers tend to be risk-averse when it comes to new products. There is pressure from distributors to deliver ‘perfect’ produce, so in adopting a new control strategy, farmers are taking a chance: it’s not enough for a biopesticide to be environmentally friendly; it has to be as good or better than the leading chemical product in the market. Secondly, bio-pesticide control strategies can be more complex than single use, single application chemical pesticides. More often than not, they are most effective as a component of ‘integrated pest management’ schemes, involving combination treatments with different products and control strategies. These schemes require a considerable knowledge base, and significant investment of time and resources on the part of the grower. Finally, bio-pesticides aren’t yet the darling of the ‘concerned consumer’ that we might wish them to be. The name itself still bears all the negative connotations of ‘pesticide’ and there is work to do before the sector is fully embraced by the organics market, and the tremendous consumer support and pressure that might bring to bear on the market.

Nevertheless, biopesticides are increasingly finding their way into mainstream agriculture, and in the tradition, perhaps, of the outsourcing and in-licencing strategy adopted by big pharma, biopesticides and the companies which manufacture them are beginning to attract the attention of the ‘big players’. For example, AgraQuest, a US biopesticide manufacturer, recently signed a major new agreement with chemical company BASF to market and distribute its leading ‘SERENADE’ fungicide in Europe, Asia, and Africa. In the same year, it entered an agreement with herbicide and seed company Monsanto to develop new bio-treatments for seeds. Our portfolio company, Exosect, has already attracted the attention of Bayer AgroChemicals, which last year signed an exclusive license on Exosect’s ‘VarroMite’ product for honeybees.

So the opportunities offered by Biopesticides are real, and are already beginning to be realised by front-running companies like AgraQuest, and our own Exosect and Oxitec. It’s an exciting and fast moving area. So if there are any entrepreneurs out there with a great idea for a new way to exploit its enormous potential – we’d like to hear from you!

With thanks to Michael Conway for his contribution to this blog.