Algae is a potentially sustainable source of production for materials ranging from food ingredients to fuel.
Algae produce a large range of different oils and natural products. Their bioproduction is prolific. For example, crude oil is theorized to be derived originally from algae. Millions of years ago, algae and plants, after dying, sinking and being buried on the seafloor, would be subject to high pressure over millions of years, transforming that organic matter into what we know today as fossil fuels.
The practical question is what oil or natural products can algae produce that is of commercial value?
This field has already gone through a few generations of technologies and business models. Innovation is sparked by learning from the lessons and failures of prior efforts. Let’s review these past cycles of effort to discern where to look for future opportunities.
Omega-3 fatty acids
Every year or two, I come across a proposed venture seeking to use algae for omega-3 production. These are usually misinformed about the business history of this field and the intellectual property landscape.
The first successful application of algae in this field occurred almost thirty years ago.
In the early 1980’s, Martin Marietta, a defense and aerospace company, was researching the use of algae in space flight. Due to corporate cut backs, this program was terminated in 1985. Three former Martin Marietta scientists licensed assets of the algae program from their former employer to launch Martek Biosciences. Their aim was to develop and commercialize high value products derived from microalgae.
Typical of early stage research-driven companies, Martek had a large portfolio of programs: nutritional products, drug discovery, pharmaceuticals, and diagnostics. Also typical of such companies, success eventually came from one product. For Martek, it was an omega-3 fatty acid called DHA.
Omega-3 fatty acids are healthy fats. The two pharmacologically active omega-3 fatty acids are eicosapentaenoic acid (EPA) and docosahexaenoic acid (DHA). We get these through our diets by eating fish. Fish have high levels of EPA and DHA, because they accumulate up the food chain starting from marine algae.
I have an earlier post that describes the supply chain of omega-3 fatty acid oil derived from fish, used for dietary supplements. It is extracted by rendering fish parts and subjecting them to steam and further processing. In my opinion, it is a questionable exploit of higher marine life. Now, what if these can be obtained from algae instead?
Martek’s scientists found that one species of microalgae, a dinoflagellate called Crypthecodinium cohnii, or C. cohnii, can be cultured and grown in high mass, and produce a high level of omega-3 fatty acid.
There are many strains of C. cohnii. At the time, 10,000 to 30,000 strains were postulated to exist. Today, more recent research in algal science suggests this number may be much higher.
Finding a good strain is a matter of “prospecting” from different sources of materials in sea waters around the world. This is the modern day “glamorous” Indiana Jones gallivanting around the world, hopefully to make the world for the better.
Let me illustrate this. Scientists can deposit strains of algae and other microorganisms into commercial cell banks to make them available for wider research.
A look at a commercial cell bank, such as the American Type Culture Collection (ATCC), shows different strains, isolated from waters off locations as diverse as USA, Hong Kong, Puerto Rico, France, Taiwan, Honduras, Greece, and the U.S. Virgin Islands.
Here are just a few examples to show strains collected by different biologists who submitted them to the bank. There is a lot of biodiversity out there, if you know how to prospect:
- C. cohnii ATCC 50297 was isolated from Padina alga in the waters of Annaberg in the U.S. Virgin Islands
- C. cohnii ATCC 30772 was isolated off Macrocystis kelp in the waters of Pacific Grove, California
- C. cohnii ATCC 30556 was isolated off organic debris on the shoreline of Tolo Harbor, Hong Kong
- C. cohnii ATCC 50052 was isolated off Dictyota seaweed in the waters off Banyuls-sur-Mer, France
- C. cohnii ATCC 30774 was isolated off Phragmites grasses in the waters of Dead Horse Bay, New York
- C. cohnii ATCC 30341 was isolated off rotting brown Fucus seaweed in the waters off Mattapoisett, Massachusetts
- C. cohnii ATCC 30541 was isolated from the waters off Icaco Island in Puerto Rico
- C. cohnii ATCC 50053 was isolated from Sargassum seaweed from the waters off Olympia, Greece
By 1996, Martek claimed to have over 2,700 strains of algae, not just of C. cohnii, in their own proprietary library. The strain they ultimately used was C. cohnii ATCC 40750. They never disclosed where this strain was isolated.
To illustrate the characteristics of this strain, Table 1 is an independent academic study performed at the University of Hong Kong, published in 1998. They used C. cohnii ATCC 40750 for their study as well as many other algae.
I have labelled EPA and DHA in the table. They are known by their shorthand notation to oil chemists as 20:5 and 22:6, respectively.
Among these algal species, note that oil produced by C. cohnii has a high proportion of DHA (19.9%) and no EPA (0%).
If one wanted to use algae to make omega-3 fatty acid with a composition similar to that found in fish oil, Table 1 shows better choices, such as A. carterae (its oil has 15.1% EPA and 17.0 % DHA) or Cryptomonas (its oil has 16.6% EPA and 10.2% DHA). These produce both EPA and DHA in high amounts. However, the practical issue is manufacturing. These other species are very hard to grow into high mass.
Algae for palm oil or palm-like oil
To digress for a moment, I have also circled palmitic oil (16:0) in thick red in Table 1. This is the major oil in palm oil. Note the exceptionally high levels of this oil produced by almost all algal species.
I have also circled, in thin red, other oils in palm oil and oils that can substitute for palm oils.
My previous post was about the devastation of rainforests and the cruelty faced by orangutans for the sake of cultivating palm trees for palm oil.
The idea here is algae as a sustainable source for another commodity oil, which will be covered in a later post.
Martek Biosciences as an infant formula ingredient business
Returning to Martek, they were able to find processing conditions to culture and grow C. cohnii efficiently and more cost effectively. Patents for organisms are not allowable. Martek’s patents were for the process conditions. Their conditions were optimized to a point where their C. cohnii were producing oil with a DHA content as high as 40%. Their current commercial production system yields algal oil having 35% DHA.
Martek’s first commercial product was DHA from this C. cohnii, as a dietary supplement, launched in 1996 under the Neuromins brand. This is still available today. However, there are cheaper fish oil capsules, and this product in the dietary supplement market is not enough for a company. It is simply proof of concept of their ability to manufacture.
Fortunately for Martek, a new scientific direction at the time was the growing knowledge in the field of infant nutrition. DHA was being found to be important for infant brain and retina development.
Manufacturers of infant formula seek to replicate the same composition as that found in breast milk. DHA was turning out to be an important ingredient, for which there was no source available at the time.
Sourcing DHA from fish oil for use in infant formula was not possible, because fish oil also contains the other omega-3 oil, EPA. EPA is not as prevalent in breast milk. Higher levels of EPA in infant diets is not suitable. EPA has anti-coagulant effects which present bleeding risks to infants.
This put Martek in a position to provide the first commercial source of DHA to infant formula manufacturers.
The business pivot would be as infant formula ingredient manufacturer. This would require developing regulatory capabilities, large scale production capabilities, and developing other ingredients not just derived from algae.
Concurrent with knowledge about DHA in infant nutrition, the science was also revealing that an omega-6 fatty acid, arachidonic acid (ARA), was also important. ARA is found in breast milk and is associated with development of immune function.
To access ARA quickly, Martek secured an exclusive supply license from another company that had a process to manufacture ARA in high volume. The Dutch biotech company, Gist-Brocades, had developed a patented process for producing ARA from the fungus, Mortierella alpina.
That Martek executed in this manner, and not the other way around with Gist-Broacades licensing from Martek, demonstrates that business success is also about understanding the commercial strategy and on executing effectively on business development.
Another reason Martek was able to break into the DHA infant formula space was the market structure. Infant formula is a concentrated industry with four global companies dominating market share: Abbott, Mead Johnson, Nestlé, and Danone. In the late 1990’s, the US market dominated in market size for infant formula.
Western Europe was the global leader in infant nutrition research at the time, and arguably still is. Martek’s initial launch of DHA was into the European market, where there was a better understanding of the science of DHA nutrition. However, it wasn’t until DHA launched into U.S. market that a DHA production business could really scale.
With the U.S. being the biggest market, Martek’s geographic access, being based in the U.S., gave it an advantage. In the U.S., Martek secured Mead Johnson as the early adopter customer. By providing DHA as a high value ingredient in their infant formula, while their competitors could not, Mead Johnson captured more market share.
There were other companies that attempted to fill the gap to provide DHA to infant formula manufacturers.
In 2008, a Swiss company, Lonza, attempted to enter this space by acquiring the DHA assets of German ingredient company Nutrinova. Nutrinova had developed a fermentation process using a marine fungus, Ulkenia sp. 2179, to make DHA.
Nutrinova licensed Ulkenia sp. 2179 from Suntory, a Japanese beverage company. Suntory scientists isolated Ulkenia sp. 2179 from Japanese coastal waters back in 1996.
However, Martek’s process patents still barred Lonza from entering this market.
In the intervening time, DSM, a Dutch nutrition and materials company, acquired Martek for $1.1 billion in 2010. It also acquired a Canadian omega-3 company called Ocean Nutrition for CDN $540 million in 2012.
Today, DHA for infant formula is essentially dominated by DSM, through Martek’s DHA assets.
DSM’s monopoly position in supply arises from three factors.
The first was the patent position. Patents have a 20 year life. These will run out, but these provided for the initial competitive position.
The second is that brand reputation is critical to infant formula companies. They will not risk switching ingredient supply to a new source where there is no record of large scale manufacturing reliability and general safety. Any infant formula brand in any country market requires tons of DHA ingredient supply. Entering into this kind of high volume production is a steep learning curve for any new entrant.
The third is that Martek (now DSM), has been manufacturing long enough to move down the experience curve to have a strong low cost position. Martek’s initial manufacturing was based in Winchester Kentucky, where Martek built their initial large scale fermenters in the early 1990’s. They started with two 140,000 L and one 70,000 L fermenters. They built supply redundancy by opening another facility in Kingstree, South Carolina.
As of 2010, according to US SEC filings, Martek had 1.2 million litres of capacity in Winchester Kentucky and 2.7 million litres of capacity in Kingstree, South Carolina. While they need to produce thousands of tons of DHA per year, this capacity is far in excess of what is required! This is a testament to the prolific production capability of algal sources, if you have the right strain and process conditions.
Next generation species for DHA production
The “technology” of DHA production has since progressed to the next generation of species.
Martek and Ocean Nutrition had internal R&D that used large sample collection efforts to find marine organisms producing higher DHA levels. Both companies found organisms within the Thraustochytriaceae family to be the best producers of DHA.
Thraustochytrids appear common around worldwide shorelines, especially when sampling decaying mangrove leaves. All publications describe collection protocols based on sampling these microenvironments.
For now, DSM is still the leader in this algal DHA space through its acquisition of Martek and Ocean Nutrition. Martek’s commercial strain is Schizochytrium ATCC 20888, which DSM still has in its portfolio.
Ocean Nutrition’s commercial strain is Schizochytrium sp. ONC-T18. DSM licensed that out to former Ocean Nutrition entrepreneurs based in Nova Scotia, Canada, who are now back by the family office fund of Ocean Nutrition’s former owner, John Risley.
Other companies have learned about this directional shift and have been following suit. These other companies have filed strains such as Schizochytrium sp. FCC-3204 and Schizochytrium sp. RT100. There are so many recently that I haven’t bothered to look all of these up.
It is unlikely that infant formula companies will be supplied by a switch to this organism as a production source any time soon, for reasons mentioned previously. However, this switch will happen eventually, particularly for emerging markets and for local brands and micro brands of infant formula.
Longer term, while Thraustochytrids stand out as high DHA producers, these organisms are not likely the only ones in nature that exhibit high DHA production.
There is a lot of biodiversity out there. Somewhere, a special organism is lurking in an ecosystem waiting to be discovered.
For now, the omega-3 DHA space has been well defined and it is saturated. New omega-3 algal ventures that are developing this product need to address the limited market opportunity for DHA omega-3 oil in their business plan.
In the next post, we will look at other opportunities for algal prospecting for sustainability.