Symyx Technologies, Inc.

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Symyx Technologies, Inc.

310 Central Expressway
Santa Clara, California 95051
U.S.A.
Telephone: (408) 764-2000
Fax: (408) 748-0175
Web site: http://www.symyx.com

Public Company
Incorporated: 1994
Employees: 275
Sales: $83.1 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: SMMX
NAIC: 541710 Research and Development in the Physical Sciences and Engineering Sciences

Symyx Technologies, Inc. acts as a partner in research and development efforts, serving customers in the chemical, energy, pharmaceutical, and electronics industries. Symyx uses what is known as combinatorial chemistry to discover new compounds with potential commercial applications. Through high-speed, automated techniques in a mass-production approach to chemistry discovery, the company helps customers such as Dow Chemical Company, ExxonMobil Company, Eli Lilly and Company, and Merck & Co., Inc. improve or discover products. The first company to apply combinatorial techniques to materials research in a commercial context, Symyx owns the largest portfolio of patents in its field, with 280 patents issued and 370 patent applications on file. The company is supported by more than $600 million in strategic relationships with its customers, relying heavily on collaborative agreements with Dow and ExxonMobil. Symyx maintains that its methodology is 100 times faster than traditional research methods, at a dramatically lower cost per experiment.

ORIGINS

Symyx's founders, Alejandro Zaffaroni and Peter Schultz, helped shape a revolution during the late 20th century, developing and promoting a new approach to scientific research that promised to play a prominent role in the advancement of science in the 21st century. Their work centered on combinatorial chemistry, a new methodology in chemistry discovery that took the conventional process of research and development and replaced it with something akin to what Henry Ford might have done had he been a chemist instead of a pioneer in mass-producing automobiles. Traditionally, chemists in search of a new compound analyzed the properties of molecules one compound at a time, using carefully thought-out recipes to synthesize compounds and, with hope and a rationalized premise to support their hope, discover something useful: a new type of compound that presented characteristics superior to those of existing compounds. Combinatorial chemistry took a different approach, but its architects, Zaffaroni and Schultz included, did not look to Ford for the inspiration for their work. A form of combinatorial chemistry had been on display for millennia, but it took millennia for the show to be witnessed. Once scientists were able to observe the intricacies of the human body's functions, a model of combinatorial chemistry was available to replicate. The research into mimicking the body's strategy began in the early 1980s, establishing the scientific foundation that gave birth to Symyx.

The way in which the immune system functioned offered one example of a combinatorial approach to discovering a solution to a problem. The immune system responds to diseases by unleashing billions of antibodies and selecting the one that best combats the disease. The process taps into the ability of cells to create a wide variety of molecules by only using a limited number of building blocks. Cells create a vast number of DNA and protein molecules by arranging a common, relatively small number of building blocks in different order. In contrast to the way chemistry research was traditionally conducted, there was a certain randomness in the human body's approach to discovery. By using a small library of information, the body created an exponentially larger selection of answers to a problem by rearranging, or recombining, its library of information, producing billions of potential answers to arrive at one "correct" solution. Traditional chemistry research dictated unearthing one potential answer at a time before moving on to the next potential answer, repeating the process until a solution was found. Combinatorial chemistry took its cue from the human body, relying on high-speed, automated techniques in a mass-production approach to produce vast numbers of potential answers in a short period of time.

During the early 1980s, the first attempts to use combinatorial chemistry were applied to the pharmaceutical industry. The approach, which to some eliminated the science of drug discovery, drew heavy criticism from some elements of the scientific community. "There was enormous resistance from medicinal chemists in the beginning," a founder of a combinatorial start-up venture noted in the May-June 1998 issue of Technology Review. "They felt it was completely inelegant and ugly." Combinatorial chemistry's supporters felt differently, claiming that the new methodology would transform drug discovery and genetic screening "from a plodding one-at-a-time business to a high-technology bingo game," as quoted by Technology Review.

One of the supporters of combinatorial chemistry was Zaffaroni, a drug and biotechnology entrepreneur with a remarkable record of success dating to the 1960s. Zaffaroni, described as a "serial entrepreneur" in the September 28, 2005 issue of Forbes, had more than a basic understanding of the science in which he was investing, having earned a Ph.D. in biochemistry from the University of Rochester. In 1987, intrigued by the potential of using combinatorial chemistry to discover new drugs, he approached a biochemist at the University of California in Berkeley named Peter Schultz. At the time, Schultz was conducting pioneering work on the antibodies produced by the immune system, which Zaffaroni believed could benefit drug discovery. Schultz later conceded that he had little idea about the commercial implications of his work (Zaffaroni was the entrepreneurial wizard), but the meeting eventually led to the formation of Affymax, the first company committed exclusively to using combinatorial chemistry to discover new drugs. Affymax flourished, adding another success story to Zaffaroni's list of achievements. In 1993, Affymax spun off Affymetrix, creating a separate company that used combinatorial methods to create DNA chips for drug screening. In 1995, in a deal that confirmed the legitimacy of combinatorial chemistry in the pharmaceutical industry, U.K.-based GlaxoSmith-Kline PLC, one of the five largest drug companies in the world, paid $538 million for Affymax.

COMPANY PERSPECTIVES

Traditional materials discovery relies on an expensive and time-consuming process of trial and error, making and testing one material at a time. A typical project can take years to complete, often with low probabilities of success. This approach cannot keep pace with current product life cycles and growth expectations in the chemical and electronics industries, nor can it address rising costs, manufacturing challenges, and increasing competitive pressures. Symyx's high-throughput technologies enable researchers to generate hundreds to thousands of unique materials at a time, and rapidly screen those materials for desired properties. Our approach delivers results an order of magnitude faster than traditional research methods at a fraction of the cost. Symyx pioneered high-throughput experimentation for materials discovery, applying the same concepts of automation, miniaturization and parallel processing that have been employed successfully to discover new pharmaceutical compounds.

The commercial success of combinatorial chemistry in the pharmaceutical industry led Schultz to explore other applications. Back in the laboratory, Schultz, with Affymax thriving in the marketplace and deepening his convictions, became convinced that the methods of miniaturization, high-speed automation, and parallel processing could be applied to materials research. Schultz believed combinatorial chemistry could be used to discover new polymers, superconductors, catalysts, phosphors, and any of a number of new materials. In what was something of a role reversal, he approached Zaffaroni about the idea, perceiving commercial uses that were not discernible to Zaffaroni. "He's not a materials scientist," Schultz said of Zaffaroni in his interview with Technology Review, "but he is a person who is always looking for new scientific ideas. When he sees something with tremendous potential, he's not afraid to go after it. It's just damn the torpedoes, full speed ahead."

To make his case and trigger Zaffaroni's entrepreneurial zeal, Schultz enlisted the help of Xiao Dong Xiang, a physicist at the Lawrence Berkeley National Laboratory. Together, the pair created combinatorial libraries of materials, first making an array of 128 different compounds on a one-inch chip, each a potential high-temperature semiconductor. Schultz and Xiang went on to create collections of phosphors, polymers, data storage materials, and catalysts, but Zaffaroni already was convinced. With $1 million in start-up capital, Symyx was formed in 1994, becoming the first company to attempt to apply combinatorial techniques to materials research commercially.

EARNING RESPECT IN THE LATE 1990S

Zaffaroni took the managerial helm at Symyx, serving as its chairman and chief executive officer during its first four years—the period critical to the company's development. As the company worked to put Schultz's theory to the test, it subsisted on research deals and investments from private and venture sources such as Aventis Research and Technology, Bayer Innovation, and Chemical and Materials Enterprise Associates. A breakthrough moment occurred in 1997, when Germany's Hoechst AG, one of the world's largest chemical makers, signed a five-year, $43 million deal with Symyx, an agreement that industry observers touted as combinatorial chemistry's entry into mainstream industrial research. Symyx grew from an organization with 23 scientists to a research and development firm with 85 scientists during the year. At the company's laboratories (there were seven in operation by mid-1998) the carpet-bombing approach to materials discovery was well underway, pursuing research in several different directions. In one room of Symyx's two-story office building, a robotic arm moved side to side across a tabletop, depositing drops into scores of wells arranged on plastic trays slightly larger than a CD jewel box. Each well contained a different mixture of chemicals, which, once the robotic arm finished its work, would represent entirely new types of plastic. With an array of novel polymers to screen, Symyx's scientists hoped to discover at least one polymer with desirable attributes and strike upon a new plastic that would become the preferred material for use in high-strength structures, electrical insulation, biological implants, or sundry other applications.

Symyx caused a stir in the materials industry as it entered the late 1990s, attracting admirers who saw great promise in the company's research efforts. The major obstacle for the company was turning the potential inherent in its research into the discovery of a compound that was commercially viable. One shortcoming of using combinatorial methodology in materials research was the lack of a screening process to vet compounds with potential and determine which one possessed superior properties. Rapid screening methods existed in drug discovery research, but materials research technology had no way of quickly determining physical properties. "It doesn't make a lot of difference if you can make 100,000 compounds at once if you have to test them one by one," conceded a chemist in Technology Review 's May-June 1998 issue. A consultant to combinatorial firms reiterated the chemist's point in the same issue, asking, "How do you measure the strength of a nanogram of material? Nobody has developed that technology yet. There's a whole new technology that has to be built."

KEY DATES

1994:: Symyx is incorporated.
1997:: Hoechst AG invests $43 million in Symyx.
1999:: Symyx completes its initial public offering of stock.
2003:: Symyx signs a $200 million technology agreement with ExxonMobil.
2004:: Dow Chemical commits $120 million to Symyx, extending the six-year relationship between the two companies.

Schultz and his team of scientists were working on software to enable rapid screening, but funds were necessary to finance such research, as well as to support the company's combinatorial research efforts. To obtain the necessary capital, Symyx turned to Wall Street, completing its initial public offering of stock in November 1999. The company sold 5.4 million shares at $14 per share in its public debut, raising nearly $80 million to continue its pioneering work.

SYMYX IN THE 21ST CENTURY

As Symyx progressed toward the end of its first decade of business, the company was hitting its stride, both financially and scientifically. Annual revenues nearly doubled between 2000 and 2004, jumping from $43 million to $83 million, while profits began to come in on a consistent basis. After losing $922,000 in 2000, the company recorded four consecutive years of profitability, with net income increasing from $6.3 million in 2001 to $12.8 million in 2004. On the research side, three of the company's discovered materials made the all-important leap into the commercial marketplace: a catalyst used by Dow, a phosphor used by Belgian-owned Agfa-Gevaert N.V., and a polymer used in electronic applications by Tokyo-based JSR Corp. Commercial success heightened the company's appeal among its research partners, convincing massive, global concerns to increase their investment in combinatorial materials research. In mid-2003, the company signed the largest agreement in its history, forging a technology alliance with ExxonMobil. The $200 million, five-year agreement called for the incorporation of Symyx's technology into ExxonMobil's research and development program. "It's hugely significant," an analyst explained in a May 12, 2004 interview with Investor's Business Daily. "It's like Merck or Pfizer saying they're going to modify their research around a little company. It's a profound vote of confidence." The deal with ExxonMobil was followed in late 2004 by a $120 million, five-year agreement with Dow, extending their six-year alliance.

As Symyx plotted its course for its second decade of business, the company reigned as the leader in its field, having carved a lasting place for combinatorial chemistry's contributions to materials research. In November 2004, the company strengthened the screening capabilities it offered to customers by acquiring Intelli-Chem, a Bend, Oregon-based developer of electronic laboratory notebooks used in the pharmaceutical, biotechnology, and chemical industries. On the heels of the $28.9 million acquisition, Symyx announced that sales had increased between 26 percent and 35 percent during the previous three fiscal quarters, a pace of growth that was eclipsed by the company's earnings performance. During the same period, Symyx's earnings per share increased between 150 percent and 300 percent. As the company looked ahead, standing on firm financial footing, there was every expectation that the great promise of its research techniques would yield lucrative discoveries in the materials industry in the coming years.