Blue-Green Hawaii: farming in the shadow of the volcano God.

As an introduction to the company and its main products, and to explain his apparent transfer from chemical and nuclear engineering to microalgae farming, Gerry offered a brief overview of the company's history and its principal activities. "Well, my PhD and thesis focused on alcohol fermentation, the enzymatic conversion of cellulose to the fermentation of alcohol. So, really, rather than being a study in chemical engineering, it was more of a bioengineering degree. As such, I've always been interested in the development of industrial-scale processes to generate products from microscopic organisms. And, in fact, Cyanotech was founded in 1983, largely as a result of work that I had done at the University of California Santa Barbara (UCSA) and followed up at Battelle Memorial Institute (Richmond, Washington, USA).

Work really started at UCSA when, essentially, I grew a little disenchanted with alcohol fermentation and enzymatic hydrolysis, so spent a summer in the library and discovered that microalgae offered tremendous potential for the production of various valuable chemicals ... and there really hadn't been any engineering work done to investigate the possibility of large-scale production or manufacture. So I began work to find a solution; I wrote letters to the National Science Foundation and applied for grants. Very fortunately, the NSF supported my initial research, back in 1976, at UCSA where I was an assistant professor in the department of Chemical and Nuclear Engineering."

As group leader of microalgae research at Battelle Northwest, the investigation continued until, 7 years later, Gerry co-founded Cyanotech Corporation in Washington State. He initially served as the company's scientific director and became president and CEO of Cyanotech in 1990. During his time as scientific director, one of Gerry's jobs was to seek out the optimum site to launch its commercial production of microalgae. And, having located a region with abundant, virtually year-round sunlight, a ready source of pure water from island aquifers, an endless supply of deep-ocean seawater to fuel a new, chill-drying technology and access to transport and skilled labour, the Kona coast of Hawaii became the company's new home.

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When asked whether he considers himself to be a pioneer in microalgae production, Gerry is characteristically modest and unpretentious. "I can't really be thought of as creating the niche," he replied. "At the time the company was formed, the initial product we looked at was spirulina, and that was already coming into the United States from production facilities in Mexico. They had a kind of semi-natural soda ash mining operation going on where a natural bloom of spirulina was being harvested. It was an expensive product; it was a poor quality product. We realized that we could make a much superior, high quality product ... and also make some money in the process!"

"Spirulina, our first offering, is a rather mature product that we've been interested in since the late 1970s. We're actually starting to learn more about this product and, just in the last 5 years, have discovered that in addition to being a very good source of protein and essential fatty acids, it also contains antiviral compounds and has the ability to stimulate the immune system. In addition, we've also just recently learnt that it can protect the liver and kidneys from toxic chemicals. So, we're learning more and more about the health benefits of spirulina and position it is a whole-algae product; nothing is extracted from it, it's just grown, dried and sold."

"The other product line from Cyanotech is our natural astaxanthin range. We started out producing natural astaxanthin for the aquaculture industry as a source of pigment. Astaxanthin is probably the most commonly occurring pigment in the aquaculture environment; it colours salmon flesh pink/red, and also colours lobster and shrimp. And the primary source of astaxanthin is, of course, microalgae. The major market in aquaculture is salmon farming, but 95% of the astaxanthin used in these farms comes from synthetic astaxanthin (derived from petrochemicals). We initially began to produce natural astaxanthin from microalgae to compete with the synthetic form and provide a natural alternative. After about 9 months of production for the aquaculture market, we began to become aware of literature--primarily coming out of Japan--that suggested that astaxanthin was an incredibly potent antioxidant and had a number of very positive health benefits. So, we developed a product for the human supplement industry ... and that's the product that we're very excited about."

Briefly discussing the situation that, in the UK, the use of astaxanthin to colour salmon flesh has a negative connotation, Gerry is keen to point out and emphasize the differences between the natural and chemical versions of astaxanthin. "Synthetic astaxanthin, which has been derived from petrochemicals, has a different chemical shape; it is indeed an artificial colouring. In nature, microalgae are the primary source of astaxanthin; krill eat the microalgae and it moves on up the food chain until it accumulates in the flesh of salmon. The astaxanthin that microalgae provide is a completely natural form, and that's what we use in our product offering, NatuRose. So, if salmon are fed NatuRose, for example, they are receiving a nature-identical form of astaxanthin which should not be detrimental to the fish or to anyone who consumes it." Gerry goes on the mention that there are analytical techniques for salmon flesh to determine whether the fish was fed with synthetic astaxanthin or a product derived from yeast, or whether it was caught from the wild. With some enthusiasm, he points out, though, that you can't tell the difference between wild-caught salmon and that fed on NatuRose; they're identical ... because they fed on astaxanthin from the same original source.

Trials and Regulations

Looking at the two main products, Spirulina Pacifica is a highly absorbable source of protein, mixed carotenoids and other phytonutrients, B-vitamins, GLA and essential amino acids, whereas BioAstin's benefits derive from its superior antioxidant activity and from its ability to support and maintain a natural inflammatory response, enhancing skin, muscle and joint health. It is also reported to protect the skin from the damaging effects of ultraviolet radiation, enhance the immune system and improve energy metabolism. There appeared to be quite an overlap regarding the properties and applications of spirulina and astaxanthin. Gerry responded: "There are some overlaps, in that spirulina also contains the fatty acid GLA, which does help with joint health, and we're finding with BioAstin that it, too, is a very effective product for joint problems--particularly those caused by rheumatoid arthritis and sports injuries. So there is a slight crossover, but what we're seeing at a clinical level is that BioAstin is much more effective. There is also some evidence that natural astaxanthin can stimulate the immune system. And, we actually have some definitive evidence, based on research done by other scientists, that spirulina can absolutely enhance the immune system, so there is definitely some complementary activity."

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Having mentioned clinical trials, it seemed only sensible to pose the question and ask Gerry about the value and/or necessity of clinical trials for nutraceutical products. Without hesitation, he replied: "I absolutely think that there is a need for clinical trials to be done on nutraceutical products, and done to the highest standard. As a small company, Cyanotech has run about six clinical trials. Because we're a small operation, we have to limit the number of patients that are involved, so use between 20 and 40 subjects; but, nevertheless, I think such studies are very valid and can help with funding additional, larger trials, which is also very positive. I really think, going forward, that it's the science that will drive the sales ... and it has to be good, sound science. As such, I think clinical trials are absolutely essential."

As a corollary, the industry is also faced with the "spectre" of pharmaceutical-like regulations and whether they should and will occur. "Legislation, at least in the United States, is a positive thing," stated Gerry. "It has been hampered somewhat; for example, we've recently seen the introduction of a bill requiring the recording of adverse events (AERs), which is very positive, but there has been a misconception--at least in the United States--that nutritional supplements don't have any regulatory requirement whatsoever and you can throw anything out into the market. That, obviously, is not true; there's the new Dietary Supplement Ingredient legislation and the necessity for US Food and Drug Administration (FDA) review. The FDA does not give you an approval, but they will certainly give you a rejection." Is it a tongue-in-cheek "don't ask, don't tell" situation for nutraceuticals in the US? Gerry suggests not, and insists that if something is dangerous, the FDA will not allow it, and act very quickly to prevent anything harmful entering the marketplace. "I think it's very positive concerning the AER bill and the fact that all supplement manufacturers will soon have to comply with Good Manufacturing Practices (GMPs)," he added.

Is there a downside? So far, the legislation has been somewhat tempered. There have been some proposals, in Gerry's opinion, that have been quite negative but what he feels is necessary now is for the industry to restore some public confidence, and he believes that adverse event reporting and GMPs will help a great deal. Cyanotech was the first microalgae company in the world to obtain ISO 9001:2000 accreditation which, as Gerry explains, strengthens the company's position. "It gives us credibility, particularly with our foreign customers. ISO is not so well recognized in the US, but it certainly is in Asia and Europe. And, from a manufacturing standpoint, it has helped us to advance our quality management systems, document and measure our procedures and stimulate us to constantly improve." One of the company's missions is to offer the highest quality products, which Gerry acknowledges, is reflected in their application of analytical techniques, QA/QC and GMPs.

Social and Environmental Responsibility

"Cyanotech's mission is to provide high value, natural products from microalgae, and our aim is to offer ingredients and supplements that will genuinely help human health--healthy, natural products--using a production system that is environmentally friendly. As such, we use absolutely no herbicides or pesticides; we recycle and recondition our culture water and, something we're quite proud of, we actually won a corporate award from the Hawaii Audubon Society for our work with local birdlife, Hawaiian stilts. The birds were attracted to our site because of the abundance of food, so we contacted the Federal Fish and Wildlife Agency and worked with them to develop a plan to protect this endangered species. We ended up creating a protected 2.6 acre area for the birds which was so successful that more of them fledged here than anywhere else in the State; the population increased from 60 to 240 in the 2-3 years that we ran the site. Overall, we're very environmentally conscious and we try to do things in as 'green' a way as possible."

When it comes to the topical issue of packaging, Gerry admits that it's not something that Cyanotech has really addressed. In terms of bulk packaging, the products are distributed in foil laminates and oxygen barrier bags with O2 absorbers to maintain their freshness and nutrition content. The company does operate a retail division, Nutrex Hawaii, which uses glass bottles, selected for its ability to be recycled, even though it pushes the cost of shipping up. "We haven't made a concerted effort to examine the environmental impact of our packaging, but we've been using glass for a long time ... and are aware that plastic has only relatively recently become recyclable," said Gerry.

Regarding the growing public debate concerning the connection between diet and health, Gerry was keen to expand on what the movement means for his business and the industry. "I think it's a real opportunity! Essentially, what you're saying is that what you eat helps your health. And, I believe that people look at supplements as something that's simple and convenient to eat, rather than taking hard, prescription drugs. I think that as more people understand the concepts of diet, health and the importance of what they put into their body, it will lead to a greater acceptance of natural supplements."

Down to Business

Between 2003 and 2006, the company posted remarkably consistent total revenues in what is essentially a mature and competitive sector. I asked Gerry what factors they'd had to contend with and what Cyanotech had done to cope with such a volatile market. He explained: "One thing that we've had to contend with is competition coming out of China, particularly in the spirulina industry. The material is not of the same quality that we produce but, nevertheless, there's quite a lot of it. We've had to work with our customers, show them that our company is producing high quality product, demonstrate that scientifically and assure them that the money they're spending with us is worth it. Our biggest push, right now, as we go through 2007, is that we realize that the spirulina market is mature. But, we feel there's a real opportunity for the growth of natural astaxanthin--our BioAstin product--so we're investing in promotion, public relations and advertising to raise the profile of this valuable product, which can provide a lot of health benefits."

Going forward, Gerry feels that because astaxanthin can address such a wide range of health issues, particularly because of its anti-inflammatory properties, the company will focus on developing broader markets for existing products, rather than researching novel offerings. "One of the problems we've had in the past, as a B2B organization, is that we've been touting the tremendous potential of astaxanthin ... but we haven't been focused enough. Moving on, we're going to concentrate on the joint health aspects of the product, even though it has eye health, brain health and immunity enhancing properties," he explained. He feels that the bone/joint health market is under-exploited for astaxanthin and is an area that can be capitalized on.

The increase astaxanthin focus does not necessarily mean expanded production facilities or scale-up in the traditional sense. Gerry pointed out that they have the capability to convert the spirulina ponds over to astaxanthin production and vice versa. "Astaxanthin does provide more revenue than spirulina ... and we are geared up to make that switch. Right now, we're not looking to expand our total acreage (90 acres/36 Ha), just to alter the spirulina/astaxanthin manufacturing ratio."

Regarding production schedules, working with the microalgae is remarkably efficient. Spirulina, for example, grows in a very alkaline media (pH 10-11) in which nothing else will really thrive--it's a very hardy alga! When a culture pond is ready for harvest, it is 70% drained and the algae are transferred to a processor; the pond is then refilled, nutrients are added to account for the algae that have been removed and in just 7 days, the pond is ready to harvest again. Cyanotech produces approximately 360 tonnes of spirulina a year; the harvest from each pond yields about 200-220 kg.

With astaxanthin production, it's quite a different story. The alga used (Haematococcus pluvialis) grows in fresh water under very mild/neutral conditions (with added nutrients) and because of this, pretty much anything floating in the air can contaminate the culture and spoil the batch. Cyanotech, therefore, starts with 250 mL laboratory cultures in shake flasks, then scales up to 20 L carboys, followed by 400 L column cultures and then 30,000 L closed-system bioreactors, and finally releases the batch into the growth ponds. The last step is when, as Gerry describes: "We're very mean to the poor algae." Haematococcus is a green alga, but when stressed by factors such as starvation due to lack of nutrients, or pH and temperature, it forms a spore and rapidly starts to accumulate astaxanthin. And in the large 500,000 L reddening ponds, deprived of food, the algae turn from bright green to bright red in a period of about 7 days. Essentially, the scale of production is similar for both spirulina and astaxanthin, but the Haematococcus require an extra period of front-end laboratory culture work.

A Tricky Period

What with a delayed Q1(07) filing, a Delisting Notice from NASDAQ, organic standards stopping spirulina production and a 27% sales drop in Q3(06), I wondered what was going through Gerry's mind as he was trying to run a business, believing he was doing it for a good cause and seemingly coming up against a raft of unexpected hurdles. In his typically unaffected way, he admitted: "It's very frustrating. We have a wonderful corporate mission, helpful products for people that are manufactured in an environmentally friendly way ... and we've been plagued by some accounting issues." Gerry was optimistic that the filing and accounting matters would all be behind them and completed by the middle of March. In fact, their Q1 and Q2 filings were posted at the end of February; the Q3 filing was slightly delayed. Gerry explained that all the delays stemmed from an inventory accounting issue that was developed when the company was founded, and perpetuated for years and years. It was an expensive mistake that just kept moving ahead and, following some changes in the inventory accounting regulations, the company's Chief Financial Officer spotted it and immediately--in line with corporate philosophy--started to "make it right."

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Direct Marketing

Cyanotech recently ventured into the untested waters of marketing directly to consumers, placing adverts in magazines such as Time, Newsweek and Sports Illustrated to educate readers about the benefits of BioAstin. The ads not only promoted the Nutrex brand, but also the products and services of their B2B bulk customers. "The campaign has been running for quite a while," said Gerry, "but it's low, low key. We don't want to compete directly with our B2B customers, but what it does do is allow us to keep in close contact with our consumers. It helps us to find out what they want; the Nutrex brand represents about 15% of our business, so it's an important market." Even though Cyanotech is a raw material producer and a brand name supplier, Gerry is quick to point out that there's still plenty of room in the market. "We sell to distributors of bulk materials, end-users of our raw materials who incorporate them into their products and directly to consumers. We actually have a very limited product offering through Nutrex; we sell pure spirulina tablets and pure astaxanthin tablets, no formulations," he explained. The company actually hasn't undertaken any nationwide promotional activity for the last 4 years, but Gerry said that they have an open dialogue with their customer base and they receive a lot of unsolicited testimonials that keeps them close to the consumer and helps with their B2B dealings.

Location, Location, Location 

Given the relatively straightforward manufacturing techniques used to process microalgae, one might suppose that a plant could be located almost anywhere. To be located in Hawaii has its obvious benefits, but is it an essential factor for Cyanotech's business? Gerry concedes that the company could be situated in a number of places, but believes that Hawaii is one of the best options. Another company, Fuji MicroGaia operates on Maui, on a small scale, and in Sweden, using stainless steel tanks, artificial lighting and geothermally produced electricity. "Yet, Hawaii is the best location to be able to cost-effectively manufacture high quality products," he added. And, there are some technical benefits; there is access to very bright sunlight, a source of deep-ocean cooling water that is also rich in nutrients, abundant fresh water for the cultures and temperatures that enable year-round production. On the negative side are the energy costs, which are possibly the highest in the country.

Regarding the labour force and living with a volcano, at one time the company struggled to fill entry-level positions but there is, apparently, a significant amount of qualified scientists and technicians in the Kona area and recruitment is not a problem. And, in terms of natural disasters, Big Island seems to be spared from hurricanes, only very occasionally gets a "good shake" from earthquakes and suffers only from winter storms. It is, essentially, an ideal environment.

The Future

Gerry wouldn't be drawn on personal aspirations and ambitions, he's far too polite and modest, but did comment on behalf of the company: "I'd like to see Cyanotech grow in terms of revenue with BioAstin, and for natural astaxanthin to be recognized as having real health benefits. Also, I'd like to see Cyanotech start moving into more over-the-counter or ethical pharmaceutical areas; we have the potential to produce some very unique compounds for human health and I'd like to see that aspect of the business developed." The only concession he made to his own goals was that he'd like the company to prosper and be known as a supplier of high quality health products. Supported by a strong body of evidence and published literature, and with the public becoming more and more aware of the health benefits of spirulina and astaxanthin, demand for these "superfoods" and supplements is destined to grow. And, as long as Pele doesn't suddenly become averse to microalgae production on her precious island, the future for Cyanotech looks very promising indeed.

For more information

Cyanotech Corporation

73-4460 Queen Kaahumanu Highway

Kailua-Kona, Hawaii 96740, USA.

Tel. [phone]

[e-mail]

www.cyanotech.com