Last November, when PepsiCo Inc. became the first soft-drink company to drop saccharin and flavor its diet beverages entirely with NutraSweet, analysts saw a bright future for two local biotechnology companies that supplied ingredients for the low-calorie sweetener.
Eight months later, both of the local companies are in serious trouble following the decision by G. D. Searle & Co. to cut them off as suppliers and to increase purchases from its Japanese partner, Ajinomoto Co.
Genex Corp., of Rockville, will lose the source of 58 percent of its revenue and virtually all its current product sales after Oct. 31, when Searle stops buying Genex's L-phenylalanine, an amino acid used to make aspartame, marketed by Searle as NutraSweet.
Purification Engineering Inc., of Baltimore, which held its production plant dedication the day of Pepsi's announcement, lost its only customer for its only product when Searle stopped buying its L-phenylalanine in January. Today, PEI is "not selling anything," said Charles W. Morris, company president.
Searle refuses to discuss its contractual agreements, and would not say why it decided to stop buying aspartame ingredients from Genex and PEI. Searle did say that sales of aspartame worldwide grew to $585 million in 1984, from $334 million in 1983 and $74 million in 1982. Industry analysts, however, noted that both Ajinomoto and Searle have increased their plans for aspartame and L-phenylalanine production.
"It's very simple," said Joseph P. Riccardo, an analyst who follows Searle for Bear Stearns & Co. "Both Ajinomoto and Searle have a lot of capacity. They don't need Genex or anybody else."
Ajinomoto USA Inc., which holds some of the crucial patents for aspartame and worked closely with Searle to develop the product, said it plans to increase its amino acid sales by 20 percent this year, the same rate of growth as last year. Ajinomoto's supply contracts with Searle are "a touchy question," but the Japanese company "hopes to increase sales to Searle," said Takashi Muramatsu, a spokesman for Ajinomoto U.S.A. Inc.
The Japanese corporation plans to enlarge its Raleigh, N.C., amino acid production plant, build a new one in Europe and possibly construct one in New York, he said.
Amino acids, including products used for intravenous solutions and feed additives, accounted for 12 percent, or $22.4 million, of Ajinomoto's sales of $1.8 billion in the fiscal year ended March 31, Muramatsu said.
Ajinomoto, a leading Japanese food and pharmaceutical firm, sees better growth prospects for amino acid sales than for its other businesses, seasonings, vegetable oils, processed food and feed, he said.
In January, Searle opened a $130 million facility in Augusta, Ga., for the production of L-phenylalanine and aspartame, but will not disclose the plant's production capacity.
Last month, Searle also stopped buying aspartame from Erbamont N.V., which produces the sweetener in Italy, where Searle's patents are not recognized.
All of which leaves industry analysts wondering how Genex and PEI will survive. Both companies say they are looking for equity investments to keep them going, and can apply their expertise to the development of other products. However, PEI has no other products, and Genex's only other product, an enzyme-based drain cleaner, produced negligible sales last year.
Analysts note that an easy solution for both firms would be to be acquired by larger companies with interests in specialty chemicals. "We have considered the possibility of selling the company," said Morris, one of the founders of PEI, which is privately held. PEI has a "superior" technology that could be applied to therapeutic products and other specialty chemicals, such as amino acids and enzymes, he said. "We are not about to go belly up."
Genex "has not decided to be acquired," said Robert F. Johnston, a founder and director of the company. "It's always an option, but there are other alternatives."
The option "being aggressively pursued" and "most likely" to occur is the establishment of joint research ventures with large corporations, which would provide needed capital and acquire a minority interest in the firm, Johnston said. Genex is in negotiations with potential investors "who see products and technology coming out of the company," Johnston said.
But the seriousness of the situation is reflected in the stock price, said George J. Stasen, chairman of ProServices Inc., a financial management firm with 104,000 shares of Genex stock in its investment funds. The stock is selling "close to book value," he said. It closed Friday at $2.50, up 25 cents, far below its historic high of $22.50.
Genex has roughly 8 million unissued shares available for a private placement.
Sales to Searle in 1984 accounted for $20.2 million of Genex's product sales of $20.6 million. Genex's net losses increased to $7.4 million in 1984, from $5.4 million in 1983, largely reflecting $6 million in start-up costs for the production facility built to produce the aspartame ingredient.
The manufacturing plant is now "a millstone around their neck," said John Greene, an analyst with F. Eberstadt Co. Inc.
Genex's most valuable asset is its research talent, particularly its protein engineering program, several analysts said.
"Everything Genex has is in the heads of those people" working for the company, Greene said. "Just call up the key people, offer them more money and job security, and voila! You have Genex's technology."