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From inception Cetus activities were predominantly of a "contract work for client" nature. This is still the case. However, we do not view ourselves as competing with contract research houses such as Battelle or SRI for we differ from them in several si nificant g ways. Most important is our requirement that project success provide Cetus with a reward in terms of a royalty, license fee or ,.some other type of equity participation. -Limited as to the total number of projects we can handle we must select carefully among the choices available. Among important criteria to Cetus: Royalty potential must be in the multi-million dollar range. Clearly, this dictates: (1) that the target economic objective'iof each Cetus project be major in magnitude since reward to the client must be significant, and (2) that the target represent a substantial market, e.g. one approximating $100 million per year.;~in sales"volume. Not surprisingly, therefore, all current Cetus-'clients,eport sales •1 excess of $l,billion yearly. Our mix~is~anging; too. Almost ,1100$ of the company's early work was{in"antibiotic-producing strain improvement programs for the world's pharmaceutical industry. - Today, however, antibiotic p roj ects.:comprise'no more than 25% of on-going Cetus activitiestr~other,pharmaceutical, chemical, food and energy-related projects account7for the larger portion of our research attention. Indeed,,:.the~on-going mix of Cetus activity spans several major industries on behalf of a number of different clients. Antibiotic'work'is not`being slighted; rather, the po- tential in applying Cetus skills in other industries has been addressed and our'services are in increasing demand. Thus, Cetus today is engaged_in developing a wide range of biologically-based industrial processes, each, hopefully, of potentially profound economic impact. ` o` o oQ Client-related Cetus projects by their very intimate research/new business nature.lead to continuing relationships; most projects have a particularly high component of "follow-up" opportunities. Each relationship also has a strong component of building Cetus- owned capabilities which can be applied either to Cetus programs or to projects undertaken on behalf of other clients. While an or- ganism~_and a process developed in response to a client's needs becomeahe'proprietary property of that client, research fall-out resides with Cetus and can be applied toward Cetus proprietary projects as well as to the benefits of others. Thus, biological expertise, methods of engineering improved organisms, and in many instances the organisms themselves for uses other than that of the client remain as Cetus property. In addition to contract work for clients, Cetus now pursues re- search projects for its own account. Although such work comprises a minor portion of our operating budget, research results to date

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are exciting. Broad patents have been applied for and should lead to attractive business opportunities either as stand-alone opera- tions or as joint ventures with other corporate partners. Cetus management is convinced that self-funded programs are essential to maximizing Cetus' growth. Even more important, they are essential to the building of a highly profitable, self-sufficient company large enough to maintain leadership in exploiting "the new biology," ai C :;for industrial purposes. And that is Cetus' stated corporate. ,`,~cobjective. , . _.. ._ ~.....

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II. Contract Projects for Clients The following projects are current: A. Client: Imperial Chemical Industries Ltd. (ICI) Nature of Project: Using recombinant DNA and other genetic ,techniques, to add missing genes to an industrial, single-cell protein organism. (Special note: ICI is the largest company to have declared commitment publicly to recombinant DNA work; it supports university basic research in this field, as well as having built its own containment facilities in the U.K. These facts notwithstanding, ICI selected Cetus for this project.) 'That SCP is a high-priority program'within ICI is clearly demonstrated by that company's allocation ..df $80 tnillion for its first plant (50,000 to 70,000 tons/yr: capacity), the largest single plant in the world for'protein production. %~: While soybean-rich countries such asthe U.S have limited enthusiasm for SCP, those nations not so endowed have great interest in the fermentative production of~this protein from readily available low-cost substrates. QNfethanol is ICI's choice.) If ICI s judgment.is;correc~s eventual market in the 1990's will be enormous.`and Cetus.rewards will be in the multi-million doLlarJyr.~xange. Financial returns to Cetus could start by 1981: One must also anticipate that regulatory problems to be resolved by.ICI before utilizing a Cetus or- ganism will be great;:`ICI recognizes this and shall take proper measures to obtain'approvals. B. Client: GeneralFoods Corporation Nature of Project:O Conversion of wastes from human food processing into pet food. Objective: to develop a captive source of efficient protein for animals, which source will be non-competitive with human food requirements. It is; Cetus' judgment that GF is correct in assuming that in the_iong:term considerable pressure will be generated against the use of prime human food products for feeding pets. Feeding •-the-hungry world must take priority. GF currently enjoys 15% of the approximately $3 billion U.S. market for dog food, exports only a little, and has nothing as yet for the cat food market. It would very much like to expand into these latter product areas. Development of dog food products is of such importance to GF that this effort now consumes in excess of 15% of GF's total R&D budget. This is a business worth pro- tecting; aggressive efforts to expand the market are warranted. Success by Cetus in converting otherwise useless.waste food products to nutritious pet food protein could be expected to

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open an immediate market via replacement for a significant portion of the food protein now utilized. Beyond such re- placement one would then expect growth for the new product to assume a pattern consistent with pet food growth itself. mated 10 to 12% of all dog food sold is in fact consumed by introduction can be expected, unfortunately, since an esti- expected before 1985. Regulatory problems to enable product In any event first earnings via royalties to Cetus cannot be humans. :'Client: Major European pharmaceutical.company _ >-Nature of Project: Improvement of yield of an important, non- client scale up.' r.c{, The current market for ;t~is antibiotic approximates $250 million/yr. Expected market growth is slow but steady. The improved Cetus-produced organism could well be in production vessels`within two monthsj royalty flow could start then and eventually exceed $1 million/yr. Regulatory problems: none. non-patented antibiotic in'the world. Client's present pro- duction process is"already';one of the highest-yielding pro- cesses in the industry.Project completed; Cetus is awaiting Nature of Project: Improvement of yield of largest-selling, antibiotic drug fermentation product. The product involved currently enjoys a;,woxld market approxi- mating $50 million. A process that improves yield of this product can be expected to be util:ized almost iii~nediately (1979) and provide royalties in the range of-$1 MM/yr. to Cetus. Regulatory problems::~? minimal. D. Client: Major European,vph rmaceutical company Y to its existing lead antibiotic, Garamycin, which accounts for }.i over 50% of Schering's profits. If Schering achieves market success, royalties to Cetus could go as high as $4.5 million/yr. C Regulatory problems: the usual ones Schering will experience ~ in introducing a new antibiotic. derivative of which is targeted by the client as a follow-on .Af*rewards. (See attached Blyth Eastman Dillon clipping.) detus work related~ to yield improvement of an antibiotic, a Cetus is awaiting client marketing development for enlargement . Nature of Project: Yield improvement of aminoglycoside anti- biotics. ~.Project completedt small royalty stream has begun; E. Client:_~Ichering Corporation GQ+" ~ti~r' GO' Ca ~~ .~

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F. Client: National Distillers and Chemical Corporation Nature of Project: Creation of a new process for the produc- tion of ethanol from starch-rich substrates. Cetus biology, - "coupled with ND chemical engineering innovations, is expected - to result in (1) a sequence of 50 Mgal./yr. ND-owned and operated plants and (2) royalties via licensing of a tech- nology "package" to others. Current world consumption of synthetic ethanol is in excess of 500 MM gal./yr. Explosive growth is expected if (1) the "gasohol" concept extends beyond Brazil, a country now-com- mitted to it as a matter of national policy, or (2) if petro- chemical-derived ethylene prices continue to rise as ethylene availability eventually becomes a limitation, such that fer- mentation ethanol becomes an attractive_,ethylene substrate. o a~ Feasibility study is completed; a major program;entailing Cetus equity involvement is in the final stages"of negotia- tion. Cetus rewards out of this program can-be expected in the early to mid^80's. ~,~~ ~'4 G G-~fi p Regulatory problems: minimal.0 ?~t~ ~~~~ ~o ~b ~ Client: Amoco Chemical Compariy G v r`~ol o Nature of Project:'~' Development of fuel and/or chemicals from biomass. This is a long-range project, one receiving the attention of many large companies.',~,The products of photosynthesis, espe- cially cellulose, hemicelluloses and lignin, are renewable resources~which many expect will help solve in some measure our future fuel and chemical requirements. Cellulose con- version to glucose or, perhaps, directly to ethanol is a process requiring optimization. At some future time it will be an economic industrial reality. (Glucose to ethanol is alreadyeconomic, assuming crude glucose at a low price.) It,taould be improper for us to discuss the Amoco approach to biomass`utilization. Suffice it to say, a special "twist" is ~~~nvolved - one which could lead to a proprietary position for ~C #iat'company. The Cetus role is to apply its skills to help ~iptimize the process. Hopefully, as the result of combined efforts, large-scale commercialization will become justified. In that event rewards to Cetus would be substantial; none are expected, however, prior to 1990. Regulatory problems are not anticipated. H. Client: Amoco Production Company Nature of Project: Investigation of the mechanism for the enzymatic synthesis of products normally produced by chemical synthesis. (Further discussion not appropriate.)

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I. Client: Standard Oil Company (Indiana) Nature of Project: Biological processing of oil. (Further - discussion not appropriate.) `Client:' Standard Oil Company (Indiana) Nature of Project: Production of model compounds using synthetic genes and recombinant DNA technology. (Further .:discussion not appropriate.) Client: Amoco Production Company Nature of Project: Biopolymers useful in tertiary oil recovery. o Tertiary oil recovery is a major concern'of•the oil industry. Secondary recovery techniques (essentially water..flooding) have yielded only 34% of the oil in a'field so<tYie potential for more oil from existing wells is:enormous.~-?,.The biopolymer, xanthan~ gum, has been found, helpful iin forciin`g up recalcitrant oil so•attention has focusedon_its''possibleuse. It has been predicted that polymers will enable U.S. bil producers to .recover upwards of 200,,0Mbbl.-a day by-1986, with xanthan accounting, perhaps, for half..cl, That could mean xanthan annual sales of approximately $100 million. 'An increase in oil prices would enable,evenygreater/faster use of tertiary pro- cedures; that, inurn;;-would increase biopolymer usage. " Probable date of first earnings for Regulatory problems•:~=minimal. :a~ G° 2y, a•' ti 0 Cetus: 1985.

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III. Cetus-Funded Projects A. Recombinant molecular research Nature of Project: Effective recombinant molecular research ' requires (a) genes, (b) vectors and (c) industrial (production) host organisms and various ways to obtain each. Significant activity is underway at Cetus towards developing a proprietary position in all three areas. Use in the synthesis of bio- active peptides is of immediate interest. Planned for the future: human antibody production, first for diagnostic and then for human therapeutic purposes. This program is addressing a multi-billion dollar market by the 1990's, but this market will develop slowly. Rewards could come to Cetus by 1985, however, should,we elect to license others to use our expected proprietary tools and/or developments. 101- Some of the Cetus programs in this;area are described in somewhat greater detail in t"he Appendix. CG' B. Hydrocarbon oxidation o~ b' g cS`~4 0, o, .4 v Nature of Project: The development of novel Cetus technology, now the subject of patent,:filings. Directed towards the economic, biological production of a family of commodity chemicals with U.S. volume„exceeding 10 billion pounds/yr. Sales: $2.5 billion%yr:y.•`Sales growth: 6-10%/yr. for the next five years. Relateespecialty chemicals on which higher profit margins can be expected are not included. We view this as a harbinger of biology replacing or augmenting chemistry for the production of organic chemicals. Oppor- tunities for biosynthetic approaches are now enhanced because of increasing'costs for petroleum-based feedstocks, energy and pollution concerns and, naturally, the improved capabilities of today's microbiologist. Z, Cetus expects significant profits out of commercializing this technology. One plant for one specific chemical could be .pperational by 1983; possible size: 400 million pounds/yr. <C.rSales'value: $100 million/yr. ~,i Potential licensees/joint-venture partners are now under consideration; multiple licensees or partners, both in the U.S. and abroad, are possible. Proper circumstances might also encourage Cetus itself to manufacture special process components or even certain specific low-volume, high-profit specialty chemicals. No regulatory problems are anticipated. <;~F ~ R;:._c ~k~.%<..,.~.-:~...rK~;~,~.-.ra.:«w.-:.<

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Nature of Project: The development of patentable yield- improvement techniques for fermentations of major commercial value. Preliminary research success generates optimism that . licensable technology will result from this work. Nature of Project: The development of enzymes, immobilized enzymes and immobilized cell systems for use in the industrial bioproduction of both commodity and specialty chemicals. This project is supportive of other Cetus programs; it is also meaningful in and of itself. It is Cetus' belief that many potential biosynthetic processes will assume:commercial via- bility only if catalyst-type conversions-can be developed to replace reactor-type fermentations. Enzymes are;catalysts; they must be protected and supported;_so:that they retain maximum catalytic efficiency and are'usable in.`'an industrial process, envirorunent. v This 40' G`U.~ 0 This can be,a good profit generator for Cetus. Properly immobilized enzymes canbe produced and''sold by Cetus. The immobilization art iG'real{~-`:just developing; it is ripe for innovation. ~o oc v p~ E. New antibiotics r.`~' ?~~ Kwa ti~~ Nature of Project .The exploration of a number of different and novel biological protocols for the production of new compounds that havea greatly increased likelihood of being highly useful new antibiotics. See Appendix for elaboration. ~ F. Steroids 0 (The implementation of this project is now under serious study. )-,-.ac; Q,: Nature of Project: The investigation of potential steroid transformations, e.g. of cholesterol to sex hormones and corticosteroids. The precedent for such transformations.is ,c~~,clear but an efficient bioproduction process must still be developed. G. A Novel Fermentation Substrate Nature of Project: A new, low-cost, biomass-derived material with high potential as an economic fermentation substrate will soon be under evaluation for a number of industrial applica- tions. If, as a consequence of Cetus work, markets or li- censable patents result, Cetus will enjoy equity rewards, these already defined in a negotiated formal agreement with Occidental Petroleum's Occidental Research Corporation.

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IV. Negotiations Underway There is no dearth of projects conforming to Cetus' criteria and worthy of our attention. Project evaluation and selection to insure that only the most rewarding projects are pursued and that our chance for success on these is high are our prime concerns. Our ultimate limitation is the availability of seasoned Cetus scientists whose talents we do not wish to squander. We are involved in contract negotiations on a continuous basis. Caution dictates against detailing those now underway, but a few comments are perhaps appropriate. For example, we can say that we expect soon to finalize the following contracts: - A. With a major oil company (not Standard), a project covering the in-situ generation of methane fr=oi1._,. ~,° ~a~ a B. With a major U.S. company and via recoinbinant molecular methods, the production of a specific human neuropeptide, which neuropeptide addresses a significant existing medical market. ' v w~ C. For a major U.S. pharmaceutical company,=-a yield-improvement program on an~important"new-antibiotic:about to be marketed in the U.S. 1~~oa~' o t r~ •~' 2y D. A collaborative agreement calling for the production of a potential male contraceptive developed by a major, non-profit scientific institute. ~-:*.fi~v3.:c:s'~~..''.~a~:,,.rl.a~l..+u.~_.v.e_ i..i.:~...':~. .. ~.........r,i..-i.,C.a.-..,~aisr.f'-~k-~.n•'.~'.~a`i3~'.ss~s~:.~i.~tt~'.

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