Putting bugs to work

Gainesville's Entomos hopes it can lower the cost of producing ladybug larvae to eliminate pests to make its 7-year-old biocontrol business profitable.

By KRIS HUNDLEY

© St. Petersburg Times, published May 15, 2000

GAINESVILLE -- Entomos LLC's chief financial officer, director of research and office manager were huddled around a table at the company's headquarters here recently, but they weren't updating their business plan or preparing an earnings statement. They were using artists' paint brushes to transfer ladybug larvae -- black and yellow, six-legged creepie-crawlies -- into plastic cups filled with green Easter grass.

Filling "Ladybug Changing Rooms," educational products that demonstrate stages of metamorphosis to school kids, probably isn't on any staffer's job description. But orders from schools are flooding in, and the $14.95 product, developed a year ago almost on a whim, is helping to keep this small biological control company afloat.

Entomos is 7 years old and struggling to survive in the brutal biocontrol business. It's long been known that beneficial bugs, such as the pink-spotted ladybug that is Entomos' primary product, can be as effective as chemical pesticides in eradicating infestations of aphids and spider mites on everything from palm trees to strawberry plants.

But the cost of producing these bugs, and producing them in large enough quantity to do the field trials required for commercial use, has stymied dozens of well-intentioned companies.

Kuppert Biological Systems, a 33-year-old Dutch company, is the world's leading producer of so-called beneficial pests, with sales of about $20-million a year, primarily to greenhouses. About half of Kuppert's business is in bumblebees used for pollination; Kuppert also sells adult ladybugs that have been harvested in the wild.

Large agricultural chemical companies such as Monsanto have opted to develop genetically altered, insect-resistant crops, rather than find an inexpensive way to produce beneficial bugs. But public pressure is building against such a strategy: Even McDonald's has taken a stand on the topic, recently rejecting genetically altered potatoes for its french fries.

James H. White, the geneticist who founded Entomos in 1993, said agricultural chemical companies are interested in using beneficial pests, but only after someone has found an economical way to produce them. White said Entomos is well on its way to reaching that goal.

"The big agribusinesses say, "Make it work and then we'll pay for it,' " White said. "There will be a tremendous financial return once it's proven that beneficial bugs can be effective in commercial agriculture."

But White predicts it will be five to 10 years before companies such as his can get a share of the $3-billion to $5-billion a year spent by commercial farmers on pesticides. Until then, Entomos is making it on a combination of persistence, diversification, low-cost living and luck.

White's spotted-bug business is a big yawn to most venture capitalists, who are falling over themselves to throw money at dot-com start-ups. "Though we have losses, they aren't big enough for us to qualify as an Internet deal," said White, who seems more at home behind a microscope than pitching deals. "We're definitely not an Internet deal and investors shouldn't expect that sort of a time line for returns."

That did not deter one investor, Timothy G. Cockshutt of Advantage Capital Partners in Tampa. Last fall, Advantage invested $1-million in Entomos and committed another $1-million for this year. Cockshutt, a geologist by training, has joined Entomos' board. With the completion of the investment, Advantage also will become majority shareholder in the company.

In previous jobs with other venture capital companies, Cockshutt had made successful investments in two organic food companies and one biocontrol company. And Cockshutt thought Entomos was a particularly appropriate investment since Advantage, funded by insurance company premiums under the state's certified capital or CAPCO program, is required to invest half its capital in early-stage Florida technology companies. Still, he had a tough time convincing his partners to put cash in a bug company.

"The younger people in the company especially thought it was nuts to invest in something like that," said Cockshutt, who made sure everybody on the investment committee received a Ladybug Changing Room kit. "But our approach is to keep the burn rate low and not blow it out. We're looking at a real long-term thing here."

Cockshutt said a key to Advantage's investment was Entomos' development of a second product line that has a potentially faster payback than the beneficial bugs. The company says it has developed technology to grow a bacteria in the lab that will interrupt the reproductive cycle of deadly nematodes, which attack roots of plants such as tomatoes.

Growers fight nematodes by fumigating the soil with methyl bromide, an ozone depleter originally scheduled to be pulled off the market in 2001. It now is to be phased out in 2015.

Bacteria have long been known as effective alternatives to methyl bromide, but until Entomos' breakthrough discovery scientists did not think it was possible to cultivate such bacteria in a lab. Geneticist White estimates it will cost up to $5-million to advance from the current stage, which involves growing the bacteria in small quantities in the lab, to large-scale production of the bacteria in fermentation vats. But investor Cockshutt is confident that within a few years, Entomos' bacteria will replace methyl bromide as the accepted commercial treatment for nematodes.

"You're talking about replacing a very toxic substance with a naturally occurring substance, so the instant market is very large, probably $700-million worldwide," Cockshutt said. "That's the hook that made this thing financeable for us and persuaded my partners to go along with the investment."

White, a 43-year-old with a Ph.D. in molecular biology from UCLA, learned the hard knocks of the biocontrol business in a previous career as senior scientist for Biosys Inc., a now-bankrupt California company. That experience did not deter him from starting his own business, then known as Predation, after his wife joined the University of Florida as a chemistry professor in 1993.

"The cost of living here was very low and I saw an opportunity to survive on my wife's salary," said White, who says he went three years before drawing a salary. "I opened this on my own dime."

The company has 14 employees, including three "ladybug farmers."

U.S. Department of Agriculture grants provided $560,000 in capital in the early years; a local angel investor contributed about $50,000 more. Predation changed its focus several times in the first few years, finally settling on breeding the ladybugs, which are pink with black spots. The species has two winning characteristics, White said: a warm and fuzzy public perception combined with a fierce appetite for a wide variety of pests. To prove his point, there is a big picture in the company's conference room of a lady bug snapping the head off an aphid.

"I keep telling Jim he has to make some "bug snuff movies,' " said Cockshutt, who fears that the ladybug's benign image might hamper sales. "Farmers get a certain gratification from knowing that these bugs are going to kill something."

The benefits of ladybugs, which come in thousands of species, have long been known to gardeners. Several companies sell adult ladybugs that have been captured while hibernating in the foothills of the Sierras in California. On Garden.com, a pack of 1,500 adult ladybugs is advertised for $9.99 plus shipping. The disadvantage of using adult ladybugs, according to White and several of his customers, is that they can easily fly away rather than stay in a targeted area.

Unlike its competitors, Entomos sells pink-spotted lady bugs that are bred in special environmentally controlled chambers and sold as larvae. Entomos' price is $15 for 250 larvae, with one bug covering about one square foot of plants. The wingless larvae stay on the plants where they're applied, eating thousands of pests before turning into a pupae, then an adult, a process that takes about two weeks.

Jim Atchison, owner of Atchison Exotics in Delray Beach, has been using Entomos' bugs on his nursery's plants for several years. "We get probably 750 to 1,000 bug larvae weekly and it's been extremely effective," said Atchison, who supplies wholesale garden centers outside Florida. "The cost is close to the same as pesticides, and I'm doing the environment a favor."

David Kirwan, owner of Phoenix Foliage in Winter Haven, which propagates houseplants for other nurseries, gets a delivery of Entomos' ladybugs every two weeks. "By the time you add in the cost of labor to apply pesticides, it's probably cheaper to use the bugs," Kirwan said. "The biggest trade-off is that it's difficult with bugs to have 100 percent control, which you get with chemicals. But we've had good results."

Despite strong reviews, Entomos has yet to break even, with sales of about $30,000 last year. But demand is picking up, and White said revenues in March and April exceeded 1999's total. Sales of the Lady Bug Changing Room -- a low-cost, high-margin product -- exceed agricultural sales. That has allowed Entomos to boost production to about 50,000 larvae a day, a number that is expected to double with the completion of a third growing chamber in a few weeks.

Higher volume means lower per-unit costs, which will make it feasible for the company to run the field trials necessary to bring large-scale growers on board. White said Entomos continues to hammer away at the cost of producing beneficial insects so they can be feasible for use on such commercial crops as corn and soybeans.

"Right now it costs several hundred dollars to treat an acre with insects," White said. "When we get it down to $5 or $10 an acre, it will be competitive with pesticides and we'll have tremendous markets available."

To cut costs, Entomos, taken from the Greek word for insects, has patented a low-cost artificial diet for its bugs to replace moth eggs, which are used by other commercial bug growers. The company also is planning to automate the process of harvesting the ladybug eggs, now a painstaking process done by hand.

Tucked in a low-rent industrial park on Gainesville's south side, Entomos' headquarters are surprisingly low-tech. Only one lab, where the company is conducting research on the anti-nematode bacteria and another microbial product, fits the image of a biotech business, with expensive incubators, microscopes and plenty of petri dishes.

The bug breeding business, which takes up most of the company's space, consists of three walk-in "insectories," air-tight rooms set at 85 degrees to promote ideal growth conditions. On one shelf, glass cases hold adult ladybugs, which lay 10 to 15 bright yellow eggs every other day on pieces of fake fur. ("We've discovered that even the color of the fur makes a difference," said White, who declines to say which color is preferable to a pregnant bug.)

After three days, the eggs hatch into larvae, the stage at which they're sold to growers or schools. After two weeks, the larvae, which White claims look like miniature baby alligators, transform into pupae. A few days later, the adult ladybugs emerge. A ladybug will live for about a year.

White, who can look at a crawling ladybug larva and call it "cute," expects Entomos to break even or show a slight profit by 2002. He thinks the time is right for biological control companies to overcome their dismal history and succeed.

"You've got growing public perception of the difficulties of using toxic chemicals and an increasing demand for organic food," White said. "We did our technology development at a time the industry was out of favor. As opportunities develop, we'll be in a better position to exploit them."

Still, White is talking about returns in terms of years, not at Internet speed.

"You have to knock on lots of doors until you find people whose interests are aligned with yours," he said. "It's extremely frustrating because nobody recognizes how obvious it is that you're going to succeed."

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