For almost a decade Plasan Sasa had been one of Israel’s most successful companies and a standout of the country’s kibbutz industries. The company made custom-made armor for vehicles used by United States forces in Iraq and Afghanistan, almost from the first days of the military operations there in 2003. With attacks on Americans a daily occurrence, Plasan’s sales skyrocketed to as much as $870 million in 2010.
Then came the nightmare of every defense contractor: Peace may not have broken out in Iraq or Afghanistan, but the Obama administration decided to withdraw American troops from Iraq. Plasan was forced to fire hundreds of its 1,100 employees. Kibbutz Sasa, Plasan’s owner, needed to diversify for a new era of lower demand for its armoring.
To the members of this collective settlement in Israel’s Galilee region, the food industry looked like a good bet, a source of steady and stable revenues which could serve as a counterweight to the sharp ups and downs of the U.S. defense budget that Plasan relied on. Sasa bought a 19.2% stake of the Golan Heights Dairy, which makes what it calls “pure mountain milk” and UHT dairy products. The dairy had been jointly owned by Tnuva, Strauss and Tara – Israel’s three largest dairy product makers – until the antitrust commissioner forced them to break up the partnership.
At the same time, Sasa was offered a more exotic opportunity in the global health food market: investing in Qualitas Health, a company in one of the hottest food niches – food supplements based on Omega-3 fatty acids.
It may have been just a coincidence, but the entrepreneur who approached the kibbutz, Dr. Isaac Berzin, the founder and chief technology officer of Qualitas, had just finished his own fascinating but traumatic experience with the U.S. government. Berzin, who has a Ph.D. in chemical engineering from Ben-Gurion University of the Negev, was then an adviser to the Arizona Public Service Company, which in 2009 received a $70 million grant from the U.S. Department of Energy to research the feasibility of producing fuel from algae using carbon dioxide emissions as the source for the photosynthesis.
Berzin found that it was indeed possible to do it, but at the steep price of $800 a barrel, almost six times the peak price of oil in the summer of 2008. The study was Berzin’s second failed attempt at manufacturing fuel from algae after his GreenFuel Technologies, which he founded in 2001, closed down.
“It was where I learned the difference between scientific excellence and economic excellence,” says Berzin. “I told Carl Bauer, who was then the director of the [U.S.] National Energy Technology Laboratory and monitored the project on behalf of the U.S. Department of Energy, that there was no economic case for producing fuel from algae without being able to produce another product from it as well. Bauer turned down the idea. I returned to Israel and looked for something to do with the knowledge I had collected.”
Berzin chose the manufacture of Omega-3 oil from algae and Sasa as his partner in the nutraceutical project. “I consulted with friends in the Kibbutz Movement and they recommended Sasa since novel ideas don’t scare them, and the fact that something hasn’t been done in the past isn’t held against you.”
In addition, even though they had built a hugely successful manufacturing business, they like advanced agriculture and wanted to be involved in it. “There was a feeling they had built themselves up from the conflict in the Middle East. They were looking for a new horizon,” says Berzin.
Sasa asked to bring in as a partner Kibbutz Dan,which had experience in marine agriculture, for example in raising trout and sturgeon for caviar.
The financial side of Omega-3 is very clear. Omega-3 oils are very important for the human body from infancy when they are critical to brain and vision development, through old age when they help preserve nerve cells and regulate inflammation.
The world market for Omega-3 is estimated at $25 billion a year. In the U.S., where it comes mostly from fish oil, it is the best-selling food supplement. “The source for the Omega-3 is in the algae the fish eat, but unlike other cases in which the animals are used as mediators between the final product and the raw material from nature – cow’s milk is the best example – the fish as a mediator of Omega-3 does not create value, but damages it,” says Berzin, who has a 20% stake in Qualitas.
There are two main types of Omega-3: DHA, a long chain polyunsaturated fatty acid that plays a role in fetal development, mostly in brain and central nervous system development; and EPA, a fatty acid with medicinal value for adults, since it aids in lowering cholesterol levels and can help with depression and rheumatism. When you take Omega-3 supplements you take a mixture of the two forms of oils, each of which competes to bind with the same receptors, which means a mixture is worse than the pure substance, says Berzin.
Better than fish
Algae have a few important advantages over fish oil as a source of Omega-3. The algae produce pure EPA rather than a mixture. The polarity of the EPA guarantees quicker absorption by the body than for fish oils. In addition, as opposed to fish, algae do not absorb heavy metals and are not tainted by pharmaceutical residues, he says.
Environmental pollution is just one of the problematic aspects of using fish oil as a source for Omega-3. In light of the thinning out of fish stocks in the oceans there is clearly a need for alternative sources. Algae are not only a reliable source but are renewable since they can grow by 15% in mass every day.
Qualitas’ development team spent its early days searching for the optimal algae for producing Omega-3, until it remembered about a strain that caused enormous difficulties during the period when it was intended to serve as an alterative source of energy for the U.S.
“It was an annoying algae,” says Berzin. “Its oil was viscous, its carbon chains were the wrong length and the partners of APS spat blood when they tried to turn it from oil into fuel,” he recalls.
But nannochloropsis oculata, the scientific name for the genus of the annoying algae, turned out to be an excellent source of Omega-3 oils. “You work hard for many years, and sometimes you discover that luck is the most dominant parameter,” says Berzin.
After their initial success, Qualitas set up a beta site in Carlsbad, New Mexico, near the largest site in the U.S. for producing oil from algae, belonging to Valicor Renewables. Valicor’s technology turned out to be inappropriate to produce the product Qualitas wanted to bring to market, because the process destroyed the polarity of the EPA, sacrificing its main advantage over fish oil. But Valicor agreed to take on the task of developing the specific technology required by Qualitas, and provided it with an exclusive license. In exchange, Valicor asked to become a partner in the venture and not just a supplier. It acquired 5% of Qualitas in 2013.
Berzin did not forget his lesson from burning through the $70 million in government support in the project with APS – the importance of being able to increase the size of the project quickly at a relatively low cost. Qualitias went to Texas to find a site where it could manufacture the product at a competitive price.
Only in Texas is the owner of the land also the owner of the water rights under the property, and the area near the city of Midland in the western part of the state has a ocean of underground water with a salt concentration half that of seawater – and the land was cheap. This has given Qualitias unlimited access to the water it needs as well as regulatory, technological and business advantages. Companies that have to use seawater find other intrusive species of algae competing with their own, said Berzin.
Three years after it was founded (and 10 years of research and development), Qualitas received approval from the U.S. Food and Drug Administration for two products, becoming the first company in the world to sell EPA from algae.
Almega PL will be sold directly to consumers under the brand of Dr. David Williams with the Helen of Troy company, intended for improving cardiac health. Vitamin and supplement giant GNC will also sell five products based on Almega PL, which will compete with products made from krill oil. Other joint sales projects are planned for the future for the pure EPA product.
Qualitas is positioning itself as a higher quality alternative for Omega-3, but at the same price as the fish-based products: $150 a kilogram to the retailer. The shelf price for consumers will be about $1,100 a kilogram.
Considering the relatively low manufacturing costs in Texas, Berzin says the company’s operating profits will be over 50%. The next product in the company’s sights is protein substitutes, including for use in baby formula.