Rising tide for $1bn water start-up

Welcome back. As excitement — and trepidation — about huge advances in artificial intelligence have gathered in recent months, so has the debate about what a responsible business approach to AI should look like. Can we trust companies to act ethically with this rapidly evolving technology — or do we need governments to constrain them as swiftly as possible?

Sam Altman, chief executive of ChatGPT creator OpenAI, was grilled by lawmakers on Capitol Hill yesterday, and issued a striking call for new regulation.

“We think that regulatory intervention by governments will be critical to mitigate the risks of increasingly powerful models,” Altman said, suggesting a combination of licensing and testing requirements. “If this technology goes wrong, it can go quite wrong,” he added. “We want to work with the government to prevent that from happening.”

This is set to become a new hornets’ nest for responsible investors to grapple with — as if they didn’t already have enough to worry about.

In today’s edition, I look at another area of technology that’s increasingly in the spotlight, as companies rush to shore up their water supplies. And Kaori looks at how investors are helping to tackle the threat of antimicrobial resistance. Thanks for reading. (Simon Mundy)

Water tech gets its first unicorn

Investor interest in water technology has been on the rise of late, as concern mounts about widespread shortages and contamination. But richly valued start-ups in the space have been thin on the ground.

So the latest fundraising from Boston-based company Gradiant, which has developed new ways to treat industrial wastewater, is worth noting. Today it announced a $225mn funding round, which values the company at $1bn — making it the water tech sector’s first “unicorn”. The round was led by New York family office BoltRock Holdings and Centaurus Capital, the investment vehicle of Enron trader turned hedge fund manager John Arnold.

Gradiant’s bumper cash injection chimes with a new report from analysts at Jefferies, arguing that “now is the time” for investors to look at companies working to provide clean water.

For one thing, they note, companies are getting increasingly nervous about water supply, as climate change worsens. Government policy is starting to offer attractive financial incentives in this space — see, for example, the investment credits offered for certain types of wastewater treatment in Joe Biden’s Inflation Reduction Act. And businesses with a poor record on water pollution are at growing risk of punishment from regulators (witness the investigation into large UK water companies).

Gradiant chief executive Anurag Bajpayee told me the company was targeting the top levels of the water pollution “pyramid”. The lower levels of that pyramid have contaminants such as sewage — high-volume, but relatively easy to tackle. At the upper levels are industrial toxins that are released in smaller quantities — but can prove highly dangerous.

The company’s work builds on the postgraduate work Bajpayee undertook at the Massachusetts Institute of Technology with his co-founder Prakash Govindan, with two key concepts behind Gradiant’s 250 patents. One aims at replicating the natural process through which water is purified and recycled, through evaporation and condensation. The second forces salty brines through a succession of membranes with increasingly high salinity.

Gradiant promises customers that its technology will allow them to purify and reuse larger amounts of water, reducing the amount they need to source externally. That has attracted customers from a range of industries, including chipmakers such as TSMC and Micron; miners BHP and Rio Tinto; and carmakers Hyundai and BMW.

The wide-ranging interest is partly a reflection of the growing pressure on companies — from society as well as regulators — to take a responsible approach to their water consumption and avoid pollution, said Bajpayee. But it also reflects an increasingly real concern about their own long-term water security. “If you can treat your wastewater as an opportunity,” he told me, “to a great degree you control your source of water.” (Simon Mundy)

The next pandemic could be a ‘silent’ one

In the past few weeks, the World Health Organization as well as the US government declared an end to the Covid-19 pandemic.

But as one health crisis ends, there’s already another on the horizon: the looming threat of antimicrobial resistance. And as we’ve discussed before, investors are taking notice.

So far, emphasis has mostly centred on the demand side of the antimicrobial value chain, such as large meat producers that are allegedly overusing existing antibiotics and thereby stoking antimicrobial resistance. But pharmaceutical companies are now cautiously betting on start-ups that are developing technology to battle this threat.

The AMR Action Fund, a public-private partnership supported by the International Federation of Pharmaceutical Manufacturers & Associations, will invest $1bn in start-ups with the aim of developing two to four new antibiotics by 2030 that target drug-resistant bacteria. In late April, the fund invested in two start-ups, Vedanta Biosciences and Pattern Bioscience, bringing the total to five. The fund’s investments are on track to reach a total of $200mn by the end of this year.

Antimicrobial resistance “is a silent pandemic”, Thomas Cueni, director-general of IFPMA, told me. There are “already 1.4mn people per year dying directly from antimicrobial resistance”, he says. But “big pharma quit [investing in antibiotics] because there are no sustainable markets”, he said.

A 2017 study showed that the cost to develop a new antibiotic was about $1.5bn. Meanwhile, a study by Duke University’s Margolis Center for Health Policy showed that only five out of 16 new antibiotics approved between 2000 and 2017 generated annual sales of more than $100mn.

Even companies that have successfully developed new antibiotics that targeted drug-resistant bacteria have been forced out of business. Of the 12 antibacterial companies that went public in the past decade, only five have survived, according to a report by the Biotechnology Innovation Organization.

This has spooked investors and pharmaceutical companies from getting into the development of new antibiotics, which in turn makes us more and more vulnerable to drug-resistant bacteria.

Until now, pharmaceutical companies “have gotten off the hook”, Sara Murphy, chief strategy officer at non-profit group The Shareholder Commons, told me. Eventually, she said, investor campaigns would need to extend to the pharmaceutical industry as well. Future campaigns could request companies to publish data on antimicrobial resistance, or ask to decouple the base pay and bonuses of sales agents from the volume of antimicrobials they sell.

On the demand side, investors are intensifying their campaigns. In the 2023 proxy season, the Shareholder Commons, together with asset managers Amundi and LGIM, as well as Hesta, one of Australia’s largest pension funds, filed shareholder proposals at McDonald’s, Tyson Foods, and Hormel Foods on antimicrobial resistance.

“As a diversified investor or universal owner, antimicrobial resistance will have an impact on multiple of the sectors in which we are shareholders,” said Maria Larsson Ortino, a senior global ESG manager at LGIM.

The proposals, which ask these companies to adhere to WHO guidelines on reducing antibiotic use, have so far secured 20.4 per cent of non-insider support at Tyson and 13.3 per cent at Hormel. The vote at McDonald’s is scheduled for May 25. If interest continues to grow, that may put the focus more on the pharmaceutical industry to engage.

Covid-19 “showed us the cost of an untreatable disease”, says Murphy, arguing that the next global health crisis could well be driven by a drug-resistant pathogen. The coronavirus pandemic “was absolutely predictable and it was just a matter of time. I think the same applies [to antimicrobial resistance]”. (Kaori Yoshida, Nikkei)

Smart read

As other institutions dropped their links with the Sackler family, who presided over the aggressive marketing of addictive painkiller OxyContin, Oxford university allowed their name to remain on buildings and staff positions. Now it has finally severed ties, Antonia Cundy reports for the FT.

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