How DNA Can Protect Your Brand
A California startup is using genetic technology to help fight counterfeit products.
By Eilene Zimmerman

(FORTUNE Small Business) – APPLIED DNA Founded by Larry Lee

The numbers aren't pretty. According to the International Chamber of Commerce, some 5% to 7% of world trade is in counterfeited goods, a percentage that has stayed consistent since the ICC started keeping track in 1990. The ICC's Counterfeiting Intelligence Bureau estimates that the problem now costs U.S. industries $200 billion to $250 billion a year, and 120,000 jobs—particularly in the software, sporting goods, and trademarked textile industries.

To combat the problem, security experts and government agencies have tried a James Bond movie's worth of high-tech solutions, most of which are still in the experimental phase. But a small startup in Los Angeles called Applied DNA Sciences may have come up with a workable counterfeiting solution that starts with the most basic raw material—plants. Applied DNA takes strands of DNA from plants and alters them to create unique chemical tags that can be used to mark products (just as chemical taggants are added to explosives sold in the U.S.). One variant of DNA could go into, say, gasoline to verify that it was refined by Shell and not Exxon Mobil, while another could mean that a blouse was assembled at a factory in Malaysia but made with cotton grown in the U.S.

The technology to alter plant DNA has been around since the 1970s, but until recently that process left the genetic material chemically unstable. (It would break down in about three months, or less if subjected to the conditions in a typical factory.) Applied DNA's big advance is the ability to put the DNA into a kind of microscopic capsule that the company says will let it survive almost anything, from the rigors of manufacturing to the chemicals in petroleum. The encapsulation also encrypts the DNA so that it can't be decoded and reproduced by counterfeiters. To be used as a marker, the DNA starts as a powder and then gets dissolved into a fluid that can be added to ink, plastic, paint, petroleum, textiles, and microchips. Paul Reep, director of product development at Applied DNA, says, "Even if, through some miracle, someone chemically unwrapped the envelope, the integrity of the DNA would be compromised," he says. "It would not look the same as it did before the unwrapping."

Will the technology work? A lot of small businesses hope so. Applied DNA is already in a partnership with the U.S. government to test it for the the textile industry, where counterfeiting is a large, complex problem that affects businesses ranging from yarn spinners and textile mills to shops that sell blue jeans. The National Textile Association reports that in 2003 the U.S. Customs Department seized more than $160 million worth of bogus apparel from China alone. Last summer the National Council of Textile Organizations in Washington, D.C., learned that Customs was investigating the shipment of 5,000 containers of apparel imported from China through the Port of Los Angeles/Long Beach worth half a billion dollars.

Applied DNA Sciences began as a conversation three years ago between Larry Lee, formerly CEO and now chief technology officer at the company, and J.J. Sheu, a biologist and part owner at Biowell, a biotech firm based in Taiwan. A mutual friend (and relative of Lee's) introduced the two. Since the early '90s Sheu had been working on a way to encapsulate DNA so it could be embedded into different substances, and by 2001 he had a prototype ready. Lee, an engineer who had worked at telecom companies, was fascinated with biosecurity. By the time he met Sheu, he had already made small investments in several biosecurity companies (which he declined to name). After a few meetings between the two, and months of research by Lee into the legitimacy of the technology, he believed the market potential was huge. "DNA is the gold standard of authentication in the courts, and here was a much broader application for it," he says.

The final arrangement was a partnership: Applied DNA has a 15-year agreement with Biowell to be its exclusive licensee and marketer in every continent but Asia, where Biowell already sells its product. (Among its clients are China Sugar and China Salt, both multibillion-dollar companies, as well as businesses in banking, biotech, entertainment, and publishing.) Applied DNA and Biowell file jointly for U.S. patents.

It may seem odd that Biowell found a partner rather than just opening up a U.S. office on its own. But Sheu recognized that Biowell was a group of Taiwanese scientists without much business experience. "They realized the market was so vast that they would need a sales and marketing arm here in the U.S. to assist with their campaign," says John Barnett, Applied DNA's vice president of sales. "There are also cultural and language barriers to overcome, and we had important relationships in the government sector and other industries that helped them open doors."

Lee funded Applied DNA out of his own pocket at first, spending several hundred thousand dollars, and took it public in October 2002 through a reverse merger with a shell company on the OTC market. (Reverse mergers raise both cash and eyebrows—they don't require the kind of disclosure or due diligence that an IPO does.) Through the deal Lee raised about $2.5 million. Today the company has around 20 employees and consultants who handle marketing, sales, technology development, and financial issues related to the DNA marker developed by Biowell. The L.A. office has researchers on staff, but very little science happens there. The main research is still done in Taiwan.

Although the company already has revenue in the Asian market, John Barnett would give only very conservative revenue projections for the U.S.—about $5 million for 2004. CEO Rob Hutchison, 47, who took over Applied DNA a year ago, has more sanguine expectations: He estimates that Applied DNA ultimately has the potential for more than half a billion dollars in sales.

Applied DNA has a handful of U.S. clients, most of which don't want their names revealed. One exception: Champion Thread in Cary, N.C., which embeds the DNA marker into its sewing thread if customers ask for it. Champion's president, Bob Poovey, says that application costs are low and that test results so far have been 100% accurate. "You can take two designer handbags, the real one containing the DNA thread and the other a fake, and we could tell you rather quickly which is the real one," Poovey says.

Similarly, Lustre Cal in Lodi, Calif., uses the DNA marker in some of its inks, which are used to label a wide array of goods such as microwave ovens, computers, auto parts, and medications. In May, Applied DNA began testing its marker with a major fuel producer to combat the selling of stolen gasoline, and last summer it started working with a few pharmaceutical and chemical companies. (Applied DNA officials say they cannot disclose the identities of those companies.) Still, although the technology can work in many industries, the one with perhaps the most potential is textiles.

A little more than two years ago U.S. textile manufacturers asked the federal government for help in finding a cost-effective "tracer"—something that could authenticate their products and track them around the world. Cass Johnson, president of the National Council of Textile Organizations, says the object was to fight counterfeiting and transshipments—or goods imported into the U.S. bearing a false country of origin, usually to get around import quota limits. (Some apparel importers get preferential tax treatment if they use U.S. fabrics and yarns.) Researchers at Oak Ridge National Laboratory in Tennessee began looking into textile-marking systems that could be carried within the cloth itself rather than on a separate tag. Right now three methods are being tested: Applied DNA's marker, nano-barcodes (submicroscopic stripes attached to a rod many times thinner than a human hair), and quantum dots (artificial atoms that give off colors in the presence of a special light). Of the three, Applied DNA's marker is the furthest along in development.

The first stage of research is being coordinated by the USDA's Cotton Quality Research Station in Clemson, S.C. The Clemson facility embeds marking technology into harvested cotton to see how it holds up. Applied DNA will give the USDA lab its marker already mixed into a solution that will be sprayed over the cotton, which is then processed into yarn and knitted or woven into fabrics. At the end of the process, a researcher will test to see if the DNA or other markers made it through the manufacturing process intact. Applied DNA says the tagging procedure won't change the look or feel of the finished product.

To solidify its partnership with the government, Applied DNA established a Cooperative Research and Development Agreement between itself and the USDA in February. No money changes hands, but Applied DNA gets to use the simulated manufacturing facility in Clemson and the USDA gets to use Applied DNA's "sequencer"—a machine about the size of a computer printer that reads the DNA and confirms that it survived the manufacturing process.

Once the government decides which marking system works best, it will let industry decide what happens next. "We'll share our results with everyone who has something to gain from this," says Glen Allgood, a senior researcher at Oak Ridge who is coordinating the project. The government is unlikely to adopt one technology as its "official" verification method, nor will it recommend one to textile growers. "What they'll do is sanctioning," says Paul Reep at Applied DNA. "They will probably publish a list in a journal that includes discussion of a number of different technologies that might meet the needs of an end user. And then it's on the end user to take the information and figure out if and how they want to use the technology."

Until now, a big challenge for Applied DNA has been its lack of a device that can instantly read the code contained in its DNA markers. In October the company was testing several readers, and it plans to have one in use by the first quarter of 2005. Right now, when the marker is used in ink on labels, the label can be swabbed with a special solution and will turn from blue to pink and back to blue in about ten seconds (please see box on page 58). But if the DNA is embedded in fabric, testing takes about 15 minutes. "If you're a customs official scanning a case of shirts and you need to know if it has U.S. cotton in it, you can't wait 15 minutes to get the readout," says Hutchison.

Some experts have other criticisms. Zachary Zimmerman, a senior research analyst at Life Science Insights, a subsidiary of market and technology research firm IDC (and no relation to the author of this story), says that he is skeptical about using the marker in textiles. Zimmerman, who specializes in genetics, says, "One of their major hurdles is going to be convincing people it's okay to have DNA sprayed all over their clothing. With the public's fear of genetically modified crops, I can't imagine consumers will buy into this. There are easier, secure ways to tag things."

Specifically, Zimmerman thinks RFID tags and quantum dots are more promising and possibly less frightening to consumers. "You could have a combination of these dots, and it would be a fingerprint similar to the way DNA can give you a fingerprint," he says.

Paul Reep counters that RFID is easy to manipulate and duplicate. Nanotechnology, he says, isn't as stable as DNA and involves the use of radioactivity, which is both expensive and dangerous. And as for people being nervous about the DNA on their clothing, Reep says consumers need only be reminded that when they eat a salad, they're eating plant DNA.