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Executives

Idalia Rodriguez – IR, ICR Inc.

Richard Eno – President and CEO

Joseph Hill – CFO

Oliver Peoples – Chief Scientific Officer and VP, Research

Analysts

Lucy Watson – Jefferies

Michael Carboy – Signal Hill

Jeff Osborne – Thomas Weisel Partners

Jinming Liu – Ardour Capital

Ron Lee – Lee Capital Management

Michael Cox – Piper Jaffray

Metabolix, Inc. (MBLX) Q3 2008 Earnings Call Transcript November 5, 2008 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Mextabolix, Incorporated third quarter 2008 earnings conference call (Operator instructions) I would like to turn the conference over to Ms. Idalia Rodriguez with ICR; please go ahead.

Idalia Rodriguez

Good afternoon everyone. Metabolix released third quarter financial results after the market closed today. If you do not have a copy, one may be found on the website at www.metabolix.com on the Investor Relations section. Making the presentation today will be Richard Eno, President and Chief Executive Officer; Joseph Hill, Chief Financial Officer of the company; and Oliver Peoples, Co-founder of Metabolix and Chief Scientific Officer.

Before we begin our formal remarks, I need to remind everyone that a part of our discussions today will include forward-looking statements. The statements are not guaranteed of future performance and therefore, undue reliance should not be put upon them.

The company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this conference call. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risk that could impact our future operating results and financial conditions.

With that I’d like to turn the call over to Rick Eno, President and CEO of Metabolix. Rick

Richard Eno

Thank you, Idalia. I’d like to welcome all of you to the third quarter 2008 earnings conference call for Metabolix. Today I will provide you with a review of the Metabolix vision and a broad update of our ongoing activities. Joe will then take you through the financials. All-in-all, I’m very pleased with our progress and the current financial position of the firm.

For those of you new to these calls, Metabolix is an innovation driven, Biotechnology Company which is focused on bringing environmentally friendly solutions to the plastics, chemicals and energy industries. We are developing and commercializing pathways and products that lessen the world’s dependence on oil reduce the CO2 footprint of traditional materials and address critical solid waste issues.

We are founded on hard science and have exceptional capabilities in plant science, in fermentation, Microbial and Polymer Engineering, and in market development. We currently have three business platforms

One Mirel which is a bio-based, biodegradable plastic currently being commercialized with our partner, Archer Daniels Midland through a joint venture called Telles; two, our C4 chemical platform; and third, our plant-based activities, which include our activities in switchgrass, oil seeds and sugarcane. With that context, I will now provide you highlights of recent activities across all three platforms.

First, let me begin with Mirel. This past quarter we continued to move towards commercialization of Mirel. I will update you on progress in ongoing market development activities, the Clinton plant and a program to establish a long-term growth plan for the business.

First, let me review our market entry strategy for Mirel. Our market development activities remain focused on six specific segments with the combination of Mirel’s properties result in a unique offering.

As a reminder, these segments are packaging; compostable bags; consumer products focusing on cosmetics, gift cards and other products you would commonly find on the retail shelves; business equipment; agriculture and Horticulture; and marine and water applications. These six segments represent over two billion pounds of addressable, annual demand growing at 5% per year. Just the growth in our target markets is sufficient to fill out our first plan.

Since our last call we’ve had two new customer contracts signed for the supply of Mirel. We are very excited about these contracts for a number of reasons. First; they demonstrate measurable progress against our stated market entry strategy; second, both represent consumer applications and, as such will be integral in building the Mirel brand in the eyes of consumers; third, they represent further validation of our injection molding and sheet products by leaders in their respective market segments.

Let me just discuss each agreement in greater detail; first, is an agreement with Ball Horticultural Company. Ball is a global leader in the Horticulture industry with breeding, production and distribution operations in more than twenty countries around the world. Ball will be using Mirel in its patented soil wrap.

This is a new concept for a bottomless plant container that was test marketed in June at the twelfth annual LOHAS (Lifestyles of Heath and Sustainability) Forum held in Boulder, Colorado.

The soil wrap made with Mirel is a fully, biodegradable and compostable plant pot solution for the home gardener. Plastic has become an integral part of Horticultural packaging because it is lightweight and easy to shape into plant pots, tags and trays. However, there continues to be increasing concerns about the environment and growing amount of plastics that are piling up in potting sheds, basements and landfills across the nation.

In North America alone, nearly 320 million pounds of plastic material is used per year for nursery pots, flat trays of six-pack annuals and sale packs. Only 100,000 pounds of this plastic material is recycled according to a 2004 estimate from Penn State University College of Agricultural Sciences.

Mirel sheet used in soil wrap will biodegrade in the soil, thus eliminating waste. The printability of Mirel differentiates it from lower performing materials providing Ball with the ability to label and print the container.

We will be co-marketing the Mirel brand with Ball on this new innovative product. We expect that consumers will be seeing the product in their local garden shops during the second half of 2009.

Our second contract is with a Fortune 500 consumer products company. For confidentiality reasons we cannot describe too much about this opportunity, but Mirel will be the enabling material for consumer product launch planned for the second half of 2009. The product will be injection-molded and differentiated based on its non-petroleum, bio-based feedstock as well as its biodegradability.

The contract contemplates an initial three years of supply. We are discussing co-branding and advertising options via a variety of media sources including television. This launch reflects one product line in one brand family. The parent company has over a dozen brands which encompass numerous potential product applications for Mirel.

For those of you familiar with our market entry strategy framework, these contracts demonstrate our ability to work in two additional target sectors; first, sheet products serving agricultural and horticulture markets; and second, injection molded-products serving consumer markets.

Moving forward, we’ll continue to make customer announcements, when appropriate to give you a sense of the progress of the business. I would also like to point you towards another development for Mirel this quarter. That is the publication of some extensive work we have been doing in examining the use of Mirel for agricultural mulch film applications.

Mulch film is a growing market, reflecting a total market of about 3 billion pounds of plastic globally that offers numerous planting benefits. It helps alter soil temperature, maintain moisture content and minimize weed growth. Its helps improve productivity of value added crops through increased yields, earlier maturing crops, higher quality crops, enhanced pest management and weed control.

In working with Penn State University, we’ve shown that Mirel film can be applied to a field using existing commercial equipment and that crop fields tested for peppers, squash, eggplant and zucchini are comparable to that of conventional, polyethylene mulch film.

Because incineration and landfill disposal are currently the most commonly employed means of eliminating incumbent polyethylene mulch films, natural biodegradation of the Mirel film is not only an eco-friendly alternative, but a considerably more efficient farming practice.

In late 2007, after the test crop harvesting was complete, the Mirel film was plowed in to the soil and by spring 2008 had completely biodegraded. As we work to commercialize this application, our technical team is developing ways to tailor the biodegradability of the film such that the product can be applied to a wide range of crops and climates.

A portion of this study is posted on our website under Investor Events and Presentations. I would now like to update you on product pricing levels. As we have continued to develop the market for Mirel, we are sharpening our value and use for the product and getting a greater understanding of the value that it brings to our customers.

As I have mentioned before, we have over 1,000 leads waiting to be pursued, as we choose, upon startup of the Clinton plant. Our historical pricing guidance has been between $2.00 and $2.50 per pound. We would suggest as you examine the business to utilize pricing levels between $2.25 and $2.75 per pound. All of our existing contracts fall within this new range typically about the mid-point.

Now on to our pipeline; another way we measure progress towards an effective Telles business start up is to monitor the identified, potential demand for each prospective customer application for the 2010 production year. This process enables us to forecast a forward-looking estimate of potential which is based on discussions with and analysis of our customer prospects.

As a reminder, our customer prospects are not committed to purchase these amounts nor have we received orders for these amounts, but it is an important exercise that helps us gauge demand.

The last time we spoke, we reported that our pipeline related to non-food contact applications was about 85 million pounds, reflecting growth of 15% over the previous period. Since that time, non-food contact applications have grown to 95 million pounds, an increase of 10 million pounds or about 12% over this period.

In the future we expect that this volume will continue to grow. In the near term, we will be focusing business development activities and utilizing pilot plant material to drive the current 95 million pounds towards firm purchase commitments. Note that all of the above volume is non-food contact and we are confident that there is more than enough non-food contact demand to fill out Clinton 1.

Now let’s shift to the FDA process for food contact. The FDA process for food contact requires the submittal of a dossier which is made up of a number of extraction studies conducted under specific guidelines. The tests vary depending upon the level of food contact submittal chosen. Levels range from frozen food storage up to high temperature heat sterilized applications.

After the submittal of the dossier, the FDA has 120 days to ask for additional testing or to modify the submitted approach. Once this time period has elapsed, assuming no objections from the FDA, one is free to pursue the submitted food contact segments.

In Q2, as we indicated, we submitted a pre-notification submittal to the FDA. The FDA provided us with a detailed, very constructive written response well beyond the oral guidance we were seeking. We then submitted a series of follow-up questions to which the FDA has responded.

In summary, the FDA is supportive of our approach and our testing protocols and offered a number of suggestions for our final submittal. We found its input very valuable and are now in the process of preparing samples in accordance with their guidance for used in testing and dossier preparation.

We are not projecting the timing of the overall FDA process as we have little control over many aspects. As I have mentioned before, we have very few resources deployed against FDA applications and we do not have the pilot production volume to grow food contact applications at this time.

Our interactions with the FDA confirm our confidence in ultimately receiving food contact approval, but our entry strategy for Clinton 1 is not designed around it and does not depend on it.

I would now like to provide an update on our Clinton plant progress. For those of you new to the calls, ADM is building the Mirel polymer facility adjacent to its corn wet mill in Clinton, Iowa. ADM will own the facility and supply polymer to the Telles joint venture which is equally owned by ADM and Metabolix.

I was on site in October and I will be there again later in November. The plant is coming along very well. All major equipment is in place and buildings are nearing completion. Control rooms and laboratories are being outfitted and operating manuals are being prepared. We continue to remain on target for Q2 product shipments to customers.

For the last two years our capital cost guidance has been north of $200 million. We have seen external estimates in the $250 million to $260 million range with a wide range of dispersion. ADM is currently in the process of conducting a detailed review of the estimated capital costs to complete, but we would suggest a capital number somewhat upwards of $300 million from Clinton 1.

Unfortunately, at this time we cannot be more precise than that. ADM is currently examining a variety of options to manage overall capital cost. By the time of our next earnings call, the ongoing detailed cost study should be completed and we can provide further detail.

Now some color on the increased capital cost guidance. Despite the current economic environment, the past two years have been challenging for capital project construction with most major capital projects in the refining and chemical industry having seen cost escalation. This has been driven by worldwide economic growth which has driven commodity prices, including steel; also a number of U.S. specific factors where a series of hurricanes and major refinery projects have placed a premium on construction labor.

Some data to support this; first steel, roll coil steel which was about $500 a ton when the cost estimate of the facility was developed in 2005, exceeded $800 a ton in the first half of 2008 or an escalation of about 60%. Prices have recently dropped, but nearly all of the Clinton structural steel has been purchased and installed.

On to labor; Midwest labor markets have been exceptionally tight. Wage rates have increased by over 14% during the same 2005 to 2008 period. We expect and ongoing tight labor market for final instrumentation and electrical work due to competing demands from the major Midwest refinery projects and the rebuilding from Hurricane Ike.

I think it is also important to think of capital costs in the context of growing the Mirel business and the fundamental economics of the polymers industry. Consistent with most process facilities of this type, about two thirds of the Clinton 1 capital investments will be in the actual processing equipment, in our case fermentation and recovery.

About one third of the capital investment will be in supporting infrastructure and utilities, including electrical and cooling water services, control rooms, maintenance facilities and basic site development. As we have mentioned before Clinton was selected and laid out with the vision of a (inaudible) expansion.

As such, a good portion of the supporting infrastructure investment to support future expansion has being made with Clinton 1. We expect the economics of expansion beyond 110 million pounds per year will reap substantial benefits from this Clinton infrastructure as well as we hope from a more normal environment for construction materials and labor.

That now brings us to long-term growth of the Telles business. Based on the performance of our injection molding, film and sheet products, the potential from food contact applications and some developmental activities which I will describe, we can see significant potential well beyond the initial 110 million pounds per year plan.

As such we’ve initiated a formal growth program with ADM to chart out the long-term potential of the business. This is a substantial amount of effort will address; number one, an analysis of potential markets for Mirel for both food and non-food contact applications.

Second, process engineering work aimed to continually reduce capital and operating cost for further expansions. This will include new fermentation strains, further optimization of recovery systems and examining ways to leverage the infrastructure of the Clinton site.

I believe that successful polymer companies are those who continue to drive costs out of their manufacturing and supply chain systems. ADM is highly aligned with us in this endeavor and we will be doing so for the Telles business. We expect we’ll gain tremendous operating experience through the operation of Clinton 1 and will incorporate that learning into Clinton 2 and beyond.

Third, we’ll be examining the potential for broadening the Mirel application pattern via developmental product activities. The Mirel product family is in its infancy and we are currently witnessing the rapid gains that other polymers have seen in the early years.

Over the last six months we’ve had very promising developmental work in two interesting areas, foam and non-woven. These are very substantial markets which have a strong need for bio-based and biodegradable solutions.

Our Mirel foam product would address similar segments as polystyrene foam, but be distinguished by its bio-based sourcing and its cold biodegradability properties. Addressable foam markets include non-food contact applications such as engineered foam for packaging as well as food contact applications such as cups, plates and clamshell containers.

The market for non-woven applications is very large and includes wipes, filters, fabrics, diapers and medical markets. The ability to add cold biodegradability to these product families is exciting to us and also to our potential customers. We are currently testing these products with developmental partners who are leaders in these fields and have been quite pleased with what we are seeing.

In summary you can think about the initial Telles strategy as being non-food contact with sheet, film and injection molded products. We will build upon this with food contact applications as well as these new developmental product grades. The growth work which we are pursuing with ADM will help us to sharpen our priorities for market segment selection and influence our next generation process design helping us to optimize long-term profitability of the business.

While we’ll always be improving the strategic and operational position of the Telles business, we are targeting the initial conclusions of the work I just described by the end of Q3 next year. These conclusions will then be validated by actual operating and product date from Clinton, after initial start-up and we’ll be well positioned to map out formal expansion plans for the business. With that let me move to the other Metabolix platforms.

These represent value creation opportunities for us beyond the Telles venture. In C4 chemicals we continue to execute our ATT grant, a $2 million grant aimed at producing C4 chemicals from renewable sources. We are pleased with our technical accomplishments and are working to establish a patent position around some of our recent inventions. We are beginning to develop our commercialization pathway and establishing priorities for potential partner selection.

In Metabolix, we also have a range of ongoing plant science activities including oil seeds, switchgrass and sugarcane. Last week our Australian collaborators The Cooperative Research Center for Sugar Industry Innovation through Bio-Technology announced the achievement of 3.5% PHA polymer in sugarcane leaves.

This mirrors our earlier announcement of similar accomplishments in switchgrass and demonstrates the synergies between the programs. The recent Australian result is further proof of concept of the potential to produce polymer directly in crops. All-in-all, we are very excited about our plant science capabilities as we can see this pathway ultimately replacing the capital intensive steps in the existing plastics industry, such as oil and gas exploration and production, refining and olefins by producing polymer directly in crops.

We are preparing a strategy for regulatory approvals and examining options for commercialization of our plant science activities. We aim to have commercially viable crops in field trials within three to four years. While our primary objective has been to express PHA polymers at commercially viable levels in each crop, our work has also given us insight into adding other traits into these crops, a skill which we are now examining how to exploit.

In summary, we continue to make steady progress this quarter against our milestones. We have moved Mirel closer to commercialization and manufacturing, in market development and in establishing an operating business and infrastructure.

We feel that our longer term portfolio is aimed in the right direction and are making good progress against our internal milestones. I’ll now turn the call over to Joe who will review of our financial results for the quarter.

Joseph Hill

Thanks Rick, and thank you all for joining us today. As Rick mentioned we continue to deliver on our commitment to grow the company and are very pleased with the significant stride that we’ve made towards the commercialization of Mirel.

Our customer wins to date speaks to the demand that Mirel is already experiencing and gives us visibility of what the future holds for the company. Our plant science and C4 chemical platforms are also very important to us and we have made significant progress during the quarter to advance commercialization.

The combination of these platforms gives us a solid and diversified growth strategy for the company and positions us to take advantage of global environmental trends that will drive corporations to improve their environmental footprint by reducing dependence on fossil fuels, improving their CO2 footprint and minimizing solid waste.

Now on to the financial results for this quarter; Metabolix currently manages its finance with an emphasis on cash flow. We maintain a strong focus on cash flow and we take a strict approach to managing our operating cash. We ended the third quarter of 2008 with $95 million in cash and investment balances.

For the quarter, net cash used in operating activities was $6.4 million as compared to net cash used of $900,000 for the comparable quarter of 2007. Cash usage for Q3, 2008 appears higher than expected, but this is primarily due to timing of our ongoing support payments from ADM.

To explain, in 2008 we received and recorded the Q3 support payment from ADM in the first week of October, whereas we usually receive and record it in the last week of the quarter. In addition to that, last year we received two ADM support payments in the third quarter. As a result, the third quarter 2008 cash flow does not reflect any support payments from ADM and the Q3, 2007 reflects two support payments from ADM.

On a normalized basis, we did experience an increase on our cash usage to about $4.9 million per quarter due to an increase in operation activities such as sales, marketing and research and product development. This is in line with what we had described during our second quarter earnings call.

We do anticipate some additional increased cash usage between now and the commercialization phase of the joint venture with ADM, however once we enter the commercialization phase, our net costs for sales and marketing and Mirel product development will shift over to the joint venture. As a result, the Metabolix portion of these expenses will decrease.

As Rick mentioned, the expected cost for the plant is going to be higher than we originally planned. Although there is an increase cost of the plant, it is important to note that a significant, offsetting factor will be the improved pricing of the material, where we have increased our historical guidance by $.25 per pound to a level of $2.25 to $2.75 per pound.

Given the long term nature of the business and the capital efficiencies that we expect in the future, we remain enthusiastic about the long-term economics of our technology in our competitive position.

The GAAP net loss for the quarter was $9.7 million as compared to a net loss of $8.3 million for the third quarter of 2007. As expected, the third quarter loss is greater than the cash used in operating activities.

As we’ve discussed before, all of the payments we receive from ADM are recorded as deferred revenue for GAAP purposes and therefore do not appear on our income statement. As stated previously, during the quarter we did not receive a support payment from ADM in Q3 as the payment was received in October after the close of the quarter.

We did receive payments of $500,000 during the quarter for reimbursement of pre-commercial manufacturing expenses. To-date we have received support payments totaling almost $16 million from ADM. The deferral of recognizing payments from ADM will continue until commercial sales from the Clinton plant are reached. We also recognized non-cash, stock based compensation expense of $1 million, which also leads to a reported net loss exceeding cash used in operations.

Now let me give you some additional detail on the company’s financial results for the third quarter 2008 ending September 30.

Revenues totaled $351,000 as compared to $180,000 in the third quarter in the prior year. This revenue was mostly attributed to the delivery of Mirel sample products and government research grants. As we grow the business, our expenses continue to grow accordingly.

Total operating expenses were $10.6 million, an increase of $600,000 relative to the comparable quarter in 2007. This modest increase primarily reflects increased expenditures for product development. While we do not provide financial guidance, we think it is helpful to provide some insight on certain matters that may be useful to investors.

As noted above, we previously emphasized cash flow rather than GAAP net loss in our management of the company. Thus, the cash used in operations of $6.4 million for the quarter is indicative of our current operating profile excluding capital expenditures. If normalized for the timing of the ADM support payments, the cash used in operations for the quarter would be $4.9 million. We expect to continue to add to our headcounts in other activities as we approach commercialization of Mirel.

Now on to the balance sheet; our balance sheet remains strong. On September 30, we had cash and short term investments of $95.0 million. We have no debt. We expect this capital will be adequate to build our sales and marketing infrastructure, deduct pre-commercial manufacturing, and to expand our research and development to build the company.

We continue to work with a roster of successful companies that are partnering with us to create alternative solutions and change the way they bring their products to the market place. We are extremely pleased with the progress we made during the third quarter as we continue to get closer to the commercialization of Mirel. With that we’ll open the call to questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question today is from Lawrence Alexander with Jeffries.

Lucy Watson – Jefferies

Hi, this is Lucy Watson sitting in for Lawrence.

Richard Eno

Hi Lucy.

Lucy Watson – Jefferies

What is the percentage of Clinton 1, that is pulled out given your two new customers?

Richard Eno

At this point, we’re not disclosing volume by customer. We point you towards the 95 million pounds of indicative 2010 demand that we’ve been reporting on a regular basis.

Lucy Watson – Jefferies

I guess my next question is. How far away would you be from the new product grades of foam and non-woven? Is it something like five years, ten years?

Richard Eno

This is much, much closer than that. We’re right now in development of these grades with perspective with potential partners who work in that area. It’s something that we don’t need the material for Clinton 1 to sell it out. We’re looking at injection molding, film, and sheet for that.

We can clearly envision these materials being part of Clinton 1. So, it’s something that it’s continuing to develop. We haven’t got a formal time line, but we’re quite pleased with the wrap progress and I think the progress is indicative of what happens to polymers in their early stage of commercialization. Things happen very quickly and we’re witnessing that here.

Lucy Watson – Jefferies

Okay, and with your new pricing range, are you contracting out by volume, or are there any variables in the price?

Richard Eno

Well, pricing is dependent on the value and use of the material. So, we have pricing that varies by situation and there are a lot of factors that we take into account in pricing. So, I would just cover that as value and use and really understanding the value that Mirel brings to the application, its performance product and we price it as such.

Lucy Watson – Jefferies

Thank you.

Operator

And our next question is from Michael Carboy with Signal Hill.

Michael Carboy – Signal Hill

Good afternoon, ladies and gentlemen. Congratulations on the quarter.

Richard Eno

Hello, Michael.

Michael Carboy – Signal Hill

A couple of questions for you; with regard to the agricultural products, is there scope for being able to find agricultural supplemental chemicals whether they’re suffering agents for fertilizers or like in some of the agricultural films?

Richard Eno

Yes. Actually, just one of the things you would look at as using in the future potentially, using the agricultural films as a way to deploy agricultural active ingredients. So, that’s something that’s been considered for a period of time, but our focus is really on just developing these initial grades to get the stuff in the marketplace.

Michael Carboy – Signal Hill

But for now we should focus on the packaging aspect of it?

Richard Eno

(inaudible) as an active ingredient delivery agent.

Oliver Peoples

Just to broaden that a bit, Michael, that one thing I mentioned we are working on is understanding how to best tailor the mulch film to the crop and to the climate and in the course of that work there are a lot of things we’re examining.

Michael Carboy – Signal Hill

Do we find situations where there will be specific expertise or process arts that converters develop, that sort of become proprietary to that particular brand or manifestation of the Mirel based product that is not necessarily transportable into other sectors without getting into big royalty complications?

Richard Eno

I don’t think that’s the case. Every developmental agreement is different. There are certain bits of exclusivity we carve out in developments, but I don’t think it prohibits moving from the Metabolix and Telles technology broadly from one segment to another.

Michael Carboy – Signal Hill

With regard to the prospect of what we might call a global macro slowing, what are you seeing from end use customers in regard to their continued appeal or their continued interest in the greenness of their of their product or product packaging.

Has there been attenuation of demand anything along the lines of – it’s nice, but we can’t afford this stuff anymore?

Richard Eno

Not that we’ve seen yet. When you look at our six segments – most of those segments, the agricultural segment, compost bags, consumer products tend to be I would say more recession resistant than some of the more capital intensive segments where we’re not really exposed such as automotive or building and construction and I think that because we are working with mostly leaders in their respective fields and the nature of the segments, we haven’t seen any slow down or push back at this point right now.

Michael Carboy – Signal Hill

You had touched on the issue of non-woven applications. It sounded like there was some specific personal-care or a medical related aspect there. Could you give us and idea on what sort of price premium you might be able to enjoy in that sector given the current pricing we have to talk about now?

Richard Eno

I think it is a little premature to talk about price levels in non-wovens, although you rightly point out it is a high valued sector. You’ve got things such as diapers in there, filters for air, water, medical masks.

There’s a range of things there and we’re going to be looking over the coming months at the improving properties that we are gaining in the product as well as what value it brings to those applications to sharpen our pricing strategy for that, but at least indicatively we raised our pricing guidance for the product and as we develop the non-woven applications greater we’ll keep looking at that pricing guidance.

Michael Carboy – Signal Hill

All right, tank’s very much.

Operator

(Operator instructions) And our next question is from Jeff Osborne with Thomas Weisel Partners.

Jeff Osborne – Thomas Weisel Partners

Hey, good afternoon guys. I had couple questions, most of them were answered. I just want to make sure I understood, Joe that the expenses in 2Q ‘09 was it that you indicated would be transferred to Telles. So we should think about the company being pretty cash-flow positive in the second half assuming there’s no additional expansion?

Joseph Hill

Well, the first part you said is that we have the sales and marketing and product development expenses related to the commercialization of Telles shift over to the to the joint venture. We haven’t given any indication as to what the cash flow of the company will be, going forward. Remember we are investing in other sciences that we are talking about beyond Mirel. So, of the cash we have that at that point is all discretionary spending for Metabolix as to what we think is appropriate to invest in the other sciences.

Jeff Osborne – Thomas Weisel Partners

Then, hypothetically, if at that juncture in the third quarter, for example you were to announce a Clinton 2, would those sales and marketing and product development be on the Telles folks as opposed to your own at that point. Will the facility would be open? Just want to make sure I understand the dynamics there.

Joseph Hill

The way the joint venture is working is, once it reaches the commercialization phase, that the sales and marketing expense and the product development expenses are all the responsibility of the joint venture. During this construction phase, they are the responsibility of Metabolix.

Jeff Osborne – Thomas Weisel Partners

Just wanted to make sure it wasn’t the construction of a specific facility and not the entire organization. Can you just talk about any yield improvements that you’re seeing? How post the opening we should think about getting the full yield for the facility up to the 110, because I’d imagine given that you’re at 95 now you’ll be at 110 or higher as we enter 2Q and how do you expect the facility to ramp through 2009 and any formulation facilities that you’re working on? Are most of those more on the yield or on the cost side or both?

Joseph Hill

Let me make sure. I’ll answer the question in two parts; first the ramp up of the facility. We’ve not provided a lot of specific guidance on the pace of ramp up of the facility. We point to the development cycle in the polymer industry of being between nine and 15 months on average to bring a new product to market and our objective in this period of time is to shorten that cycle as much as possible and our commercial team is doing so. So, we’ve not provided a lot of detail on ramp up rate.

When you talk about yield improvements and cost improvements, those types of things. That’s something that in this growth program we are beginning to pursue. We are looking very carefully at where those can come from which can effect and result in lower costs of goods sold and improved product properties and greater capital efficiencies. So, I sense two things in your question and that’s how we’d respond to both of them.

Jeff Osborne – Thomas Weisel Partners

I guess I’m just trying to a sense of – the 110 was a nameplate capacity of the facility when you announced it some time ago. Is that a equipment capacity constraint or have you done anything in the formulation processes since then that perhaps the 110 could end up being a 130 or 140, nine to 15 months out of the gate?

Joseph Hill

No, I think we are still seeing a 110 million pounds per year capacity, although we would expect, after start up and we observe the technology and gain, we think a lot of experience operating it. We would expect to be some capital improvements, modest capital improvements that we could make to that facility to, we probably make it somewhat beyond the 110 number, but that would come out of more detailed engineering work, but at this point in time we are not in a position to say that it that we’ve got any technical gains that would result immediately in greater than a 110 million pounds per year capacity.

Jeff Osborne – Thomas Weisel Partners

Very good. Thanks so much, guys.

Operator

And our next question is from Jinming Liu with Ardour Capital.

Jinming Liu – Ardour Capital

Hi, guys.

Richard Eno

Hi, Jinming.

Jinming Liu – Ardour Capital

My question is really to your recently announced contracts. Your new customers market their products and if they have, how has the market acceptance been for your Ball plastics?

Richard Eno

I can talk about Ball, and the Ball product will be sold in garden supply stores that carry Ball products and that was test marketed in Boulder, Colorado this year. It’s really a pretty amazing product. It’s a Mirel sheet rolled into what looks like a bottomless cup where the roots actually hold the soil in place and because of its printability and the colors they’ve chosen to put on it basically leaps out at you on the on the shelf. It’s really a pretty impressive product, but that’s how they’ll go about marketing it.

With regards to the consumer products company we announced, that would be marketed through a variety of department stores, retail outlets that our customer we choose to supply to.

Jinming Liu – Ardour Capital

My understanding for next year, we should not expect much revenue from your current venture, am I right?

Richard Eno

The Metabolix revenue from the joint venture will be in the commercialization phase. Once we enter the commercialization phase, every pound of product that’s sold does provide a royalty back to Metabolix and then also the other revenue that we’ll be receiving on the P&L which will be non-cash, will be the deferred revenue that we have been booking as we’ve been receiving the support payments from ADM.

Jinming Liu – Ardour Capital

Yes, actually I did model in that part. My last question is can you give me an update on the oil seeds program?

Richard Eno

Oil seeds?

Jinming Liu – Ardour Capital

Yes.

Richard Eno

I’ll provide some comments. Ollie you could provide further to that. We’re proceeding ahead, working on against a series of internal, technical targets working with the Danforth Institute. There’s a lot of interaction between ourselves and the Danforth Institute. The primary objective is to express this family of polymers in oil seed crops and we’re making good progress on that.

We are quite pleased with that. We’re working on a variety of intellectual property elements of that and starting to think about the commercialization options for that technology.

There’s not a lot we can say right now till we move ahead a little bit further, but we’re pretty happy with our choice of the Danforth Institute and happy with the progress we are making.

Oliver Peoples

Yes, I think just a follow on from that. We are very excited about the prospects for the oil seed technology. We’ve been at this now for, I think we announced the program in January, and so this is the beginning of the 11 month of our science project. We’ve assembled a terrific team. We’ve got a great working relationship with the Danforth folks, and we hope to be seeing the results of that investment sometime towards the middle to late next year.

Jinming Liu – Ardour Capital

Okay, thanks.

Richard Eno

Thank you.

Operator

(Operator instructions) And next we’ll go to Ron Lee with Lee Capital Management.

Ron Lee – Lee Capital Management

Good afternoon gentlemen. Thank you for the conference call. I just wanted to go a step further with this bottomless plant container that you’ve been just talking about. How many pounds is this contract to Ball horticulture?

Richard Eno

We’re not disclosing that, at this point we talk about the overall size of the market. Ball’s the leader in the market, but we’re not at liberty to disclose the size of the contract at this point.

Ron Lee – Lee Capital Management

With respect to this bottomless plant container and its usage, do you basically take this as the plant is bought and throw the whole thing in the ground or do you still have to remove this outside container or is it just biodegradable once it goes into the ground?

Richard Eno

You can stick it right in the ground and it’s done, its just biodegrades.

Ron Lee – Lee Capital Management

Okay. Thank you gentlemen.

Richard Eno

Thank you.

Operator

And our next question is from Michael Cox with Piper Jaffray.

Michael Cox – Piper Jaffray

A couple of quick questions, as you’re going through the planning process of Clinton 2 or further capacity expansion, what would be the lead time of adding another production line?

Richard Eno

Our intent with this program that we’re pursuing with ADM is to get a direction established, by the time Clinton 1 starts up. At that point we can validate that direction with actual operating data and really prove out how that technology works.

As I mentioned in an earlier question, there may likely be some rather modest gains that can be applied to Clinton 1 just to put in good engineering capabilities at it, but in order to get to a very significant expansion, let’s say another 100 million or 200 million pounds at the site, I would think about it as another project like Clinton 1, say between two and three years of time in order to do that because you still have to put down new foundations, construct new fermenters, recovery trains that type of thing.

Our anticipation is to understand enough about the market, the technology and basically have a plan on the drawing board such that as we see demand develop, as we anticipate quite strongly for the material we’re able to begin to think more detailed and hopefully commission an expansion so there is not much waiting time for that capacity. So, the work that we’re kicking off now is beginning that process.

Michael Cox – Piper Jaffray

The funding for that type of expansion could take many forms, is that correct, either another arrangement with ADM or looking at it on your own in some capacity?

Joseph Hill

Yes, absolutely. Our capital funding options are open for expansions, so it could take it could take many forms.

Michael Cox – Piper Jaffray

If you could maybe comment and I apologize if you covered this in your prepared remarks, but the certification granting that you received, you announced a couple weeks back could you maybe provide a little bit more detail around that and what it provides for you?

Joseph Hill

Sure. This is a certification by Vincoat, which is a European certification agency, very rigorous standards, and what they’ve done for us is they’ve validated biodegradability characteristics both in soil and in water such as rivers, lakes or any natural fresh water.

It really is a differentiator for this family of polymers versus others and we are the first manufacturer of these high performance materials in North America to get the qualifications, and we are working on some other qualifications in a similar nature, but I think the message to our investors is that this is a unique and differentiated product based on it’s cold biodegradability and the fact that the material will biodegrade in one soil in their backyard or in a in the ocean is just a tremendous selling point for the material. We now have third party certification to prove it.

The other thing to note on this to, is there’s clearly a movement around truth in labeling and being absolutely clear when someone claims a product is biodegradable, what does it mean and I think our positioning with having this Vincoat certification sets us up well for the inevitable direction which is being extremely accurate in terms of what we say and we feel we’re in great position as that trend emerges.

Michael Cox – Piper Jaffray

Thank you.

Operator

And our next question is from Michael Carboy with Signal Hill.

Michael Carboy – Signal Hill

Well thank you very much for the follow-up. With regard to the increase in the capital costs on the Clinton 1 facility, I seem to recall the original agreement with ADM contemplated the complete payback of those construction costs prior to Metabolix being the share 50-50 and cash flows coming from that JV. Did that agreement contemplate a firm total capital cost or does Metabolix sort of share that in increased capital cost risk, in other words this delay that – essentially delay in the payback or the does this delay the time in which Metabolix can enjoy 50% participation in free cash flow coming from JV?

Joseph Hill

Right in the way the way the JV was structured as the agreements were signed years ago was that it’s a concept that the cost of the of the construction of this is totally born by ADM and in return for that, they receive the first profits from the joint venture after paying royalties to Metabolix to recover the cost of that. There is not a contracted cap in there.

Michael Carboy – Signal Hill

All right.

Richard Eno

Operator

As we have no more questions at this time, I’d like to turn the call back to management.

Richard Eno

Well, first I’d like to thank all of you for attending our call today. As you can tell we are very pleased with our progress and we have a lot of enthusiasm about the long-term potential of our Metabolix platforms. We look forward to updating you on our progress across each of these platforms over the next quarter and during the next earnings call. So, thanks again and have a good evening.

Operator

We thank you for your participation on today’s call and have a wonderful day.

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Source: Metabolix, Inc. Q3 2008 Earnings Call Transcript
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