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Metabolix, Inc. (NASDAQ:MBLX)

Q4 2012 Earnings Conference Call

March 26, 2013 16:30 ET

Executives

Lynne Brum - Vice President, Marketing and Corporate Communications

Rick Eno - President and Chief Executive Officer

Joe Hill - Chief Financial Officer

Olive Peoples - Co-Founder and Chief Scientific Officer

Analysts

Laurence Alexander - Jefferies

Henrique Akaishi - Piper Jaffray

JinMing Liu - Ardour Capital

Operator

Good afternoon, and welcome to the Metabolix Fourth Quarter and Year End 2012 Conference Call. Today’s call is being recorded for internet replay. You may access an archived version of the call on Metabolix website at www.metabolix.com. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference call.

I would now turn the call over to Ms. Lynne Brum, Metabolix VP of Marketing and Corporate Communications. Please proceed, Ms. Brum.

Lynn Broom

Thank you, Lorea. Good afternoon. This is Lynne Brum, VP of Marketing and Corporate Communications. Welcome to the Metabolix fourth quarter and year end 2012 conference call. On the call with me today are Rick Eno, President and Chief Executive Officer; Joe Hill, Chief Financial Officer; and Olive Peoples, Co-Founder and Chief Scientific Officer.

If you do not have a copy of the fourth quarter news release, which was issued a little bit earlier this afternoon, one can be found in the Investor Relations section of metabolix.com. In addition, slides accompanying the presentation are available on the Metabolix website on the Events and Presentations page in the IR section.

Now, please turn to page two, slide two. Please note that as part of our discussion today, management will be making forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be put upon them. Investors are also cautioned that statements in the discussion today that are not strictly historical statements constitute forward-looking statements. Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated, including the other risks and uncertainties detailed in Metabolix’s filings with the Securities and Exchange Commission, including the company’s most recent 10-K and the company’s 10-Qs and other filings. 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.

With that, I’d like to turn the call over to Rick Eno. Rick?

Rick Eno

Thanks, Lynne. Good afternoon, and thank you everyone for joining us today. As many of you know, Lynne has assumed the leadership of the Investor Relations functions of the company and will be supported by Sharon Merrill, the Investor Relations firm. I am sure all of you will enjoy working with them.

Please turn to slide three. On last quarter’s call, I outlined our strategy going forward for each of our business platforms, which include Metabolix biopolymers, which are a family of biobased and biodegradable polymers, biobased chemicals to be used as drop-in replacements for conventional, industrial chemicals, and finally, crop-based activities, which include our programs in switchgrass, oilseeds, and sugarcane.

I will refer you to that transcript for the summary of our strategy. In essence, for biopolymers, we have developed a well-patented technology for biobased biodegradable products with exceptional properties. We are working to develop high-valued markets and customers for these products while continually working to lower the cost of our product supply and manufacturing. As a result of these efforts, we expect to have a large profitable business protected by our patents and know-how. Our chemicals and crop programs will offer further value potential based on our technology. I would now report in our progress in pursuing this vision.

Please turn to slide four. Let’s start with Metabolix biopolymers. During the fourth quarter, we achieved quarter-on-quarter sales growth of 33% over the third quarter of 2012. We now have over 70 customers in total. Our customers represent the film, performance additives, and functional biodegradation application segments targeted in our biopolymer business. Keep in mind that we are not trying to sell the product as quickly as possible at this point, but we are building our customer base and supplying product to enable a smooth transition to ongoing manufacturing.

During the fourth quarter, we launched our next generation certified compostable film product, Mvera B5008 biopolymer resin for film and bag applications. We entered into an agreement in December with Swiss-based packaging solutions supplier, Kenmare, to promote Mvera B5008 to its customers in Europe beginning in 2013. Mvera B5008 is designed for consumer compost bags, can liners for commercial compostable food waste and shopping and retail bags that can be reused as consumer compost bags. Based on the worldwide trends we are seeing in the compostable market, this is an exciting long-term growth opportunity for Metabolix.

In December, we also began shipping I6001, which is a biobased polymeric modifier for PVC. Our testing shows that I6001 not only provides biobased content, but has the potential to improve the impact resistance and toughness in rigid and flexible PVC applications without compromising transparency or UV stability. We are currently working with customers to identify specific applications for PVC formulations using I6001, which is based in our Mirel biopolymer resin. We believe I6001 offer numerous value propositions, including lower migration through the reduced use of phthalate plasticizers and the creation of tougher PVC compounds for a wide range of applications from construction materials to medical.

We are also using our existing inventory to continue to develop new formulations for high valued applications. We are blending our own biopolymers with those purchase from third-parties to enhance certain performance attributes and develop new products that are targeted for specific uses. The demand for application-specific products is an important trend in the biopolymers market and we are actively working to capitalize on it.

Please turn to slide five. Let me update you in our plans for commercial production of our biopolymers. As you know, we plan to use the existing capacity at Antibióticos in Spain as a source for manufacturing of our biopolymers. I have recently returned from Spain, but we have had numerous discussions with Antibióticos’ management regarding their liquidity in our current and future relationship. As has been documented in the press, Antibióticos is undergoing a financial restructuring in order to grow the site and ensure long-term strength.

Some key points for you. Antibióticos are in active discussions with multiple financial and business partners in order to resolve their issues. The timing and outcome of this restructuring is unclear and the outcome will directly affect their ability to deliver on both the demonstration and commercial phase for Metabolix. We are in frequent contact with Antibióticos’ leadership and are monitoring progress on a regular basis. We continue to be very impressed with the Antibióticos site and the capabilities of their technical and manufacturing team.

We are in the process of negotiating our commercial contract with them, so that when we are satisfied with the outcome of their restructuring, we can move ahead rapidly with commercial production. While the site is impressive, you should know that we have and will continue to develop multiple options to drive down the cost of our supply, including opportunities that are being brought to us. We will keep you up-to-date on the Antibióticos’ progress and our product launch with them.

In order to enhance our supply chain for our customers and to diversify our expected supply from Antibióticos, we also took another major strategic step in our biopolymer business with agreements with China-based Tianjin GreenBio Materials, or TGBM. The first is a distribution agreement through which Metabolix will distribute a biobased heat shrink film produced by TGBM in the U.S. and Europe. This film will broaden our film portfolio. The heat shrink film market is estimated at approximately $2 billion in the U.S. and Europe.

In addition, we have entered into a supply agreement to buy various grades of PHA polymers that will extend the range and availability of our grades. Tianjin GreenBio is a leading Chinese PHA manufacturer with 10,000 tons of design capacity currently in place. They have excellent formulating and compounding capabilities. We have been working with them and their products for more than a year in a spent time on their site. This relationship helps Tianjin to grow its business through our efforts in the EU and the U.S. and it gives our customers further assurance of supply.

Looking further ahead, we believe a key long-term objective for Metabolix is a low cost site with the potential ability to integrate PHA biopolymers and our PHA based chemicals. This will allow us to continually lower costs, expand margins, and grow the business. We are in the process of conducting a feasibility study, examining alternative low-cost sites that could incorporate both our biopolymer and biobased chemical platforms. We have already seen strong engagement from parties interested in potentially participating with us. Our commercial strategy in essence is to build the customer base and demand ahead of this site.

To conclude on biopolymers, we have made progress in our program both in terms of launching our compostable film and polymeric modifier products, and advancing towards commercial production both at Antibióticos and through our relationship with Tianjin GreenBio. And we are now looking forward to the future to a potential long-term site that will help us grow the business, expand margins, and meet the market needs.

Please turn to slide six, let’s move on to our biobased chemicals platform where we are leveraging our PHA microbial technology to produce renewable based chemicals as drop in replacements for fossil fuel-based chemicals. We are developing four carbon or C4 and three carbon or C3 chemicals from biobased sources using proprietary, patented fermentation technology and the FAST or fast-acting selective thermolysis recovery process.

We continue to make advancements in this program and are actively filing additional IP. Our crops platform includes our programs on oil seeds, switchgrass and sugarcane. During the fourth quarter we received a sub-award under the Advanced Research Projects Agency-Energy or ARPA-E to work with UCLA to redesign carbon fixation pathways to increase the efficiency of capturing energy from sunlight. This was the third grant that we received in 2012 for leading edge crop research targeting multi-gene expression and transformation of plants.

Funding from these new grants will total nearly $1 million and run through 2014. In addition, we are making good technological progress under $6 million grant from the U.S. Department of Energy to produce PHB in switchgrass, to co-produce densified biomass for fuel and to produce value-added crotonic acid. We plan to continue to pursue opportunities for additional grants and collaborations to fund and advance our crop program.

Now turn to slide seven, in our recap of 2012 accomplishments I would like to mention that the focus on developing intellectual property is a key element of our business strategy. In 2012 we filed 14 new patent applications. We were also granted or allowed 43 patent applications, five in the United States and 38 international. The inventions covered under these patents include methods of processing PHA bio-polymers and compositions, methods to produce biobased chemicals, PHA expression systems in microbes and plants and novel feedstocks for PHA production.

With that I’ll turn the call over to Joe for a review of the financial results. Joe?

Joe Hill

Thanks Rick and thank you all for joining us today. I will now focus on the financial results for our fourth fiscal quarter ended December 31, 2012. As always we managed our finances with an emphasis on strict cash flow management. We have maintained this focus and ended the fiscal year with $46.3 million in unrestricted cash and investments.

Turning now to slide eight, for the fourth quarter net cash used in operating activities was $7.3 million, which represents a planned increase in cash usage from $6.3 million during the third quarter of 2012 and is a decrease over the $8.6 million used during the comparable period of 2011. Net cash used in operating activities reflects the company’s activities in sales and marketing development as well as research and product development. The increase in net cash usage in the fourth quarter of 2012 is primarily attributable to plant modification, manufacturing equipment and raw material costs incurred in connection with the Antibióticos manufacturing demonstration agreement. For the full year net cash used in operating activities was $31.7 million, unchanged from 2011.

Now turning to slide nine, we will now review product orders and associated revenue recognized. Product revenue for the fourth quarter of 2012 was $918,000, which includes $621,000 of revenue from Q3 orders that were previously deferred and $133,000 from products shipped and billed during the fourth quarter. $785,000 of Q4 orders that were shipped and billed was deferred to the first quarter of 2013 as a result of the company’s product return policy adopted in the third quarter of 2012. We modified our product return policy prospectively during the quarter ending September 30, 2012 to allow discretion in accepting returns during the period of 60 days after product delivery. Until we have sufficient return history on which the base and estimate of product returns, we defer recognition of product revenue and related costs to the later of the end of a 60 day period or when the customer payment has been received.

Turning to slide 10 for a review of financial results, total revenue for the fourth quarter was $1.4 million versus $400,000 in the comparable period of 2011 and consisted primarily of revenue from government grants and product sales. Cost of product revenue was $600,000 during the quarter ended December 31, 2012 and primarily reflects inventory product costs associated with product revenue recognized during the period plus current period inventory storage and shipping costs including warehouse consolidation activities.

At this point we are not ready to provide specific guidance for sales forecast. However, we do anticipate that product revenue will increase 2013 as we continue to gain market acceptance for our products, although there will be fluctuations from quarter-to-quarter. Overall the markets we are serving are growing at about 15% to 20% per year and we are enthused about our long-term growth potential.

Total operating expense that is R&D plus G&A – SG&A, in the fourth quarter of 2012 were $10.3 million versus $10.1 million a year ago. Research and development costs were $7.2 million, an increase of $1.1 million from the comparable period in 2011. This increase was primarily due to $2.3 million in plant modification, manufacturing equipment and raw material costs incurred in connection with the Antibióticos manufacturing demonstration agreement. This increase was partially offset by reductions in the use of external research and development support and consulting costs.

Selling, general and administrative costs were $3.1 million versus $4 million in the fourth quarter last year. The decrease of $900,000 was primarily attributable to decreases in employee compensation and related benefit expenses in travel due to a reduction of headcount in response to the termination of the Telles joint venture and consulting reductions due to that termination. As a result net loss for the fourth quarter was $9.5 million or $0.28 per share as compared to a net loss of $9.6 million or $0.28 per share for the fourth quarter of 2011.

Revenue for the 2012 fiscal year was $42.3 million. The year-over-year increase was primarily related to $38.9 million in deferred revenue that was recognized as a result of the termination of the Telles joint venture in February 2012. Grant revenue was $2 million and biopolymer product revenue was $1.2 million. An additional $800,000 of product revenue was deferred to the company’s first quarter of 2013 as a result of the company’s product return policy mentioned earlier.

Net income for the full year ended December 31, 2012 was $3.6 million or $0.11 per share compared to a net loss of $38.8 million or $1.24 per share in 2011. As in previous quarters the fourth quarter loss is greater than the cash used in operating activities as a result of non-cash expenses including depreciation of $300,000 in stock based compensation expense of $900,000.

As I mentioned our cash level at December 31, 2012 was $46.3 million and we continued to have no debt. This compares to $53.6 million in cash as of September 30, 2012 and $78.4 million at the end of 2011. We believe that our cash, cash equivalents and investments together with expected funds to be received from existing grants and anticipated product sales will be sufficient to meet anticipated cash requirements for at least the next 12 months.

With that we will open the call to questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Laurence Alexander - Jefferies

Good afternoon.

Rick Eno

Good afternoon Laurence.

Joe Hill

Good afternoon Laurence.

Laurence Alexander - Jefferies

Can you some – sort of sketch of how you expect R&D costs and SG&A costs will evolve given the new partnership structure?

Rick Eno

So, with the Antibióticos partnership structure of course that we have R&D and SG&A costs, we are not expecting significant changes in those other than as we had discussed earlier as Antibióticos resolved their financial situation, we will be making additional capital investments in getting to the commercial phase of the agreement.

Laurence Alexander - Jefferies

Okay and the change in partnership there will be no increase in R&D costs for you to – for that relationship, correct?

Rick Eno

No, Laurence, not, we don’t foresee that at this point due to very collaborative relationship, and their products will work right down our channels that we have established and we will be working to determine if there are future joint projects we should be working on that would change R&D, but right now, it’s more of a distribution and marketing synergy approach.

Laurence Alexander - Jefferies

Okay. And then the caution around outlook commentary, does that mean the prior cash burn comments were off the table?

Rick Eno

So, you are talking about the guidance we gave at the last earnings call?

Laurence Alexander - Jefferies

Yeah.

Rick Eno

Yeah, at this point, as we are working through our partnerships and our supply arrangements, we are not prepared to give cash burn numbers for the year end, but we are comfortable that the cash balances we have will be there for us to meet our goals for 2013.

Laurence Alexander - Jefferies

Yeah, thank you.

Rick Eno

Thank you.

Operator

Thank you. Our next question comes from the line of Henrique Akaishi with Piper Jaffray. Please proceed with your question.

Henrique Akaishi - Piper Jaffray

Hi, guys.

Rick Eno

Hi, Henrique.

Henrique Akaishi - Piper Jaffray

Hi. So, can you give us a little bit more color on ramp up of Antibióticos, are you still expecting 2013 or can that get pushed off in the 2014 or do we just not know enough yet?

Rick Eno

I think it’s been well-reported that they are going through a restructuring. We are in touch with them frequently and including in person as well as on the phone with them quite frankly to keep up with that, but it is unclear to predict the timing of that. So, what we have done is we have of course continued to seek options and pursue options and we have established alternative supply points. So, we continue to monitor. We like the site. We like the people there. We are pretty much comfortable that it’s going to be a great place to produce, but why they sort their financial restructuring out we’ll continue to meet the requirements of the market to other sources.

Henrique Akaishi - Piper Jaffray

So, will Tianjin be able to make a wide range of biopolymers that will offset any reductions from Antibióticos?

Rick Eno

Well, yeah, if you recall Antibióticos was 10,000 tons of capacity. Tianjin is 10,000 tons of capacity. It’s an operating facility with proven product. We work with them for over a year and we have got an agreement to access PHA resins that extend the range and availability of our resins. So, it’s very complimentary.

Henrique Akaishi - Piper Jaffray

I see. So, I understand that the timing is a little muddy with the restructuring over at Antibióticos, but how if the recession concludes say right away, how soon after can we expect commercial production out of Antibióticos, would you estimate?

Rick Eno

Yeah, I would say, I mean, Henrique at this time the critical path item is their financial restructuring. As we know, we have completed technology transfer. We have worked through engineering design. We have got a commercial contract in negotiation. So, the real critical issue is in their court on conducting their financial restructuring to the point that we are satisfied with it. And as we monitor that we will continue to meet customer requirements and grow through our relationship with Tianjin.

Henrique Akaishi - Piper Jaffray

Great. Last one for me, so we noticed an uptick in R&D for the quarter, just can you provide any color on those charges?

Rick Eno

Yeah. So, as I was saying before that the R&D expense was increased due to the Antibióticos payment. Remember, we paid them $2.3 million for progress being made on the demonstration agreement. So, that’s mostly the uptick in the expenses.

Henrique Akaishi - Piper Jaffray

Great, thanks guys.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of JinMing Liu with Ardour Capital. Please proceed with your question.

JinMing Liu - Ardour Capital

Thanks for taking my question.

Rick Eno

Hi, JinMing.

JinMing Liu - Ardour Capital

Yeah, first was just want to clarify the relationship with Antibióticos, how much did you spend so far just that $2.3 million or?

Rick Eno

That’s correct.

JinMing Liu - Ardour Capital

Okay. And they relate to that, you mentioned you are well-developed, you are looking at to develop a low cost production site in the future. If say Antibióticos comes back online in the near future, are you still going to do or develop your own production site or not?

Rick Eno

Oh, yes Jin Ming, it’s a good question that what we are – our basic commercial strategy is to build the markets for our materials in our case these are biodegradable biobased materials in advance of a commercial site, a low cost site. Having multiple production sites and multiple options is a very good thing from the perspective of a customer, but in the end to expand the market and lower our costs, we want to keep our eye on a long-term option to actually have a lower cost site. Having options to prime the market in the near term working with our partners Tianjin working with Antibióticos gives us the options and the tools to do just that.

JinMing Liu - Ardour Capital

Okay. But the just a follow-up question on that, what will be your strategy to come out with a financing to build that additional site?

Rick Eno

Right now as we mentioned in the prepared remarks we have interest. We have technology that we know works and we continued to remove cost out of the manufacturing technology. We are building the markets I think quite effectively and we have got – there are number of people out there that have starch creams looking for higher valued homes, so there is interest. And it’s way too early to determine the specific mechanics of financing, but we have to do the homework to understand the configuration, the technology and the market focus of that site and that’s exactly what we are doing.

JinMing Liu - Ardour Capital

Okay. Moving to your relationship with the Tianjin GreenBio, regarding the supply part of that equipment, are you just simply supply, I mean, distribute their products or do you need to do any upgrading, because I know their PHA purification that is different from yours?

Rick Eno

That’s right. It’s a good question. There are two components of our relationship with Tianjin GreenBio. The first is a distribution agreement for what they call heat shrink film. And this is if you get a package of bottled water or other various a pill bottle, it’s the plastic wrap that is shrinked around it to seal it. In that case, they have produced a product. We will be selling the product on behalf of them through our channels in the U.S. and Europe through our collaborative relationship if we identify market needs that will cause a reason to improve or tweak the product. We will coordinate with them and be able to give them that feedback. So, in that case we are primarily selling the product that they have developed, that they are marketing in China, but we are doing it through our channels in the U.S. and Europe.

The second part of our relationship with Tianjin is actually for PHA polymers in which case we have got an agreement to purchase PHA polymers which in some cases are very similarly large and in other cases they actually extend our range. And in those cases, we would use those PHA polymers even either directly to work – to meet our customer needs or blended with other materials as we mentioned in the prepared remarks to meet specific product requirements. So, I would think the second part of that Tianjin agreement to basically provide Metabolix with a further diversity in our PHA supply chain, provide the hedge to Antibióticos and it gives our customers assurance of supply by just having yet another source of product that we can help tailor to meet their needs.

JinMing Liu - Ardour Capital

Okay. Lastly, can you share with us anymore financial details regarding your relationship with Tianjin GreenBio like well, whether you have to have meet minimum amount or you have to give them certain margins?

Rick Eno

No, not at this point.

JinMing Liu - Ardour Capital

Okay, got that. Thanks.

Operator

Thank you. At this time, we have reached the end of the Q&A session. I will now turn the conference back over to Rick Eno for any closing or additional remarks.

Rick Eno

Kudos, thank you very much. Just like to close by saying that the achievements that we have outlined today are very much in line with the strategy that we provided to you on our third quarter conference call. And we are confident we will continue to execute on the strategy as we proceed with 2013. We continued to build the markets for PHA and biodegradable materials. We are continuing to advance our manufacturing and product technology and we are continuing to diversify our supply sources. We see substantial long-term growth potential. So, I would like to thank you all for joining us for today’s call. And we look forward to speaking with you next quarter. Thank you very much.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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