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Metabolix, Inc. (NASDAQ:MBLX)

Q1 2009 Earnings Call

May 6, 2009 4:30 pm ET

Executives

Anthony Gallo - IR

Richard Eno - President and Chief Executive Officer

Joseph Hill - Chief Financial Officer

Oliver Peoples - Co-founder and Chief Scientific Officer

Analysts

Laurence Alexander - Jefferies

Michael Cox - Piper Jaffray

Pamela Bassett - Cantor Fitzgerald

JinMing Liu - Ardour Capital

Operator

Good afternoon ladies and gentlemen thank you for standing by. Welcome to the Metabolix Incorporated first quarter 2009 Earnings Call. Today’s call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up for questions.

At this time, I would like to turn the conference over to Mr. Anthony Gallo of ICR. Please go ahead.

Anthony Gallo

Thank you Darren , and good afternoon everyone. Metabolix released first quarter 2009 financial results after the market closed today. If you do not have a copy of the release, one may be found on the website at www.metabolix.com, in the Investor Relations section.

Making the presentation today will be Richard Eno, President and Chief Executive Officer of Metabolix; Joseph Hill

of the company. We are also joined by Oliver Peoples, a co-founder of Metabolix and Chief Scientific Officer.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees 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 risks that could impact our future operating results and financial condition.

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

Richard Eno

Thank you, Anthony. I’d like to welcome all of you to the first quarter 2009 earnings conference call for Metabolix. Today, I will provide you with the review of the Metabolix vision and a broad update of our ongoing activities. Joe will then take you through the financials.

We continue to make good progress and have maintained a strong financial position.

For those of you new to these calls, Metabolix is an innovation-driven bioscience company, which is focused on bringing environmentally friendly solutions to the plastics, chemicals and energy industries. We’re developing and commercializing pathways and products that are intended to lessen the world’s dependence on oil, reduce CO2 emissions relative to 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, first Mirel, a biobased and biodegradable plastic currently being commercialized with our partner, Archer Daniels Midland, through a joint venture called Telles. Second, industrial chemicals, initially focused on C4 chemicals, and third, crop-based activities, which include our programs in switchgrass, oilseeds and sugarcane.

In today’s call, I will focus most of the discussion on our Telles activities. This past quarter, we continued to move towards commercialization of the Telles business. I’d like to first update you on the progress of the Clinton plant, the production source for our first commercial product, Mirel.

As discussed in our last call, ADM was conducting a detailed review of the project with conclusions expected in late April. These conclusions were reviewed with Metabolix management about two weeks ago. While optimization of project completion and start up will continue right up to the date of initial production, ADM expects mechanical completion for the majority of the facility to occur in the September through November timeframe with production expected to begin in December.

Let me provide some additional details. The overall approach to finishing the construction and starting up the facility is a parallel process. Specific sections of the plant such as utilities, fermentation and recovery will be completed by the construction team and sequentially turned over to operations. ADM expects mechanical completion for the majority of the plant to occur between September and November. But some supporting systems such as utilities and solid handling will be completed earlier. As systems are completed, they are transitioned to the operations team which will then run through a detailed checkout and commissioning process prior to introducing feed.

ADM is anticipating production in December. The Clinton plant is designed in a modular fashion with multiple fermentation and recovery systems. Efforts are currently focused on completing the critical equipment and systems needed to support the initial production capacity so we can get commercial Mirel products to our customers as soon as possible. Additional major equipment, all of which is on site and most of which is already in place will be ready for production ahead of customer demand.

While start-up plans and initial production slates are being finalized with a great deal of detail; a new production process of this type will always possess initial start-up risks which could affect the schedule. We of course are working with ADM to minimize these risks. ADM’s plan to allow the engineering effort to catch up to construction has gone well, and the plant is now in the process of increasing its construction staffing. There are slightly more than 300 people working onsite and we expect this number to increase. We have reviewed a detailed Gantt chart reflecting all primary activities through completion and these activities focus on defining a number of detailed work packages which are currently being assigned to the construction workforce in a way to maximize construction productivity.

We are currently maintaining our guidance for the capital cost of the Clinton plant as north of 300 million. It is important to think about this capital investment in the context of growing the Mirel business. Consistent with most process facilities of this type, about two thirds of the Clinton One capital investment 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 developments. As we have mentioned before, Clinton was selected and laid out with a vision of a 4x expansion. As such, a good portion of the supporting infrastructure investment to support future expansion is being made with Clinton One.

We expect that the economics of expansion beyond 110 million pounds per year will reap substantial benefits from this Clinton infrastructure. We should also benefit from a more normal environment for the cost of construction materials and labor than what was experienced over the last two years while ADM was proceeding with construction of the plant.

Let me now shift to our market development activities. Mirel is a superb product offering superior biodegradability, biobased sourcing and performance levels exceeding other bioplastics. Our market development activities remain focused on six specific segments, where 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 aquatic applications. These six segments represent over two billion pounds of addressable annual demand.

In our last call we outlined the results of a detailed customer survey which confirmed the strength of demand. In addition, we have received over 60 new leads per month thus far this year. Interest continues to grow for this product. However, given the capacity constraint of our pilot facility, we have focused on our existing customer and prospect relationships. We are pleased to announce that this quarter we received two new certifications, Vinçotte OK Compost HOME and Vinçotte OK Compost. With these two latest certifications, Mirel bioplastic resins meet all Vinçotte biodegradability standards.

As a reminder, we announced that Vinçotte awarded Mirel resins the OK Biodegradable Soil and the OK Biodegredable Water certifications in October 2008. Mirel resins are now the only non-starch bioplastic to gain all four Vinçotte certifications. Belgium-based Vinçotte is widely recognized for materials inspection, assessments and certifications. The OK Compost mark verifies that Mirel bioplastic resins will biodegrade under industrial composting conditions. The OK Compost HOME confirms that Mirel bioplastic resins will biodegrade in home composting systems of varying temperature.

Third-party certification from Vinçotte validates for our customers the biodegradability and compostability properties of Mirel resins. Mirel resins are engineered with these properties and provide brand owners with uniquely biodegradable material for using their products.

Now on to our pipeline. Another way we have measured progress towards an effective Telles business startup is to monitor the identified potential demand for each prospective customer application for the calendar year two years out, currently 2011. 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.

As we’ve described before, new polymer market applications in general take nine to 15 months for development. Hence the metric which looks two years out will provide a good view of those applications which we’re developing and will also be enduring beyond our initial plant start-up.

Currently we are looking at 135 million pounds of indicative demand for two years out. This is all non-food contact volume. This is essentially the same as communicated in our recent year-end 2008 call, as we focus primarily on our existing customer base and prospects. In the near term, we will continue to focus business development efforts and utilize pilot plant material to drive this volume towards firm purchase commitment.

Let’s now 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 on the level of food contact submittal chosen. Levels range from frozen food storage up to high temperature heat-sterilized applications. After the submittal of a 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.

Last year we submitted a pre-notification submittal to the FDA, and the FDA provided us with a very constructive written response. We then submitted a series of follow-up questions to which the FDA has favorably responded. Dossier preparation is currently ongoing.

We are not projecting the timing of the overall FDA process, as we have little control over many aspects. Our entry strategy for Clinton 1 is not designed around food contact applications and does not depend on it. However, our interactions with the FDA, reviews by independent consultants and our own testing gives us confidence in being able to ultimately serve food contact applications.

We have not yet included these in our two year indicative demand outlook, but are investigating how food applications could best integrate into our existing non-food contact pipeline. We continue to be enthused about the potential for Mirel; demand for the product remains strong in the current economic environment. Product application work is continuing to illustrate the increasing breadth of potential applications and our process technology team has a suite of ongoing advancements in development as we work through the plans for long-term growth of the business.

Let me now move on to the other Metabolix platforms. These represent value creation opportunities for us beyond the Telles venture.

In C4 chemicals, a key part of our industrial chemicals platform, we are continuing the execution of our ATP grant, a $2 million grant aimed at producing C4 chemicals from renewable sources. There have been a number of technical milestones thus far in the program, and we have achieved them all. We are pleased with our technical accomplishments and continue work in this area as well as in others.

In Metabolix, we also have a range of ongoing Plant Science activities, including oilseeds, switchgrass and sugarcane.

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 in olefins, by producing polymer directly in crops.

We are pleased with our technical progress and we will communicate important milestones to you, when reached, such as our switchgrass and sugarcane announcements from last year.

In summary, we continue to make steady progress this quarter against our milestones. We have greater resolution on the completion of the Clinton plant and are making good progress against our internal milestones for other platforms.

I’ll now turn the call over to Joe for a 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 I am very pleased with the significant strides that we have made towards the commercialization of Mirel.

Our partner, ADM, has made significant progress towards completion of the manufacturing facility, our prospecting for new customers remain robust and the stability our indicative demand gives us visibility of what the future holds for the Company. Our Plant Science and industrial chemical platforms are also very important to us. We have continued our progress during the quarter to advance commercialization. The combination of these platforms gives us a solid and diversified growth strategy for the company and position us to take advantage of global environmental trends that will drive corporations to improve their environmental footprints by reducing dependence on fossil fuels and minimizing solid wastes.

Now on to the financial results for the quarter. Metabolix currently manages its finance with an emphasis on cash flow. We maintain a strong focus on cash flow and take a strict approach to managing our operating cash. We ended the first quarter of 2009 with over $82 million in cash.

For the quarter net cash used in operating activities was $8.6 million as compared to net cash used of $4.5 million for the comparable quarter of 2008. Approximately 60% of the year-over-year increase in our cash burn, or $2.5 million, relates to the timing of a quarterly support payment from ADM and reduced reimbursement for material production due to temporary equipment down time. These items which are recorded as deferred revenue on the statement of cash flows were $119,000 in Q1 2009 compared to $2.6 million in Q1 2008. The remainder of the difference between our cash burn in Q1 2009 as compared to Q1 2008 relates to lower investment income yield in 2009 and a decrease in accounts payable and accrued expenses.

Let me give you a little background on the support payments and an update on where we stand today. The commercial alliance agreement calls for Metabolix to receive 12 quarterly support payments of about $1.6 million during the period of construction of the commercial manufacturing facility, along with reimbursements for pre-commercial manufacturing facility expansion and material production expenses.

The final of the 12 quarterly support payments was received in December 2008. However, in January 2009, Telles agreed to provide Metabolix with two additional quarterly payments of about $1.6 million each, which are payable on the first business day of each of the second and third quarters in calendar 2009. All quarterly support payments due from ADM have been received and have been recorded as deferred revenue on the company’s balance sheet. We will continue to defer recognition of these and future payments received from ADM during the construction phase of our agreement.

Once we enter the commercialization phase, our net cost for sales and marketing and Mirel product development will shift to the joint venture and the Metabolix portion of these expenses will decrease, resulting in lower expenses for Metabolix and a lower cash usage.

In the third quarter of 2008, we increased our previous guidance for material pricing by $0.25 per pound to a level of $2.25 to $2.75 per pound. A lot has happened in the world since Q3 2008. We’ve continued to monitor those numbers closely and we are pleased that they appear to continue to hold up in this environment. While the economy has remained weak since we last communicated with you, the value proposition of Mirel has not changed.

Let me now give you some additional detail on the company’s financial results for the first quarter of 2009 ending March 31. Total revenue was $261,000 and $404,000 for the three months ended March 31, 2009 and 2008, respectively. We received only modest research and development revenue in Q1 2009 as compared to the prior year period. Grant revenue decreased to $230,000 from $301,000 during the three months ended March 31, 2008, primarily as a result of a decrease in billable activity related to the strategic environmental research development program grant as the program winds down.

Total operating expenses were $9.7 million, a decrease of $309,000 relative to the comparable quarter in 2008. Research and development expenses at $6 million, were roughly $74,000 higher than in Q1 2008, due primarily to the addition of new employees, offset by lower pre-commercial manufacturing costs.

You may recall that in Q4 of 2008, we did subsequently delay some hiring, when we learned that plant completion would be pushed out from the Q2 2009 to Q4 2009.

Selling, general, and administrative costs dropped from the prior period by $383,000 to $3.7 million. The decrease was primarily due to reduced consulting expenses and a decrease in employee compensation and certain related expenses.

GAAP net loss for the quarter was $9.1 million, as compared to a net loss of $8.4 million for the first quarter of 2008. As expected, the first quarter loss was greater than the cash used in operating activities. As we’ve discussed before, all of the payments we received from ADM are recorded as deferred revenue for GAAP purposes, and therefore do not yet appear on our income statement.

We also recognized non-cash stock based compensation expense of $1 million on a GAAP basis, which also leads to a reported net loss exceeding cash used in operations.

Net loss per share was $0.40, compared to a net loss per share of $0.37 in the year ago period.

Now on to the balance sheet, our balance sheet remains strong. On March 31, 2009, we had cash and short term investments of $82.2 million. We have no debt. We expect this capital will be adequate to build our sales and marketing infrastructure, conduct 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 our products to the marketplace. We are pleased with the progress we’ve made during the first quarter, as we continue to get closer to commercialization of Mirel.

With that, we’ll open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Laurence Alexander from Jefferies.

Laurence Alexander - Jefferies

I guess, first question just wanted to see if ADM gave you any additional color on the upper bound of the cost of the facility.

Richard Eno

No, I think, what we are doing at this point is maintaining north of 300 million and that’s what we are concluding at this point, but when we change that we’ll be sure to let you know.

Laurence Alexander - Jefferies

All right. But it wouldn’t be as much as a full-scale world class, ethylene-polyethylene complex, for example.

Richard Eno

We are just going to say, north of 300 now Laurence just...

Laurence Alexander - Jefferies

Fair enough.

Richard Eno

To be consistent.

Laurence Alexander - Jefferies

And, I guess secondly can you given, as you think about the next six to nine months as the facility launches. What kind of news flow should we be expecting from your existing announced partners? I mean in prior calls you’ve discussed the potential for new announcements from larger partners. But what are you expecting for the current partners to do?

Richard Eno

Current partners, by current partners you mean those who we have already made customer announcements around?

Laurence Alexander - Jefferies

Exactly.

Richard Eno

Well I think there is certainly, we acknowledged that we have a Fortune 500 consumer products company. We hope that at some point in that time period we can provide a lot more color on that company and those applications. And as things that our existing customers go to market we certainly can let you know a little bit more about adoption of those. Granted, they’ll be at a much lower level than we would expect through Clinton. So I think that’s what you would see from our existing customers. Over the coming months as we get new customers we’ll announce them and new certifications we will like be sure to let you know. But in terms of existing customers it would be those type of things.

Laurence Alexander - Jefferies

And lastly with the potential extension of the platform into non-woven or foam applications, can you give us any update on progress on that or any technical hurdles that you’ve run into?

Richard Eno

I mean, it’s the classic polymer development process. There are, these products have not been produced at scale yet. And the product development team is doing a real nice of job of identifying things that will enable those products to be saleable at commercial scale. But I don’t think there is anything we’ve seen that is dramatically different than any polymer development process that you would normally see, and we are still very enthused about the market potential for both foam and non-wovens in the long term.

Laurence Alexander - Jefferies

But has it moved beyond just exploratory lab trials, or is it still just at the bench so to speak?

Richard Eno

I know we have worked beyond lab stuff. We’re working with testing with potential partners. So, we’re actually in contact with people that are known in those segments that we’re doing some further development work. So, it’s certainly outside of Metabolix and Telles laboratories and we’re in the further development process.

Laurence Alexander - Jefferies

And are the partners shouldering some of the cost on this? Or are they just taking very small samples up at this point?

Richard Eno

Yeah, I mean that’s just a fact, Laurence, they are putting a significant amount of their own time in it is a good signal. But, I’m not, given the scale of these potential businesses, any costs they’re putting in is relatively small, I’m sure, compared to the market opportunity.

Operator

And we’ll go next to Michael Cox with Piper Jaffray.

Michael Cox - Piper Jaffray

Good afternoon gentlemen. My first question is on the cash burn. Should we expect the cash burn to be in line with the Q1 number, and then include the 1.6 million payments from Telles, is that a reasonable range or are there other moving parts there as well?

Joseph Hill

Hi Michael, this is Joe. So, what we have said in the past is that the normalized cash burn has been about five million per quarter, when you include the ADM support payments. And we also have said that we expect that to increase somewhat as we get closer to the opening of the Clinton facility. So, if you take that normalized amount and expect that to increase as we’re increasing some of our sales and marketing expenses, and then just also note that currently with the ADM support payments, the last support payment scheduled to occur hopefully we’ll be receiving that in Q2 of this year even though it’s technically not due till the first day of Q3.

Michael Cox - Piper Jaffray

Okay so you’ll get both of those $1.6 million payments in the second quarter it sounds like.

Joseph Hill

We’ve had some timing differences; we planned for that. Sometimes it straddles the quarter.

Michael Cox - Piper Jaffray

Okay, and then on the customer side have you received any pushback or any, gotten any sense of frustration from customers about the delays that you’ve experienced in the startup of the facility?

Richard Eno

I think we’re spending a lot of time with all of our customers keeping them deeply informed on the progress of the Clinton plant and our commercial team is working with them. I’m sure our customers as well as many of our prospects would like to see the product in the market right now, but our team is doing a good job of just working with our customers to make sure they’re fully aware of the timing and working with them to work through any issues that they may have. But I think everyone’s anxious to see the product get to market.

Operator

And we’ll go next to Pamela Bassett with Cantor Fitzgerald

Pamela Bassett - Cantor Fitzgerald

Hi everybody. I wonder if you could tell us a little bit more about program progress of the earlier stage programs, oilseeds and the plant-based systems, as well as potential partnering strategies in those programs?

Richard Eno

We have nothing new, Pamela, to report on that. The crop programs take time to materialize because we’re dealing with the growing cycle of plants here but what we’ve communicated in this call and in others that the team is making very good technical progress on all of our crop families, the oilseeds, the switchgrass and sugarcane, and as we start seeing that progress, that starts to work its way into the definition of a business model and partnering strategies. We’ve said that we don’t see a case in which Metabolix will get involved in the farming activity. But we certainly have a high degree of interest in the technology on the modified crop end of the value chain and at the production end of the value chain. And beginning to look at what partners could make sense. We do feel that our technical work, given its progress, can move on a little bit forward before we have to really enter into any formal partnerships, but we’re thinking about what the prospects are. So, Pamela, we’re not quite ready to announce anything more at this point on who those specific partners are or the state of those discussions.

Pamela Bassett - Cantor Fitzgerald

Okay. And it sounds like you’ve made, the FDA filings are all moving along nicely. Can you tell us anything about the kind of questions they came back to you with?

Richard Eno

The questions are very, very technical about protocol utilized in terms of the extraction studies, ways to present data, even to the point that some of the questions, some of the comments were on grammatical issues. It’s extremely detailed comments you get back. And it’s all constructive because it gives us comfort that as this dossier gets formally submitted it meets the expectations of those reviewing it. But they are very, very technical and detail-oriented comments we received.

Pamela Bassett - Cantor Fitzgerald

Okay. And you emphasized in other calls that, certainly Clinton One is entirely independent of demand from food contact companies and utilization. How will that, moving into that segment, can you talk a little bit about how that is going to occur?

Richard Eno

Sure. While we’ve been quite clear that our 135 million pounds is indicative demand and is non-food contact. We’re confident we can sell out Clinton one with non-food contact. Our commercial team has been looking pretty carefully at the food contact applications which we’re familiar with, have been following, and really keeping our eye on.

What happens as we work our way through the FDA process and get a greater degree of comfort in being able to serve food contact applications is we start having to make some resource allocation decisions. For example, one, we could transition some of our technical and commercial capabilities from non-food contact applications to food contact applications which may offer greater potential to us. So there could be some shifting of our priorities internally, our staff in what they work on in order to maximize the value of Clinton by shifting some of the new and non-food contact things back.

Another option we would have too, is to further staff up in order to address the existing non-food contact pipeline in addition to what we would expect for food contact. So there is two major pathways we can take as this moves through. One is a reallocation of our existing team to where we see the high-value opportunities. Or second, there is an option to potentially increase so that we can handle everything, and that’s something that the Telles team will work through and recommend what they think the best approach is.

Pamela Bassett - Cantor Fitzgerald

So internally in terms of resource usage, there is some crossover that can occur or a natural passing off of, when certain formulation issues are addressed on the non-food contact side, your teams can move on to the food contact side. Am I understanding correctly?

Richard Eno

Yeah. That’s right. And I think if, going back in history we had been following a number of food contact applications and many of our commercial staff still maintain those relationships that they had in the past. So the commercial team is able to work non-food contact and food contact, and because we’re dealing with injection molding applications, sheet applications, thermoforming, a number of different technologies will, the same technical team can work for either a food contact or non-food contact account. So, it’s very fungible in terms of how we choose to resource it, which will be done in a way that we see is most valuable for Telles.

Pamela Bassett - Cantor Fitzgerald

And do you feel there is enough moving down the learning curve that development in the food contact can be expedited at least from a formulation standpoint?

Richard Eno

Oh, by all means, from a formulation point it’s, over the last year or two, we’ve made great gains just in terms of the formulations for injection molded products, sheet products, thermoform products, and that is applicable in food contact, just like it’s applicable in non-food contact. So we’d be most likely selling the exact same resin into food contact or non-food contact. The only issue being we will have gone through the FDA process.

Operator

(Operator Instructions). And we’ll go next to JinMing Liu with Ardour Capital.

JinMing Liu - Ardour Capital

I just would like to clarify something about the Clinton facility. You mentioned that all the production facilities would be on a modular basis and in December you expect some initial capacity will be online and with some other equipments will be installed later. But does that mean you will have less than the nameplate online in December and then gradually to go up.

Richard Eno

Yeah. That’s exactly right. The development cycle for this is not a commodity, so this is not any type of business where you can turn a new business on and sell the plant out on initial start-up. And we’ve been clear about how the development cycle works and how we move towards that, and in order to maintain the highest degree of production, construction productivity, what ADM’s plan is to move ahead and make sure we get a portion of the plant all completed as fast as possible and as low cost as possible so we can start it up. Now what happens thereafter is, it just becomes basically doing the final tie-ins and final instrument electrical checkout for those things that are not connected up initially, and in terms of the magnitude of what has been completed at Clinton, this is pretty minor stuff, compared to what’s been done there.

But it’s really been done in a way to say why handle an excessively large construction workforce to do the final construction and tie-in for assets that may not actually be needed for a period of time, months or so, so it’s something that can be dragged out, and maintaining very high degrees of construction productivity. And the capacity will be put ahead, put on stream, well ahead of demand. So, it’s not going to be any issue in terms of holding back growing the business, but what it manifests itself in, it manifests itself in much higher construction productivity and a smaller construction workforce needed to basically get product to our customers. So you’ve interpreted that correctly.

JinMing Liu - Ardour Capital

So, what is the initial capacity we’re talking about this year?

Richard Eno

We are not projecting that. The plant is designed for 110 million. It will get to 110 million. And the initial capacity will be more than enough for the market and all through the development, we anticipate capacity more than enough for the market, for it to have the growth, so we are not projecting exactly what the initial capacity is at this point. But it’s going to be more than sufficient to do what we need to do to grow this business.

JinMing Liu - Ardour Capital

Okay. My last question is about the start-up expense. How would they at the GV treat that start-up expense, whether that will be added to the CapEx for Metabolix to pay back later or what?

Richard Eno

The start-up expenses associated with it, I mean as a series of them built within ADM and within Metabolix, right, and where...

Joseph Hill

So the way, the way the agreement is structured now is that, there is a time at which we switch out of the construction phase and go into the commercial phase, which is defined in the agreements we have with ADM. So the way it works right now is the costs that ADM is incurring to construct the polymer facility goes to the ledger balance and everything that Metabolix is spending on the market development and product development is an expense of Metabolix. Once we hit the commercialization phase, our costs switch over to the joint venture. Remember this construction, that the ADM facility is being built by ADM, the cost of the facility goes to the ledger balance, but ADM always owns that facility and runs that facility. Operating costs of that facility are part of the manufacturing of the products and the joint venture, Telles, purchases the raw material from ADM at a cash cost basis plus a small uplift.

JinMing Liu - Ardour Capital

Okay, all right. My last question is related to your pre-existing contracts. Say, if the commercial production, say in the worst case scenario is pushed out to beyond this year into next year, whether that will have any impact on your pre-existing contracts?

Richard Eno

Well I wouldn’t, in terms of what we talked to our customers about and the timing that ADM has given us, focusing on production from the plants in December of this year, we are in touch with all of our customers and working with them to make sure that we meet their needs and it’s all very transparent. We have not, JinMing, got that into, what happens if this slips into first quarter next year and commitments, I mean we are not planning on that basis and if it turned out that somehow happen to be the case, our commercial team would be out talking to customers and working with them on that basis. But our focus right now has been on working with our customers relative to the December timeframe we just communicated.

Operator

It appears there are no further questions at this time. Mr. Eno I’d like to turn the conference back over to you for any additional or closing remarks.

Richard Eno

Good, thank you very much. Thank you all for attending the call today. We are pleased with the progress we are making and have a lot of enthusiasm about the long-term potential for this Mirel platform as well as our other Metabolix platforms. We’ll continue to update you on news as we can and look forward to speaking with you on our next earnings call. Thank you very much.

Operator

This concludes today’s conference. We thank you for your participation.

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Source: Metabolix, Inc. Q1 2009 Earnings Call Transcript
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