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Executives

Lynne Brum – Vice President-Marketing and Corporate Communications

Richard P. Eno – President and Chief Executive Officer

Joseph Hill – Chief Financial Officer

Analysts

Henrique Akaishi – Piper Jaffray

JinMing Liu – Ardour Capital

Metabolix, Inc. (MBLX) Q1 2013 Earnings Call May 8, 2013 4:30 PM ET

Operator

Good afternoon, and welcome to the Metabolix First Quarter 2013 Conference Call. Today’s call is being recorded for internet replay. You may access an archived version of the call on Metabolix’s website at www.metabolix.com.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 will now turn the call over to Ms. Lynne Brum, Metabolix’s Vice President of Marketing and Corporate Communications. Please proceed, Ms. Brum.

Lynne H. Brum

Thanks, Manny and good afternoon, everyone. Welcome to the Metabolix first quarter 2013 conference call. On the call with me today are Rick Eno, President and Chief Executive Officer; Joseph Hill, Chief Financial Officer; and Olive Peoples, Co-Founder and Chief Scientific Officer.

If you don’t have a copy of the first quarter news release, which was issued earlier this afternoon, one can be found on the Investor Relations section of metabolix.com. In addition, slides accompanying the presentation are available on Metabolix website on the Events and Presentation page in the IR section.

Now, please turn to 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. 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 the conference call.

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

Richard P. Eno

Thanks, Lynne. Good afternoon, and thank you everyone for joining us today. Please turn to slide 3. During the first quarter, we made significant progress in each of our businesses; biopolymers, biobased chemicals and our crop-based programs. As a reminder and for those of you who have joined us more recently, in biopolymers, we have developed well patented technology for biobased, biodegradable, biopolymer products with exceptional properties. We are working to develop high value markets and customers for these products while continually working to lower the cost of our product supply and manufacturing.

Our customers represent the film, performance additives and functional biodegradation application segments targeted in our biopolymer business. As a result of these efforts, our goal is to build a large profitable business protected by our intellectual property and know-how. Our chemicals platform and crop research programs offer further value potential based on essentially the same platform technology.

Please turn to Slide 4. During the first quarter, we continue to demonstrate the commercial appeal of our biopolymer products, expanding our base of new and repeat customers for the fourth consecutive quarter. Sales of biopolymer products shipped and billed were $731,000 compared with $918,000 in the fourth quarter of 2012. This is a good time to remember that we’ve been very deliberate in applying our existing inventory as a foundation to build our strategic market segments and customer base.

As we stated in our last call, sales will fluctuate from quarter to quarter and we expect revenue from biopolymer sales will be inherently lumpy at least until we enter the commercial phase for this business. In the fourth quarter of 2012, we sold out our Mvera B5002 inventory and launched Mvera B5008, our next generation certified compostable film grade resin. This product targets similar markets and offers improved performance and economics relative to our earlier generation B5002.

Our focus in the early first quarter 2013 was managing the transition to Mvera B5008 to sampling to new and existing customers. We are now through that process and feedback on the product is encouraging. Customers are buying the product because it meets all technical specifications including those relating to both physical performance and compostability. It’s clean and easy to process, has a touch and feel appealing to consumers and is competitively priced.

As an indication of these characteristics, we’re beginning to see interest in long-term customer agreements. In April, we signed and began delivering upon our first annual contract for Mvera B5008. To give you a sense of magnitude, this contract represents approximately $1 million of potential revenue to Metabolix in 2013.

Given that this product was launched in December, we’ve been able to convert a new product launch into an annual contract in less than five months. As you recall, we have noted numerous times that in this industry product launches typically require 9 to 15 months. We are proud of our product development and commercial teams, who are working hard to compress our product development cycle time. We are seeing a similar dynamic in the performance additive segment of our business as well where our PVC additive I6001, which was launched in December is now being sold commercially, albeit, at relatively small initial volumes. We have already begun shipping under the new Mvera B5008 contract, which runs to the duration of 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. We are quite encouraged by the early positive reception for this product. The demand for application specific products is an important trend in the biopolymer’s market. We are actively working to capitalize on it through continual innovation.

In the additives segment of our business, we aim to do exactly that. Last month at the ANTEC Conference, the largest annual technical conference in the U.S. with the plastics industry, we presented new data further validating that our biobased polymeric modifiers work as performance additives to significantly improve the mechanical performance and environmental characteristics of the commercially significant polymers, polylatic acid or PLA and polyvinyl chloride more commonly known as PVC.

The ability to incorporate these new biobased polymeric modifiers into PVC and achieve needed toughness while also enabling reduced reliance on traditional non-biobased complex chemicals, including phthalate plasticizers, is a very important value-added market innovation. Similarly, we have developed the ability to modify PLA increasing toughness and softness without compromising its usefulness as a compostable packaging material. Most traditional non-biobased modifiers inhibit the compostability of PLA. Our developmental pipeline is active and we are continuing to advance a number of opportunities for high valued applications.

Please now turn to Slide 5. Turning to our plans for commercial biopolymer production, on our Q4 earnings call we announced a distribution agreement with leading Chinese PHA supplier, Tianjin GreenBio Materials or TGBM, under which Metabolix will distribute TGBM’s heat shrink film in Europe and will be the exclusive distributor in the Americas, and a supply agreement under which TGBM will supply PHA resins to Metabolix.

We recently expanded that relationship further by completing an additional arrangement with TGBM, under which they will able to purchase and use our PHA biopolymer resins. Our relationship with Tianjin continues to be very productive and we are excited to work together to grow the global market for PHA based materials. Meanwhile, as we work to develop additional commercial scale PHA supply options, we are continuing to closely monitor the financial restructuring of Antibioticos based in Spain.

The timing of any resolution, however, remains unclear. We are still very impressed by this facility and its personnel and we believe it is very well suited to our current manufacturing needs. current Antibióticos ownership, however, has been unable to deliver upon our demonstration project or on the restructuring plan that would allow the site and its staff to perform at its full potential. Although, we do not see a path forward under current ownership, we’re enthused about being able to commence production in Antibióticos once the financial viability of the site has been secured. We believe the site is appealing to numerous other parties and hope that clarity of the path forward can be realized quickly.

As we work to finalize our manufacturing foundation, we have focused our internal engineering and microbial team on the quality of the product and continual reduction of costs in our PHA production process. We estimate that the team has delivered over a 20% variable cost reduction in the last 16 months, based on development of new strains and improved recovery processes. We expect that these improvements will ultimately improve the economics of the PHA production facility and be realized as we deploy these gains in the manufacturing process under our control.

Please turn to Slide 6, let’s move on to our biobased chemicals platform where we are leveraging our PHA microbial technology to produce renewable based chemicals for applications that have been traditionally utilizing fossil fuel based chemicals. We continue to achieve our internal technical milestones and enhance our differentiated fast recovery process.

Regarding our crops platform, we continue to work through several active grants, which are funding the leading edge crop research, targeting multigene expression and transformation of plants as well as using switchgrass as a platform for making industrial chemicals. We are also pursuing funding from additional grants and collaborations to advance our crop platform. We will look forward to providing further updates on our progress as the year unfolds.

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

Joseph D. Hill

Thanks, Rick. I’ll now focus on the financial results for our first quarter ended March 31, 2013. As always, we managed our finances with an emphasis on cash flow management. We’ve maintained this focus in end of the first quarter with $37.7 million in unrestricted cash and investments. We currently expect that our cash and investments together with funds expected to be received from existing government research grants and expected product sales, will be sufficient to meet anticipated cash requirements for the next 12 months.

Turning to Slide 7, for the first quarter of 2013, net cash used in operating activities was $8.5 million as compared to fourth quarter 2012, where total cash usage was $7.3 million. This represents a planned increase in net cash usage of $1.2 million, which was mainly attributable to the timing of the accrued annual performance payments that we pay in Q1 of each year. As compared to first quarter 2012, where total cash usage was $12.3 million, the decrease in net cash usage of $3.8 million was mainly attributable to a one-time purchase of biopolymer inventory and restructuring expenses in 2012 and lower operating expenses in Q1 2013.

Turning to Slide 8, we will review product orders and associated revenue recognized. Product orders including excess raw material sales shipped and billed during the first quarter was $700,000. Revenue recognition was deferred for the majority of these shipments in accordance with the company’s product revenue recognition policy. Therefore, product revenue recognized during the first quarter of 2013 of $800,000 was primarily from shipments to customers completed during the last quarter of 2012.

Turning to Slide 9 for a review of financial results. Total revenue for the first quarter was $1.9 million versus $33.9 million in the comparable period of 2012. First quarter 2013 revenue consisted primarily of product sales and government research grants. In addition, research and development revenue increased $400,000 during the first quarter of 2013, the majority of which was earned under a development arrangement with the third-party. The $37.4 million decrease in revenue in first quarter 2013 was primarily related to the $38.9 million in deferred revenue we realized related to the termination of the Telles joint venture in Q1 2012.

The cost of product revenue was $600,000 during the quarter ended March 31, 2013, compared to $100,000 for the comparable period in 2012. The increase of $500,000 was primarily attributed to greater sales and reflects the cost of products shipped to customers, inventory storage and shipping costs associated with customer sales. We currently hold a significant amount of product inventory from material we purchased from Telles last year and from additional purchases of additives and complementary products that we use in various product formulations.

We currently warehouse that inventory in the U.S. and in Europe. Cost associated with the management of our entire inventory including warehousing and freight are incurred as cost of sales in each quarter. Total operating expenses, excluding cost of product revenue in the first quarter of 2013 were $8.2 million versus $10.4 million in the comparable quarter of 2012.

Research and development costs were $4.9 million versus $6 million in the comparable quarter of 2012. Selling, general and administrative costs were $3.3 million versus $4.4 million in the first quarter last year. The decrease in both selling, general and administrative, and research and development costs of $1.1 million each related primarily to the company’s efforts to reduce operating cost and restructure after the termination of the ADM joint venture in early 2012. Net loss for the first quarter was $6.8 million or $0.20 per share, as compared to a net income of $28.8 million for $0.84 per share for the first quarter of 2012.

Now on to the balance sheet; as of March 31, 2013, we had cash and investments of $37.7 million, this compares to $46.3 million as of December 31, 2012. As I said earlier, we believe that our cash and investments together with expected funds to be received from the existing grants and anticipated product sales will be sufficient to meet anticipated cash requirements for the next 12 months.

With that we’ll open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question and answer session (Operator Instructions) Our first question comes from Henrique Akaishi with Piper Jaffray. Please go ahead.

Henrique Akaishi – Piper Jaffray

Good afternoon.

Richard P. Eno

Hi, Henrique.

Henrique Akaishi – Piper Jaffray

Hi. So in the fourth quarter of 2012, the company had about $2.3 million in plant modifications, manufacturing equipment and raw material costs incurred in connection with Antibioticos. Are there any lingering CapEx requirements that flowed into the first quarter?

Joseph D. Hill

No. We didn’t make any additional payments after that.

Henrique Akaishi – Piper Jaffray

And so within that, would you be able to give more color on other potential manufacturing facilities with the size, location and expertise to produce the Mirel biopolymers, the Mirel?

Richard P. Eno

Well, sure, I think the probably the most imminent one, Henrique, is the fact that we have our relationship in Tianjin GreenBio, which has existing PHA manufacturing facility of 10,000 tons per year. And as we know, we have a quite a good collaborative relationship with that facility for sourcing, not only PHA polymers, but a heat shrink film product that they have as well. And as we noted, we also are now have the ability to supply them PHA resin, as well. So that’s probably the most likely candidate because it’s a well-designed PHA manufacturing facility. And then as we’ve talked about in earlier calls, there are others that we can’t particularly highlight the specific sites that have approached us following the ADM venture last year.

Henrique Akaishi – Piper Jaffray

And with that, with Tianjin, have you received any orders for their heat shrink film, and, if so, what is the magnitude?

Richard P. Eno

We are sampling the product. So with the way the product development process works is you receive the product. As you know, we are distributing the product in both the U.S. and Europe and that product is now in the market, in customers’ hands being evaluated and tested. So the commercialization process has begun for that product.

Henrique Akaishi – Piper Jaffray

Got it. And last one for me, with regards to your expectations for the next 12 months, if you were to exclude non-product revenues, by how much would that horizon be shortened in terms of ability to operate?

Joseph D. Hill

We are not disclosing at this time what the breakout is of our projections for revenue or cash coming in. We have looked at it carefully and we are very comfortable that we have sufficient cash to make it for the next 12 months.

Henrique Akaishi – Piper Jaffray

Great, thanks for taking my questions.

Lynne H. Brum

Thank you.

Operator

Thank you. (Operator Instructions) The next question is from JinMing Liu of Ardour Capital. Please go ahead.

JinMing Liu – Ardour Capital

Thanks for taking my question.

Richard P. Eno

Hi, JinMing.

JinMing Liu – Ardour Capital

Yes. First of all, can you give us more color on that annual contract you have just recently signed? Will that contract be renewed at each year, and once it got renewed, what will happen? Will you decide the size out order or the price at that point or how that should work?

Richard P. Eno

Yeah, I think right now JinMing, it’s an annual contract, which covers through the end of this year and we’re not disclosing the specific details, but I can provide some color on how it works in this industry. There is usually an expected range, a mid-max range, at an agreed price with agreed specifications that we have already proven that we need and deliveries are called off against that contract. And then with the framework for that contract would be used for subsequent negotiations for future years and you just continue on that way. So it’s a pretty standard in the plastics industry how they are established, but we are not disclosing specific volumes and specific prices on that contract.

JinMing Liu – Ardour Capital

Okay. Next question, my next question is related to your relationship with Tianjin GreenBio. What is the significance that Tianjin GreenBio can sell your products into the Chinese market, but my question there is you currently don't have production capacity yet for your own PHA production. Why did you decide to work the other way around with Tianjin GreenBio instead of just distributing their products?

Richard P. Eno

Sure, that’s a good question. As you know and when we’ve talked about in earlier calls, we received a number of different grades when we purchased the material following the ADM termination. And we are looking very carefully at all those grades and determining primarily the best way to utilize them to develop the market. A lot of our strategic approach is ensuring that we are building the markets ahead of production capacity. With Tianjin GreenBio, they are very active in the Chinese market and we want to make sure that we are open minded that if they find a very useful interesting opportunity to help develop the PHA markets globally, we can pursue that with them.

And as a result, it’s something that in terms of our collaborative relationship, if there are opportunities and they can help us develop the Chinese market that could be another good foothold to grow these markets globally. So if offers, JinMing, a bit of flexibility to us. It allows us to maximize the value of each product grade we have in our inventory, but the ultimate goal is to use that inventory and things as Joe pointed out in this remarks, we complement that inventory with, to develop the markets in our targeted segments.

JinMing Liu – Ardour Capital

Okay. Lastly, during the last call you mentioned that you are thinking about set up your own production capacity for PHA. Any new thoughts on that?

Richard P. Eno

No, it continues. We noted in today’s call that one of the things that feel – if you look at our strategy at a high level, we’re focused on high valued market applications, which is really looking at identifying places with the PHA product really brings exceptional value. And as we mentioned in today’s call, we also have our engineering and microbial teams reducing costs. And when you put the two of them together, the whole goal is to expand margins and returns for that site. We are examining a series of different sites looking at estimated capital, looking at estimated raw material costs, it’s a process that we’re working through and have a number of active discussions. No specific deadline can be applied to it, no more guidance on that that I can give you, other than that, we’re working on the revenue side and the cost side to make the returns attractive and we’ve got a number of active dialogs – areas of dialog going around the topic.

JinMing Liu – Ardour Capital

Okay, thanks a lot.

Lynne H. Brum

Thank you.

Operator

Thank you. We have no further questions in queue at this time. I’d like to turn the floor back over to management for closing remarks.

Richard P. Eno

Good, thank you very much. Thanks for joining the call. In summary, we made very good progress during the first quarter in each of our businesses, and that work has continued midway through this current quarter.

We continue to build and expand our markets for PHA and biodegradable materials, advance our manufacturing and product technology and explore new opportunities to diversify our supply sources in anticipation of commercial production. We believe the markets for our products are very robust and we see significant long-term growth potential for our disruptive technologies during the next few years. Thanks again for joining us today. We appreciate you support and we look forward to speaking with you next quarter. Have a good evening.

Operator

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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