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Executives

James Palczynski – IR

Richard Eno – President and CEO

Joseph Hill – CFO

Oliver Peoples – Chief Scientific Officer and VP, Research

Analysts

Mike Ericson Brother [ph] – Piper Jaffray

Lucy Watson – Jefferies

Jeff Osborne – Stifel Nicolaus

Ian Horowitz – Rafferty Capital Markets

Metabolix Inc. (MBLX) Q4 2010 Earnings Conference Call March 9, 2011 4:30 PM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Metabolix Incorporated fourth quarter and full year 2010 earnings conference. Today's conference is being recorded. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to turn the conference over to Mr. James Palczynski of ICR. Please go ahead, sir.

James Palczynski

Thank you, operator. And good afternoon to everyone. Metabolix released fourth quarter and year-end 2010 financial results after the market closed today. If you do not have a copy of the press 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; and Joseph Hill, Chief Financial Officer of the company. They are joined by Oliver Peoples, a co-founder of Metabolix and the company’s 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 would 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 out of the way, I’d like to turn the call over to Richard Eno, President and CEO of Metabolix.

Richard Eno

Thank you, James. I’d like to welcome all of you to the fourth quarter and year-end 2010 earnings conference call for Metabolix. Today, I’ll provide you with a review of the Metabolix vision and update on our ongoing activities. Joe will then take you through the financials.

We continued to make good progress on our commercialization and development activities 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 are 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 product and market development.

We are leaders in producing and upgrading a broad family of materials called PHA. PHA is our energy storage molecules found in nature, which have a number of useful properties. We currently have deployed our PHA technology across three business platforms. First, Mirel, a bio-based 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, our crop-based activities, which include our programs in oilseeds, switchgrass, and sugarcane.

I’d like to begin with the Telles business, our joint venture for commercializing Mirel. We continued to make good progress in this early growth phase of the business. I will review the overall status of the business, addressing manufacturing, the market including recent customer announcements and expected growth.

As you know, ADM’s Clinton, Iowa polymer plant, the supply source for Mirel bioplastic, is up and running. ADM with Metabolix support is in the process of improving yields, reducing costs, and increasing capacity. This will be an ongoing process and inherent in how we operate the business. We expect the plant will have capacity available ahead of market demand until the 110 million pound per year nameplate design is reached.

Since our last call, we have focused on building strategic levels of inventory of our various product rates at distribution points in both the US and in Europe. This has enhanced our assurance of supply to customers and allows us to more efficiently develop new customers around the world.

The market for bioplastics continues to be very robust, and we have an ongoing stream of inquiries. We are currently working with about 100 targeted prospects reflecting a broad range of processing technologies and markets. With regards to technologies, we are currently developing customers with a near-term focus on injection molding, thermoforming, sheet, and film applications. We also have ongoing developments in longer term technologies in the areas of foam, blow molding, non-wovens, paper coating and latex. These should drive the longer term growth in expansion opportunities for the business.

With regards to markets, we have focused on six target market segments; agriculture and horticulture, compost bags, marine product applications, consumer products, business equipment, and packaging. In aggregate, these market segments reflect over 50 billion pounds of plastic usage per year, and we believe that there is over 2 billion pounds of addressable demand for us in the near-term.

To illustrate our progress since our last call, we have announced five new customers; AL-PACK, Lakeside, Reef, Zoë b, and Tecnaro. Let me take you through these recent announcements and how they relate to our marketing strategy.

First, AL-PACK. AL-PACK is an innovative company in Canada who is our first announced customer for agricultural mulch film. AL-PACK will be launching a Mirel-based film in the fall of this year. We are very excited about the agricultural mulch film market in which Mirel offers considerable value towards natural degradation in the field. We have also made considerable strides in controlling the rate of film degradation based on desired customer requirement, which should help us to tailor film properties to specific crops and regions.

Lakeside is an innovative film converter headquartered in British Columbia. They will be launching our compostable bag based on Mirel. Their focus is on yard waste and consumer kitchen compost bags. They have noted that the Mirel-based bag is of superior quality in terms of both strength and compostability relative to incumbent bags. Lakeside is an early indicator of our expected success in the compost bag market, which is growing rapidly around the world.

Third is Reef. Reef is the company dedicated to sustainable aquaculture and is purchasing a special grade of Mirel, which is ideal for managing waste generated in aquariums, in marine environments such as aquaculture. In essence, because Mirel is a natural material, which is seen by microbes as food, its presence in aquarium environment activates microbes which enable a very effective denitrification process. This helps remove nitrates, which naturally build in fish tanks. Reef plans to sell this product across the world. It is one of a number of novel applications, which we see developing in the marine and aquatic market segment.

Our fourth announcement, Zoë b, is an early indication of some of the innovation possible with the marine degradable plastic. Zoë is launching a line of marine degradable beach toys this spring. This product maps to our consumer products market segment.

Finally, Tecnaro is a German company, which processes natural materials such as wood lignin and natural fibers into a range of molded products across consumer and business sectors. The addition of Mirel enhances the number of opportunities available for Tecnaro by offering products that are both bio-based and can be disposed off in composting or anaerobic digesting facilities. This announcement illustrates yet another innovative use of Mirel as well as the importance of Mirel blends with other bioplastics and natural products to access new markets.

As we have described before, each new Mirel application requires typically between nine and 15 months of development time from initial contract to closure of the sales agreement. Each of the customers that I have just described has moved from concept to contract in less than nine months, faster than we expect to be typical.

A bit more on the sales agreements. Once the agreement is signed, shipments can take quite a few months to begin as the customer aligns its supply chains and marketing plans to launch the new Mirel-based product. Sales agreements vary, but are often multi-year, specifically with year-over-year, year-on-year increase in volume as a new customer application is brought to market and then expanded.

Over the next few months, we expect we’d be able to announce more customers by name who will be launching commercial products based on Mirel. Easily drawn from a series of accounts in the later stage of the commercialization process, deep into product testing. Examples of applications that are moving towards commercial agreements include agricultural film, compost bags, retail bags, and thermoform trace for food and non-food uses.

As I mentioned earlier, polymer blends will be an important factor in the development of the bioplastics industry. By blending various polymers, customers are able to fine-tune the price and performance levels for specific applications. Metabolix has been well aware of this trend and has an exclusive license under a US patent on PLA-based blends. During the last quarter, we were pleased to grant a non-exclusive sublicense of this patent to BASF, the world’s largest chemical company. We believe that this license helps underscore the strength of our intellectual property and may enable future royalty income for Metabolix.

With regards to near-term goals, as we communicated early this year, we expect a milestone at which the joint venture moves into the defined commercial phase to occur in midyear 2011. On the longer term, we still anticipate reaching the 110 million pound per year capacity limit by mid-2013.

Finally, the last point I would like to cover on the business update is pricing. Our pricing guidance of $2.25 to $2.75 per pound is still valid, and we continue to get higher pricing in certain niches. As we have described in our previous calls, 2010 was a transition year as the Telles business was launched, and 2011 is a year when we expect a significant number of current customer efforts will materialize as new contracts. We will provide regular updates on our future quarterly calls to let you know how we are tracking against the expectation to sell the plant out by mid-2013 at our targeted price point guidance.

Let me now move on to the other Metabolix platforms. These are our industrial chemicals and crop programs. These represent meaningful value creation opportunities for us outside of the Telles joint venture with ADM. In industrial chemicals, we are leveraging our PHA technology to enable chemicals that are currently being produced from fossil fuels to be produced from renewable raw materials.

We are utilizing a fermentation process and an efficient integrated thermal recovery process to bring us our targeted chemicals. More specifically, we produce a fermentation broth containing tailored PHA composition and then dry it. Then through heat, we break the PHA molecules down into the building blocks, which are our targeted chemicals.

The PHA compositions we produce are different than those produced for the Telles joint venture, but still based on our core expertise. Given that there are large number of PHA molecules, our industrial chemicals platform offers numerous possibilities. We have selected the C4 family followed by the C3 family of chemicals as our entry strategy into this space.

Our initial focus is the C4 chemicals family, which represents a market greater than $3 billion. Uses of C4 chemicals range from high performance engineering plastics to spandex. Within the C4 chemicals family, we plan to initially commercialize a specialty segment targeting the pyrrolidones, which are used in personal care products and performance solvents among other applications. This is an $800 million market segment, which is our first step towards addressing the $3 billion broader C4 market.

After the C4 market, our next target will be the C3 chemicals market, including the (inaudible), which are used in paints, coatings, diapers and adhesives. This market is much larger than the C4 market or over $7 billion in revenue. To recap the state of the technology, we have successfully scaled the C4 chemicals fermentation process to intermediate scale, and the technology performed essentially as we predicted.

We believe that this mitigates the risk of this crucial step as we move towards commercialization. We have also run all aspects of the recovery process of small scale. Consistent with our guidance provided in our last call, we will have specialty C4 chemical samples to potential customers in the first quarter of this year.

Work on these samples is essentially complete with characterization occurring down to the parts per million level, and products will be shipped to customers later this month. Based on feedback from customers, we will be able to fine-tune our recovery process to ensure all customer needs are met. In addition, also this quarter we have completed proof-of-concept strains for our C3 chemicals platform as well.

A further technological advance over the last quarter relates to our integrated recovery process for industrial chemicals. As I described, the Metabolix process for producing chemicals is based upon thermal conversion of PHAs contained in dry fermentation broth to our targeted chemicals. We now believe that the same basic process and equipment will allow us to address the C3 as well as the C4 families of products albeit with some relatively minor tailored purification equipment based on the specific molecules being produced.

The implications are important. The addressable C3 and C4 markets are over $10 billion in aggregate. It is now potentially addressable by the same manufacturing facility. In addition there is a possibility to build swing capacity, which could allow either C3 or C4 markets to be served based on relative market attractiveness. We believe that this is a very differentiated approach relative to existing petroleum or emerging biotechnology pathways, and we will continue to advance it.

We are excited about our progress in industrial chemicals. Over the coming months, we will get feedback from prospect customers and fine-tune our recovery process. In addition, we have active partner discussions ongoing as we examine specific business models for our market entries.

Our third Metabolix platform is our crop-based activity, including our programs in oilseeds, switchgrass, and sugarcane. All in all, we are excited about this platform, as we can see the pathways we are developing ultimately replacing capital-intensive operations such as oil and gas exploration and production, refining, olefins, and polymerization by producing polymer directly in crops. Our crop programs offer numerous options to produce low-cost chemicals, plastics, and fuels in a very sustainable manner.

As discussed in our last call, we have completed the first field trial of our oilseeds program with our targeted crop Camelina, and we are now in the second field trial, which is taking place in Texas. The objective of the field trial work is to fine-tune our gene systems to maximize PHA yields while maintaining healthy robust plants. We are also gaining data that will help define our regulatory approval strategy.

This quarter we announced $203,000 grant from the Saskatchewan Ministry of Agriculture to our advance in our work in Camelina. We will be working to develop an enhanced gene expression system to help optimize the production of PHAs in the plant. Camelina is a very important crop to both Metabolix and for the Saskatchewan Province, and we are very appreciative of the funding which will support our commercialization efforts.

Another major development over the last quarter is our announcement of the production of high level of PHA polymers in tobacco, one of our research crops. Using our multi-gene expression technology, we have developed fertile transgenic plants, producing PHA at levels up to 9% of the total plant weight. PHA levels of up to 17% were found in leaf tissue. These results have 10 times more PHA bioplastic than any previously published reports for tobacco.

These findings continue to demonstrate the company’s ground-breaking scientific capabilities and continued progress on using new tools to improve its programs to developed advanced biomass crops as biorefinery feedstock. The demonstration of this new approach to increase PHA production in the model biomass crop tobacco is an important milestone in further demonstrating the scientific and technical capabilities of the company in the crop science field.

In summary, during this quarter we continued to move forward very effectively across all three of our platforms. In Telles, we continued to make steady progress on building the foundation for the Mirel business and can see sufficient demand to selling out Clinton 1. In industrial chemicals, we have successfully scaled up our C4 chemicals fermentation process and we plan to have samples to potential customers later this month. We have also made substantial gains in the development of a unique recovery system.

In our crop-based businesses, we have our targeted oilseeds crop Camelina currently in its second field trial and are seeing continued progress across our other two commercial crop targets, switchgrass and sugarcane. Our research work in tobacco has provided additional insight we would utilize to move all of our commercial crop varieties towards targeted PHA levels. We are very enthused about the potential for the company.

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. Before I go through the financial results of the quarter in detail, I’d just like to say that it’s very exciting to see a number of things falling into place. And we’re pleased with the excellent progress we have achieved with each of our three business platforms.

As Rick mentioned, we are seeing very good customer development for Telles, the speed of which our new customers have moved their products to development cycle. It is good evidence of how well Mirel can be adapted to existing processes and equipment. This is a key advantage for us as we convert additional sales. All our indications are that over the next few quarters we will continue to be qualified by an increasing number of customers. The products that are coming into the market are compelling, and in many cases, would not have been possible except for Mirel’s unique biodegradation properties.

The gains we’ve made in the development of industrial chemicals are perhaps even more exciting. We’re pleased to be working hard to identifying an advanced discussion through potential partners for this initiative and create a second source for sustainable, meaningful cash flow to add value to our shareholders

Lastly, I’m excited about the long-term financial implications of our crop programs. As science moves forward and we see increasing yield levels, it will open up new and more efficient PHA production techniques. This will potentially enable lower cost products.

I’ll now focus on the financial results for our fourth fiscal quarter ended December 31, 2010. 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 $61.6 million in cash and short-term investments.

For the fourth quarter, net cash used in operating activities was $8.1 million, which represents a planned increase in cash usage from $7.1 million used during the quarter of 2010 and an increase over the $5.9 million used during the comparable period of 2009. 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 for the fourth quarter of 2010 compared to the fourth quarter of 2009 is primarily due to a decrease in cash received from ADM for cost-sharing payments related to pilot manufacturing and increase in cash paid for salaries and benefits and other operational costs during the fourth quarter of 2010.

For the full year, net cash used in operating activities during 2010 was $32 million compared to $25.8 million for 2009. The increase in net cash usage relates primarily to a decrease in cash receipts as a result of the conclusion in 2009 of quarterly support payments received from ADM and a decrease in grant revenue received.

I’ll now give some additional detail on the company’s financial results for the fourth quarter of 2010 ended December 31. Total revenue for the fourth quarter was $100,000 versus $200,000 for the comparable period of 2009. Revenue in both quarterly periods resulted from revenue recognized from license fees and royalties and government research grants.

Revenue for the full years 2010 and 2009 was $400,000 and $1.4 million respectively. The year-over-year decrease was primarily due to a decline in government research grant revenue related to the completion of the integrated bioengineered chemicals grant during the fourth quarter of 2009.

Total operating expenses for the fourth quarter of 2010 were $9.6 million versus $10.0 million in the comparable quarter of 2009. Selling, general and administrative costs in the fourth quarter of 2010 were $3.8 million; $4.1 million in the fourth quarter of last year. Research and development costs were $5.8 million versus $6.0 million in the fourth quarter of last year.

Net loss for the fourth quarter was $9.5 million as compared to a net loss of $9.8 million for the fourth quarter of 2009. For the full year, total operating expenses were $39.4 million, a decrease of $800,000 from the 2009 level of $40.2 million. This year-over-year decrease is primarily attributable to a decrease in material production costs and depreciation expense, partially offset by an increase in employee compensation and related benefit expenses.

Our net loss for the full year ended December 31, 2010 was $38.8 million compared to $38.0 in 2009. 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 and stock-based compensation expenses. Our net loss per share in the quarter was $0.35 compared to a net loss per share of $0.39 in the year-ago period. For the full year 2010, the net loss per share was $1.45 compared to $1.62 in fiscal 2009.

Now a few words about our balance sheet. As of December 31, 2010, we had cash and short-term investments of $61.6 million. This compares to $69.9 million as of September 30, 2010 and $92.2 million at year-end last year. We continue to have no debt. We continue to believe we have adequate capital to build our sales and marketing infrastructure and to expand our research and development to progress the science of our there business platforms.

With respect to the ledger balance, which represents the cost of construction of the commercial manufacturing facility, the working capital requirements of Telles, and the support payments Metabolix received from ADM, as of December 31, 2010, the balance of the ADM ledger account was $403 million. We continue to work with a roster of successful companies with whom we can partner so they can create alterative solutions and change the way they bring their products to the marketplace. We are very pleased with the progress we have made during the fourth quarter and over the course of 2010.

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

Question-and-Answer Session

Operator

(Operator instructions) First we’ll take a question from Mike Ericson Brother [ph], Piper Jaffray.

Mike Ericson Brother – Piper Jaffray

Good afternoon, guys. My first question is on your new customer agreements. Congratulations on those, by the way. Is there any overlap with previous customer agreements that you’ve announced in the past? The Ag film particularly comes to mind, is this a different application than the customers that you have announced in the past?

Richard Eno

This is our first ag film customer that we have announced, and it is a great specifically tailored for agricultural applications. The only overlap would be the Lakeside and earlier Heritage investment, both of whom are going after slightly different portions of the compost bag market. But for the most part, I will consider them like to be unique and just really reflect our breadth of opportunity. And we’re really focused on getting early adopting customers to contracts like these for each of our targeted market segments. From that, we can extend that into a deeper penetration of each of our target markets.

Mike Ericson Brother – Piper Jaffray

Right. Okay. That makes sense. It’s the compostable bags that I was thinking of. Could these new sales agreements positively impact either the 1 million pound milestone or potentially the 110 million pound per year capacity milestone?

Richard Eno

Yes, absolutely. Clearly, the announcement of these demonstrates continued progress in increasing sales and moving that plant towards its capacity limit. It indicates increasing acceptance of the product across numerous market segments. And the other thing it does too, I'm glad you raised the question, is that each of these enhancements starts to bring more interest to us and we get additional calls based on these too as people now understand the product essentially being qualified in various segments. And granted those newly have to be qualified, we select if we choose to work with them, but they still have to go to the development process that does create more interest in the product in our targeted market segments. So for those reasons, yes, it could help on both those fronts.

Mike Ericson Brother – Piper Jaffray

Absolutely. Interesting. And then one final question is on the crop. Is the plan for the gene that produce PHA in the crop to develop your own C product or would it be the license to somebody with a germ plasm for one of the other companies that’s having a switchgrass or is it (inaudible) polymers or some type of royalty trucker or either or both?

Richard Eno

I’ll comment and Oli can add to it as well. The model is still evolving. We have no intention of getting into farming. We are looking at people with appropriate germ plasms as we look at commercializing it. Our primary focus right now is less on defining the specific model, but more on taking what we’ve learned in the field trials and scaling that up to get very high levels of PHA similar to what we announced for our tobacco, which is a research crop, and translating that into a regulatory pathway for it. So the business models are still evolving. We will manage the technology. We will control the off-take, the intermediate portion I can rest assured tell you we’re not going to be getting into farming, but we’re looking at a range of different options there. I don’t know, Oli, if you want to add anything to that?

Oliver Peoples

Yes. Well, I actually was looking forward to buying a tractor, but I guess I’ll have to give that up. But I think fundamentally – I think one of the things we’ve done, because we’ve selected non-food crops, whether that’s the Camelina or switchgrass, really it’s not the same as trying to develop something in corn. But you really need access to (inaudible) in the germ plasm. So I think we have a lot of flexibility about that. We are working in oilseeds, which is probably ahead in terms of working with folks who develop the germ plasm for that particular crop. But again, Metabolix is not trying to be in the farming farmland business. We’re really trying to really optimize the technology and validate that. And then how we go to market with it, I think all of the things you mentioned are possible, but we really focus on the technology at this point.

Mike Ericson Brother – Piper Jaffray

All right. Excellent. Thanks, guys.

Operator

Our next question today comes from Laurence Alexander, Jefferies.

Lucy Watson – Jefferies

Good evening. This is Lucy Watson on for Laurence today.

Richard Eno

Hi, Lucy.

Lucy Watson – Jefferies

I guess I have a quick question in terms of cash burn. What should we be expecting on a quarterly basis for 2011? Do you have any guidelines there?

Joseph Hill

As we have said with our current cash burn that when we reach the commercial phase of the agreement, which will be mid of 2011, that our expenses related to supporting Telles sales and marketing and R&D expenses will shift over to the joint venture and leave the Metabolix P&L. And that will be in the range of $4 million to $5 million per quarter.

Lucy Watson – Jefferies

Okay. And then I guess a question on the crop-based chemical field trials. As you look to scale up and commercialize some of these crops, do you anticipate narrowing down the list of crops that you are evaluating or will you continue with all of the crops perhaps because they are ideal for different geographic regions or which you are just expanding a little bit on expectations?

Richard Eno

Yes. I’ll start now. Oli can add his comments on that also. You are exactly right, Lucy, that the crops do address different geographic regions. The Camelina crop, a very cold weather crop; switchgrass, below the Corn Belt; and sugarcane, Southern Hemisphere, which we like that diversification. The other thing to keep in mind is the oilseed crop is moving ahead very quickly because we get a crop cycle every 90 to 120 days in Camelina, which allows us to move that quickly. So we can and we get learning from that program, which we can apply to the longer term biomass crops. So we get a lot of synergies between the three programs, and the learnings were more very easily translated into others just in terms of thinking about regulatory and thinking about commercialization paths. So from the science perspective, we feel we can handle all three, really with Camelina being the lead product. Oli, do you want to add to that?

Oliver Peoples

Yes, I think I’ll basically agree with what Rich has said. I think really the issue here is that in order to have global production of both bioplastic and also using these chemicals from crops, you need to be looking as long as a whole, and having the three-crop platform really gives us some very good optionality around that and also allows us to then consider what types of conversion technology is likely to apply to those different feedstocks as we go to buy them finally.

Lucy Watson – Jefferies

Okay. And one other one on industrial chemicals and maybe I’ll hop back in queue. With oil now about $100 per barrel, have you seen any acceleration or urgency in your partnership discussions or any change in your expectations on the timeline for ramping up that business?

Richard Eno

I think on the first part of your question, Lucy, clearly there is one heck of a lot of interest in industrial chemicals from renewable source these days. There is just a lot of activity out there, and certainly that has translated into a very significant amount of discussions. And that takes us to all corners of the world as we think about that. So clearly, increased in it with regards to timeline, we’re moving ahead quite rapidly. And I think that’s, to me, one of the highlights over the last, say, six months or so is how quickly this has moved where we’ve got the fermentation process for our first entry target, especially C4 chemicals scale up to pilot scale. The bench scale operation looks effective for recovery.

We’re down at the parts to 1 million level that I mentioned. It’s really fine-tuning that. And it really – the unique characteristic of the PHA platform is this could allow us to address both C3 and C4 markets using the same manufacturing set. We’re going to work hard to see if we can optimize that and do that, but it is very differentiating. So I think the interest that’s there in the market with oil getting high, that’s translated into increased amount of customer interest as well as partner interest. And we’re working hard to move this rapidly to pilot and semi-work scale.

Lucy Watson – Jefferies

Thank you.

Operator

Next up we’ll take a question from Jeff Osborne, Stifel Nicolaus.

Jeff Osborne – Stifel Nicolaus

Great. Just a follow-up on the C4 side, maybe, Rick, if you could just kind of go over the milestones that we should be looking at for the next three to six months? I mean, it sounds like the fermentation side science aspect has kind of nailed down a little bit of work on recovery. But how do we think about your efforts of getting a partner coming on board to really beat the key element to allow this to kind of expand the primetime?

Richard Eno

Sure. Good question. First of all, technically the next step will be getting feedback from customers for the products, which we’ll be sending them later this month. Now, for anyone looking at it, these look identical to what the products are that are made from petroleum sources. We’re pretty much there. The issue is gets down to the very part per million level, and it requires a very keen focus on any potential impact on a variety of downstream products as a result of getting the product to that level. So I think that the next thing, which we’ll communicate once we get the feedback and is tested, is do we see anything that requires us to put further optimization to the recovery process. We feel pretty good where it is now, but we really need to get customer feedback to do so. So we expect to get customer feedback hopefully within the next couple of months after we get the samples to our customer targets upon this quick turnaround. From that, we’ll be able to give you a much better in terms of the scale-up of the technology because it really is a little bit digital at that point.

With regards to the second part of your question on partners, that’s hard to predict as well because we’ve got numerous discussions ongoing and we’re looking at the market side, off-tape discussions with various customers as well as the supply side of feedstock. And we’re actively looking at second generation feedstocks as well to provide us some hedging diversification away from sugar. And all those are going in parallel, and very hard to predict timing. So I can’t, Jeff, be more definitive on timing, but clearly the technical side, we’ll have feedback to you much quicker once we’ve determined that we’ve got the whole process come down, at which point the next step is just to run it at a full continuous demonstration facility, which is we’re thinking about how we will do that next as well.

Jeff Osborne – Stifel Nicolaus

That makes sense. And are you looking for feedback on both GBL and BDO, or just GBL at this point?

Richard Eno

Right now, it’s GBL with its derivatives to pyrrolidone chain, which is used in solvents and personal care among others. And we are working on the GBL to BDO step of the technology as well. In addition, in parallel, the strain group that had developed the C4 strain now has migrated over to work also on the C3 strain, which we have proof of concept this quarter so that we can drive that towards the acrylic market. So that where that stands as well.

Jeff Osborne – Stifel Nicolaus

Got you. And then just two quick other ones. Given my assumption it would take about 1.5 to two years to expand capacity and you are kind of targeting mid-2013 to be at full utilization, how do we think about the discussions of expanding? I would think you would need to kind of come to some type of resolution in the next six months if you wanted to expand in Clinton, or am I off on the timing there?

Richard Eno

Not at all. In the last call – I think it was the last call we mentioned that there is an integrated ADM-Metabolix team looking very deeply at the current technology as well as next generation technology, because when construction was begun four or so years ago, we essentially had to freeze the technology at that point. So we could construct – so ADM with ourselves could construct the facility. Our work on technical advancement did not stop at that point. So what we are looking at is how we get what we’ve learned in some of the next generation technology into the Clinton plant. And our objective is to figure out how to expand that at the bare minimum capital deploying some of this next generation technology, which is in both the fermentation side and recovery side of the process. So the team is working on it, Jeff. And the ideal outcome would be able to figure out how to get more capacity out of that plant without a major construction project. And that’s something that we haven’t got to yet, but we are striving to get there. And over the coming months, we will get further resolution of what that would look like.

Jeff Osborne – Stifel Nicolaus

Very good. Thanks much.

Richard Eno

Thank you.

Operator

(Operator instructions) And next up is Ian Horowitz, Rafferty Capital Markets.

Ian Horowitz – Rafferty Capital Markets

Hi, good evening, guys.

Richard Eno

Hi, Ian.

Ian Horowitz – Rafferty Capital Markets

Just to piggyback of Jeff’s last question, do you feel like, I don’t know what you want to call it, enhancements or retrofit at the current Clinton plant? I mean, not looking for guidance, but are these kind of 10%, 15% volume increase opportunities or is it something larger than that potentially or kind of too hard to tell at this point?

Richard Eno

That is probably too hard to tell. I mean, certainly there are parts that just – new strains and things can get us on the order of the numbers talking about pretty quickly. And then there is a variety of pieces of equipment in the backend as some of which we can get much higher numbers, some of which we can’t. We’re looking at it as an integrated system. So, a little too soon to tell, but just to Jeff’s question earlier, our objective in expanding it is figuring out how we can be positioned to meet the market need with deploying the best technology at minimal capital. And seeing the plant operating and knowing what the key points are in it and seeing our advanced technology, we are trying to bring all those together in a proper solution for the expansion.

Ian Horowitz – Rafferty Capital Markets

So I guess it’s kind of the six-month timeframe, the last is without any kind of real capacity announcements. That may not necessarily mean that there won’t be capacity additions kind of that mid-’13 level since, I would assume, some sort of retrofit or enhancement would be much more – much easier to implement, quicker to –?

Richard Eno

Yes, that’s right. That’s right, Ian. Typically in these type of plants, it’s similar from the chemical industry, the refining industry. As you start pushing an asset’s capacity, you typically don’t hit a limit with all the pieces of equipment at one time. You start to look at where you get – where you see production being limited and you address that in – typically in the industry it’s called debottlenecking. And you’re right that it’s things that we’ll be looking at where the bottlenecks are, how we can unload the plant and start to work it that way. And it just is too soon to say what the results of that work could be, but we’ve got a rather experienced team of people looking at it.

Ian Horowitz – Rafferty Capital Markets

Okay. And Joe, are we going to be seeing kind of volumes now being reported in the next earnings announcement with some of the customers will be kind of taking on product or –?

Joseph Hill

You need to remember that the Clinton manufacturing facility is owned and owned by ADM, that Telles is the joint venture between Metabolix and ADM. The Telles financial statements for now are consolidated into ADM. What you will see going forward will be royalties we will be receiving on the sale of Mirel, which are around $0.10 a pound. But for a number of reasons, we won’t be disclosing volume of customers or volume of current capacity. And a lot of that is also driven for competitive marketing reasons.

Ian Horowitz – Rafferty Capital Markets

Okay. And then, are your royalties kind of relatively timed close to shipping a product or is there some sort of delay in payments?

Joseph Hill

There is a slight delay, but it’s not a huge delay. It’s about a third.

Ian Horowitz – Rafferty Capital Markets

And then one last – I'm sorry?

Joseph Hill

Well, actually we’ll be collecting it later, but we will be recognizing royalty revenue as shipped.

Ian Horowitz – Rafferty Capital Markets

Okay. And then I may have missed it, but sometimes you’ve – recently you’ve been giving kind of your thoughts on the total adjustable markets, end market levels. Are your thoughts changing on those at all one way or another or are they –?

Richard Eno

No, I think it’s – for quite a while we have pointed out a 2 billion pound addressable market in the range of our current pricing guidance for the film, injection molding, thermoforming and sheet. And that’s drawn out of a total market for those materials of probably some order of 50 billion pounds. So what we’ve done is taken the amount of plastic that actually goes into these markets and then actually been fairly conservative to cut that back. There is some form of elasticity in the market where with our pricing guidance can we actually see the addressable market. That’s how we came to that 2 billion kind of number.

The addressable market expands when you think about the longer term technology that we’re working on, which we see as growth potential, expansion potential for building out the Clinton site to full capacity, the 400 million pound type with Clinton and beyond. And these are things that aren’t included in our current sales mix and the customers we’re working on, things like non-wovens, for diapers, for wipes, for filters, blow molded bottles, foam replacing polystyrene foam with a bio-based biodegradable foam, paper coating, latex. These are things that have relatively synergistic extensions beyond what we’re doing. And those applications, Ian, would expand the addressable market for the product. So the addressable market hasn’t changed, but those new applications will certainly increase the scale of it.

Ian Horowitz – Rafferty Capital Markets

Understood. One last question, I’ll get back in queue. I think, Rick, this system is just one of what you are seeing philosophically. Do you kind of find that bioplastics in general with PHA or Mirel, or how are you going to tranche the market? Do you find it to be much more of a European or ex-US opportunity right now than you do in the US?

Richard Eno

It’s a little early to tell, Ian, right now, but we clearly – I think, directionally have seen a lot of activity in Europe. So at least from a very, very early read of the market and I’ll qualify it as such, because we’re really just – we are at the early stage of our first tranche of 100 target customers. There is directionally more activity in Europe and it’s hard to point out whether it has to do with the specific customers we’ve selected by region or it has to do with the attitude towards biomaterials or it has to do with the applications. But there clearly is a slight tilt in our mix towards Europe right now initially, but I think we will keep an eye on it over the coming quarters to see if it’s, call it, sampling versus a real trend.

Ian Horowitz – Rafferty Capital Markets

Great. Thank you.

Richard Eno

Thank you.

Operator

(Operator instructions) Up next is Laurence Alexander, Jefferies.

Lucy Watson – Jefferies

Thank you for taking my follow-up. This is Lucy Watson again. Just two quick ones. On food contact, do you expect to announce any customer agreements in the next maybe two to four quarters?

Richard Eno

I can say, Lucy, that we have a number of food contact customers in the queue in the development pipeline. It’s hard at this point to predict which one of those will come through. The group that has just been announced most recently, none of them are food contact requirements although Tecnaro is working with a food grade market, Mirel F1005, which is an injection molded food grade product. But we do have a number of food customers in the pipeline. It’s hard to predict which one will be out first. I would certainly expect we will be seeing something.

Lucy Watson – Jefferies

Okay. Another one of those tough timing questions, but maybe just first some more at least qualitative color. Do you have any I guess opinions on the timeframe or the amount of potential royalties coming out of the licensing agreement with BASF? And is this an exclusive licensing agreement or are you evaluating other agreements of this type? Would you be able to just maybe provide a little bit more color?

Richard Eno

Sure. The BASF license is non-exclusive, and we’d be happy to discuss licensing with other companies that may be interested in obtaining a license. And it is too soon to predict the amount of royalties that come from it. Clearly, we believe that the world of blending these materials is going to grow as certainly our materials in the market and others are coming to the market. And I think BASF, the largest chemical company in the world, seems to agree. So we think there’s some potential there, but it is too soon to predict the amount of royalties that would come from it. But we point to that as just indicative of I think we feel we’ve got a strong intellectual property portfolio, and this is one albeit small point that validates it. And we’re pretty happy about that.

Lucy Watson – Jefferies

Thank you.

Operator

And that does conclude today’s question-and-answer session. At this time, I’d like to turn the conference back to Rick Eno for any additional or closing remarks.

Richard Eno

Thank you very much. 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 for each of our Metabolix platforms. We anticipate much more progress across each of these business areas in the coming quarters, and we look forward to keeping you informed. Thanks again for joining the call and I wish each of you a very nice evening. Thank you very much.

Operator

Ladies and gentlemen, that does conclude today’s conference. We would like to thank you all for your participation. And have a great day.

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