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Executives

Kelly Lindenboom – Vice President of Corporate Communications

James Levine – President and Chief Executive Officer

Janet Roemer – Chief Operating Officer

Jeffrey Black – Senior Vice President, Chief Financial Officer

Analysts

Rob Walker – Jefferies & Co.

Verenium Corporation (VRNM) Q1 2011 Earnings Call May 12, 2011 5:00 PM ET

Operator

Thank you for holding. Welcome to Verenium’s first quarter 2011 financial results conference call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session to follow. Please be advised that this call is being taped at the Company’s request.

At this time, I would like to introduce your host for today’s call, Kelly Lindenboom. Please go ahead.

Kelly Lindenboom

Thank you for joining Verenium's first quarter 2011 conference call. I'm Kelly Lindenboom, Vice President of Corporate Communications. With me today are Jamie Levine, our President and CEO, Janet Roemer, our Chief Operating Officer, and Jeff Black, our Chief Financial Officer.

The agenda for today's call is as follows: First, Jamie will give an update on the current environment for our commercial products and trends we see for future business initiatives. Janet will then discuss commercial operations including Q1 product lines performance and key initiatives driving continued growth and success. Jeff will then summarize our financial results for the first quarter of 2011, and we will then take your questions.

Before we begin, I would like to advise you that this discussion will include certain statements that are not historical facts and our forward-looking statements that involve a high degree of risk and uncertainty. These statements relate to matters such as our strategy, future operating plans, markets for our products, partnering and collaboration activities, public policy and financing activities, technical and business outlooks.

The company’s actual results may differ materially from those projected in such forward-looking statements. Factors that could cause or contribute to differences include, but are not limited to, those discussed in our filings with the SEC including, but not limited to our reported on Form 10-K for the year ended December 31st, 2010. These forward-looking statement speak only as of the date hereof.

I will now turn the call over to Jamie.

James Levine

Thanks, Kelly. Good afternoon everyone and thanks for joining us on our first quarter call. On our 2010 earnings call, we lead out a vision for Verenium’s future based on the business we are today as a result of the transaction we completed with BP last fall. And today, I would like to provide some contexts for the strong first quarter performance Janet will discuss later on the call.

I’d like to discuss three topics. First, that the current high commodity price environment is great for Verenium’s near-term growth. Second, that the outlook for growth and demand for food and transportation fuel continues to have an immediate positive effect on our current partnering activities which will generate medium term growth, and then finally that I believe Verenium has reached critical math, where the scale and the performance of the enzymes products we sell today, are validating our business model to become the third major broad-based industrial enzymes company.

Beginning with the current high commodity price environment, our strategy is to use our unique technology platform to create manufacture and market enzyme products that address customer's unmet needs. Our development work always begins with the customer and starts with identifying the performance characteristics the customer will value.

Across our three main product lines of animal health and nutrition grain processing and oil seed processing the pressures of rising commodity prices are causing our customers to look for opportunities to become more efficient.

Customers who are traditionally more risk diverse are showing greater willingness to try new solutions like the products Verenium sales to lower their costs. The current operating environment makes our higher performing enzymes look increasingly attractive. For example Fuelzyme, our product for corn bioethanol production reduces enzyme cost per gallon, so high corn prices improve the value proposition of switching to our product.

Similarly Purifine our product for soya oil degumming increases oil yield by 1.5% to 2%. So the high price of soya oil increases our value proposition and reduces the payback period to the small capital investment required to use our product.

Moving to my second point, in addition to the growth, we believe we can achieve from our currently marketed products, we will generate a second wave of growth by commercializing the products in our late stage pipeline. One of Verenium’s core strength is our creativity when identifying and structuring relationships with partners.

Typically we work with partners either to identify high-value unmet needs for our market or to act as a distributor for our products, or both. Currently, we are taking the same approach for our pipeline products as we have in the past to identify partners who can accelerate the commercialization of our products. Given our focus on enzymes to provide efficiencies for the major global challenges of food and fuel production, the reception we are getting from potential partners has been highly favorable.

We offer not only a best-in-class technology suite, but also the track record to show we can bring products to market. In effect, our current nine commercial products not only provide an important source of near-term cash flow, but also an effective marketing tool for potential partnerships. For example, animal feed phytase is represent 10% of the $3 billion industrial enzymes market and Verenium created two of the four top performing phytase products currently sold.

Turning to my third topic, earlier this week in Toronto, the Industrial Biotech Industry Organization held at annual three day gathering. The CEO of the large multi national company observes that for decades industrial biotechnology has developed products to serve multiple industries achieving high levels of market presence and of profitability, but that the industry today is poised to unleash a flood of innovation unlike at anytime in the past.

For Verenium, I also feel that we have reached critical mass, where our commercial products, our sales capabilities, our manufacturing capabilities and our partnering activities are showing the benefit of our current management focus on growing our company to reap the rewards of 15 years of prior technology development.

By targeting markets that today represent well over $1 billion of existing enzyme revenues, and are growing 6% to 8% per annum, we see significant opportunity for our products, which have industry leading performance characteristics to drive.

Before I hand the call over to Janet, I’d like to remind everyone that we will be hosting an Analyst and Investor Day in New York City on June 7th. We plan to discuss our outlook for the company including the growth drivers and goals for the business over the next several years. This event is open to institutional investors and financial analysts and will be webcast live and a replay will be available on our website. Please contact, our corporate communications team for further information.

I look forward to continuing to update you on our progress in the coming months. And with that, I’ll turn the call over to Janet.

Janet Roemer

Thank you and good afternoon. As Jamie mentioned, the first quarter of 2011 was a solid quarter for Verenium and I’m pleased with our overall performance to date. Today I will review our first quarter progress in terms of the three major themes we focus on from an operating perspective in the effort to grow and strengthen our business in 2011 and beyond. These themes are first revenue and our ability to increase and diversify sources of revenue.

Second, driving financial performance, through improved gross margins, with focus on pricing and lower cost of goods. And third, our focus on the future and assuring supply to support our growth, developing pipeline products and establishing key partnerships to accelerate their commercialization.

I will begin my comments on revenue by reviewing the progress made in each of our three main product lines in the first quarter.

Let me start with the animal health and nutrition business and our leading product Phyzyme phytase. In the first quarter of 2011 we saw somewhat lower Phyzyme sales on a quarter-over-quarter basis. It is not unusual to see sales moderate following a strong quarter as we experienced in the fourth quarter of 2010.

In the broader picture, animal feed enzymes in general and phytase enzymes in particular continue to be a strong growth segment of our industry. We expect the nutritional benefits they provide and continued high grain and inorganic phosphate prices to drive demand growth for phytase enzymes.

Overall, animal health and nutrition represented 62% of total product revenue in the first quarter of 2011, compared with 69% in the same quarter last year. The continuation of this trend is conformation that we are on track with our efforts to diversify by increasing the ratio of non-Phyzyme sources of revenue in our product portfolio.

That being said, we are still very pleased with the performance of our foundational products and its continued strong performance in the industry.

I would now like to turn to our grain processing product line. As a reminder, we offer four enzymes to this industry segment. Fuelzyme alpha-amylase, Deltazym GA L-E5 glucoamylase, and Xylathin Xylanase, which are used in the production of bioethanol for fuel and Veretase alpha-amylase in the production of beverage alcohol.

We are pleased to report that the first quarter revenue from these products grew by 26% over the first quarter of 2010. This growth was primarily due to the addition of new customers for Deltazym as well as growth of sales in Europe particularly on Xylathin.

Grain processing enzymes represent an addressable market of $400 million. So we see plenty of opportunities for growth in market share with our portfolio of high-performance products.

I will now turn to our third industry segment and our novel Purifine phospholipase C enzyme, used in the degumming step of oilseed processing. I'm pleased to report that despite a strike by port workers in Argentina and the first quarter being a tail end of the soybean growing season in South America, Purifine sales continued to grow. This is duly in part to the successful implementation of the Purifine enzymatic degumming process at Terminal 6, the world’s second largest soybean facility in terms of crushing capacity.

We expect the growth of Purifine will include new customers in North America and China, which combined with Argentina and Brazil represent over 90% of the world soybean crushing capacity.

We are pleased with the steady progress made over recent quarters with Purifine and it is clear we are making inward business in this industry which has the potential to become a new major end use market for enzymes. I will now turn to our review of the second major theme I mentioned earlier, driving financial performance by improving gross margins through a combination of pricing and manufacturing cost.

I will start with pricing. In the first quarter of 2011, we were able to hold or increase prices because we continue to demonstrate the value of our premium price products and superior service to our customers. And if we can’t we don’t do their business. For example, in the first quarter one of our new Fuelzyme customer estimated they will face $2 million on an annual basis from lower sulfuric acid use, over and above the savings they will receive from lower enzyme dosing due to Fuelzyme’s broader page operating range when compared with the competition.

In addition to the superior performance offered by our enzymes, we offer support to customers by our product technical support team in San Diego. In the first quarter we added to our capabilities by hiring an experienced engineer and former ethanol plant manager to provide technical support to our grain processing field sales team. His expertise has already been credited by one of our customers for having significantly improved their production economics.

In addition to pricing, another key component to improving financial performance is reducing the cost of goods. As mentioned on prior calls we have been and we’ll continue to exclude a series of projects at Fermic our manufacturing partner in Mexico City. These projects require relatively minor amounts of capital directed at milling opportunities and I’m happy to report that these projects have progressed according to plan throughout the first quarter.

In addition, we will strive for continual improvement in reducing the cost of goods. To that end, our VP of Manufacturing has instituted a process dubbed Primo, short for process improvement, management and optimization. Primo begins with a comprehensive announces of historical manufacturing data for a given product to identify steps in the process for further analysis.

Examples of historical data includes time constraints from equipment limitation and our process constraints from non-optimal run parameters. And from there we analyze raw material usage and are then able to categorize the potential solutions as the interchanges requiring capital investment or changes which are procedural and for which we can develop a faster response.

As an example, we recently utilized Primo to evaluate our manufacturing process for Purifine. In addition to the capital projects well underway for the bottlenecking of this process, Primo analysis reveal the potential to improve yields by making one minor instrumentation change in fermentation and a procedural change in downstream recovery, which should not require capital.

Early results from these changes are promising and while it will take experience to confirm and quantify the benefits and memorialize the changes for our standard operating procedures indications are that these changes will translate into cost improvements. By continuing to institute procedural and capital improvements we expect the impact of these efforts for the remainder of the year will result in greater yield, reduce cost per telegram and improved product profitability.

Finally, I’d like to turn to our third major scheme for future. And what we are doing now from an operation standpoint to secure our future as the next leading industrial enzyme company. The first part of this scale needs to supporting product line growth to capitalize opportunities to expand capacity. We look for near-term incremental expansions with the highest return on investments and faster implementation time.

These expansions can be achieved through manufacturing yield improvements and modest capital investments and Fermic as I just described. In addition, we continue to optimize five-line manufacturing globally among three regional sites at Fermic and through a contract manufacturing relationship with Danisco, which frees up capacity of Fermic to support the growth of our other products without further capital investment.

The second part of our theme of positioning the company for future growth is the progression of product candidates through our R&D pipeline. In the first quarter, we continue to execute the (inaudible) of detailed project trends, notably in animal feed and oilseed enzymes. And as Jamie already mentioned, we are pleased with the progress in discussions with potential partners who could accelerate commercialization and market adoption of our pipeline products.

In conclusion, the first quarter was a solid quarter and I’m pleased with the progress made on revenue diversification, profit improvement initiatives and preparation for future growth.

And with that, I will now turn the call cover to Jeff.

Jeffrey Black

Thank you, Janet. And thank you everyone for joining us today. I’ll start with a review of our product revenue performance for the first quarter. Total product revenues for the first quarter of 2011 were $13 million, which is a 13% increase over the same period in 2010. This increase was driven primarily by increased market penetration of our products, targeted grain processing and oilseed processing industries, which we currently market to our direct sales force and various distributions for cooperative marketing relationships.

Our non-animal health nutrition product revenues grew to 38% of revenues in our first quarter and this is consistent with our objective to diversify our revenue concentration. Revenues for our animal health nutrition products for the first quarter increased to $8.1 million, which is a 2% increase over the same period in 2010 and decreased slightly on a quarter-over-quarter basis because of seasonality, which Janet has already discussed

As you might recall, our reported Phyzyme revenue is dependent upon manufacturing resources. With Phyzyme, we manufactured Fermic, we recorded the full value of manufacturing revenue plus royalty from profit share. The Danisco manufactures to a total manufacture relationship with them, we only record the royalty from profit share. And this is why growth in the gross profit line is a better indicator of the growth in this business, since the gross profit reflects in net contribution from our animal health and nutrition product line regardless of manufacturing resources.

The gross profit from this product line decreased of the prior year by approximately 10%, which is attributed to lower external sales reported to us by Danisco. However, we are still seeing steady demand for our Phyzyme product going into the second quarter of 2011.

Product revenues from our grain processing product line, which includes Fuelzyme, Xylathin, Veretase and Deltazym increased 26% to $3.9 million for the first quarter of 2011 when compared to the same period in 2010. And this reflects both a continued general recovery in the first generation ethanol sector as well as our ability to fully penetrate the market with these products.

Turning to product gross profit. In the first quarter of 2011, we generated gross profit of $4.9 million, a decrease of 2% over the same period in 2010, primarily due to a decrease in profit share received by Danisco. Overall, we are pleased with our level of gross profit in the quarter and anticipate we’ll begin to see further improvements in the second half of 2011 resulting from our efforts at Fermic.

In terms of our operating expenses excluding cost of sales and a $2.8 million restructuring charge, our total operating expenses decreased for the quarter ended March 31st, 2011 to $8.2 million from $8.5 million in the first quarter of 2010. The restructuring charge related to the close of our Cambridge office, several headcount reductions and the relocation of our field employees to San Diego. Additionally, in conjunction with the settlement of our noteholder lawsuit in March, we negotiated a reimbursement of legal fees of $1.1 million, which will expense during 2010 for defense in this lawsuit.

This reimbursement is included as an offset to SG&A expenses in the first quarter of 2011. While our continuing operating expenses decreased over prior year, our R&D cost increased by $1.2 million, which reflects a focus on investment in accelerating new products to the pipeline and at the same time we’ve been able to reduce our G&A costs.

Finally, regarding our cash position, we ended the first quarter with $26.2 million in unrestricted cash, an additional $5 million in restricted cash connected to the BP transaction. And before I wrap up, I would like to briefly update you on our current debt balance. As we previously stated, one of our corporate goals in 2011 is to address our debt.

Over the course of the quarter, we continue to make opportunistic repurchases of our notes. Due to the close of our transaction at BP, we retired more than $50 million in convertible notes. We ended the first quarter with a debt balance at face value of $34.2 million, which is a much more manageable level for our company in our stage of development.

And as you’re probably aware, our noteholders have a put option on this step in April 2012. And as such for the remainder of 2011, we will continue to explore a number of options we have to address the remainder of our debt balance while sustaining the appropriate level of investment in the business.

At this point, I’d like to turn the call over to the operator to take your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first questionnaire in queue is Laurence Alexander with Jefferies. Please go ahead.

Rob Walker – Jefferies & Co.

Good afternoon, this is Rob Walker on for Laurence.

James Levine

Hi, Rob.

Janet Roemer

Hi, Rob.

Rob Walker – Jefferies & Co.

Hi guys. I guess first, any kind of initial indication or sketches, themes that you’ll be addressing your Investor Day (inaudible)?

James Levine

Sure. I think, it’s Jamie here, Rob. So I think that on this event, we’re looking to a take a bit more time to be able to talk about the pipeline and really the drivers of future growth as a way of articulating what we see coming behind the nine commercial products that we have today. So I think it’s talking about how we’re applying the core technology to create new products in new industries.

So I think we will be laying out some milestones where we can tract against and we’ll look to be more specific on the date. But those are the general approaches we’re taking to what we’re looking to talk about on the June 7 meeting.

Rob Walker – Jefferies & Co.

Okay. Thanks and then what do you expect, what do you see as a maximum tolerable cash burn. Why you guys are investing in new products to get them to market?

James Levine

Actually it's a philosophical matter, the debt is not due until April of 2012 and certainly with the cash that we have on the balance sheet today, we are looking to invest and looking to work with partners to co-invest in developing new products to bring to market. So I think that right now after the BP transaction, we’ve obviously been able to manage the burn down considerably, but on the other hand we are looking to invest in a new generation of products that we'll be bring to market over the coming years.

So I don’t know that we are specifically looking to target an absolute level of burn based on the debt level, but I think we see those as really disconnected in the end. We need to invest for growth, but then we also recognize that we need to address the debt as Jeff commented earlier. So I think right now we feel like we're prudently investing, so R&D cost has gone up, but we have been able to manage G&A costs very aggressively, and I think that’s the balance that we are going to look to continue as we move forward.

Rob Walker – Jefferies & Co.

Okay, thanks. And then on the product side on Phyzyme and Purifine, just how are volumes tracking sequentially in those products and can you give us an update on the competitive environment in phytase and then an update on how many plans are currently in the implementation phase of Purifine?

Janet Roemer

And so in terms of Phyzyme, I mean the global growth rate for phytase enzymes is between 6% to 7% per annum. We think there is a bit of a slow down in Q1 as evidenced by what we've said as well as others have said in their comments on the market, so I think there was a big uncertainty in the fourth quarter, but there is every reason to believe that that growth is still a valid type of growth target for the market.

In terms of Purifine, we’ve had implementations at four plants. We have five plants in stages of implementation and what we would call a committed stage of implementation and the numerous others under discussion. In fact, I discussed that recently from a trip to Chian, where I met with a number of interested parties there, who'd all heard about the product, we are familiar with it, and I think we had a very good response to our story and to our engineering partner Alfa Laval's involvement in those discussions as well. So I think we are going to see some nice activity there.

Rob Walker – Jefferies & Co.

Okay, thanks. And then I could just squeeze a last one in. I guess I'm not sure if you dotted all the Is and crossed the Ts on the cash flow statement, but just curious what cash flow from operations was in the quarter, if you have it handy. And are you maintaining your prior 2011 guidance this time or should we wait for the June 7, Analyst Day? Thank you.

Jeffrey Black

So this is Jeff. With respect to your second question, we are not updating financial guidance at this time. And in terms of operating cash flow, I do apologize we don’t have that number in front of me. We will be publishing our 10-Q shortly and that will be on file probably tomorrow.

Rob Walker – Jefferies & Co.

Great. Thank you guys.

Jeffrey Black

Thank you.

Operator

Thank you sir. (Operator Instructions) Presenters there appears to be no additional questioners in the queue. I’d like to turn the program back over to Ms. Lindenboom for any closing remarks.

Kelly Lindenboom

Thank you, very much for joining us today. We look forward to update you on our continued progress. Have a good evening.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s program. Thank you for your participation. And have a wonderful day. Attendees, you may disconnect at this time.

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