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Verenium Corporation (NASDAQ:VRNM)

Verenium Completes $37 Million Sale of Certain Assets to DSM Call

March 26, 2012 04:30 pm ET

Executives

Jeff Black - SVP & CFO

Jamie Levine - President & CEO

Analysts

Laurence Alexander - Jefferies

Operator

Good day ladies and gentlemen and welcome to the Verenium closes strategic transaction conference call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). I will now like to turn the call over to Jeff Black, Chief financial Officer. You may begin.

Jeff Black

Good afternoon and thank you for joining our call to discuss the transaction we announced this morning with DSM. I'm Jeff Black, Chief Financial Officer of Verenium and with me today are Jamie Levine, our President and CEO; and Janet Roemer, our Chief Operating Officer will be joining us for Q&A.

Before we begin, I would like to advise you that this discussion will include certain statements that are not historical facts and are forward-looking statements that involve a high degree of risk and uncertainty. The statements relate to matters such as our strategy, future operating plans, markets for our products, partnering, collaboration activities, public policy, financing, future financial performance and technical and business outlook. 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 report on Form 10-K for the year ended December 31, 2011.

These forward-looking statements speak only as of the date hereof. I will now turn the call over to Jamie.

Jamie Levine

Thanks Jeff and good afternoon everyone. Thanks for joining us on the call. This morning we issued a press release announcing that we had completed the sale of certain assets to DSM and I would like to begin by sharing a few takeaway points on this transaction.

First, we have always claimed to have uniquely high-performing products and this deal demonstrates the value behind that claim. Second, our ongoing business in each of the animal feed, grain processing and oilfield service industries is based on other uniquely high performing products. This transaction provides the resources to focus on developing all of those businesses and others. Third, we often focus our commentary on our products, but the reality is that our use of fast biodiversity libraries and the proprietary tools we use to create products from them are the real stars of the show.

To date we have created nine commercial products from these libraries without ever having a product fail the regulatory process. Simply put, our future is not based on the risky development of new technology, but rather using our fully develop capabilities to produce more and more new products from our current and new end markets. Finally this transaction provides the resources necessary to unlock substantial value for shareholders. From these three sources, our commercial products, our late stage pipeline and our product development capabilities.

Let me now walk you through the terms of the transaction and what they mean for our business going forward. DSM is acquiring certain commercial and pipeline products and assuming the costs associated with those assets for a total consideration of $37 million. There are three primary components of the assets we sold to DSM. First; DSM will purchase our oilseed processing products and pipeline candidates and assume our partnership contracts with Bunge, Alfa Laval, and Desmet Ballestra.

To be clear we have always believed that this oilseed processing business was an important demonstration that Verenium is one of the top enzyme development companies in the world. However the reality is that the global infrastructure in China and Latin America required to fully realize the potential of this business is something a global player like DSM can more readily provide. At times we have addressed these limitations through partnerships such as our highly successful relationship with DuPont which enables the worldwide sale of our lead product, Phyzyme phytase.

But in this instance, we have decided to sell rather than partner given the compelling nature of the transaction terms. The second element of the transaction is our alpha-amylase and xylanase products, for use mainly in the food and beverage area. Verenium retains the right to these products in markets outside of food and beverage and may also introduce new enzyme products into the food and beverage market going forward.

And third we will use proprietary techniques to create new biodiversity libraries that can be accessed by both DSM and Verenium for the purpose of identifying new product opportunities. This transaction does not affect Verenium’s existing biodiversity libraries for our own purposes with partners. We believe these libraries are the most comprehensive and robust in the world.

I will now turn the call over to Jeff to provide more details around the financial impact of the transaction.

Jeff Black

Thank you Jamie. This transaction with DSM gives Verenium a stable capital structure that will enable us to not only retire our remaining debt, but also to take advantage of the opportunities to grow revenues with a continued focus on profitability. We are especially pleased that we raised this necessary capital without issuing shares, maximizing value for our current shareholders. As a reminder as of the end of 2011, we held $28.8 million in unrestricted cash and $8.2 million in restricted cash. As a result of this sale to DSM and after deducting transaction and related fees and assuming we retire our debt for cash, we expect our unrestricted cash balance immediately following our debt retirement to be in the $20 million-$22 million range, in addition to $5.7 million in restricted cash.

We expect to release updated financial guidance for 2012 at our first quarter conference call in May and we will issue pro forma financial statements later this week that show the impact of the transaction with DSM on our 2011 results. But I would like to take a few moments to provide a high level overview of the expected financial impact of our sale to DSM.

In terms of revenue. the sale of these assets to DSM represents approximately $7.5 million or 13% of 2011 product revenue. Under our agreement with DSM we will continue to manufacture these products, although sales of the products we will be supplying to DSM and related revenue will be at a lower margin. This arrangement will enable us to fully utilize our contracted manufacturing capacity at Fermic.

In terms of expenses this divestiture of the oil seed business will enable us to avoid the costs of creating infrastructure required for the global expansion of this product line. In terms of capital expenditures this transaction will have no fundamental impact on the CapEx required to complete the build out of our new facility in San Diego, which includes our R&D automation and bio-process development labs.

In addition, we are continuing to make investments in active projects for manufacturing improvements at Fermic, some of which we expect to come online in the second quarter. And to provide a little more color as to where we are on our CapEx to-date through first quarter, our 2012 CapEx spend we expect will be in the $3.5 million to $4 million range. We look forward to providing you further updates on our financials over the coming weeks and I will now turn it back over to Jamie for concluding thoughts.

Jamie Levine

Thanks Jeff. I would like to emphasize the impact of this transaction on our strategy. Simply put there is no impact. Verenium’s core capabilities are not affected by this transaction and so the mission remains on track. Our current eight commercial products generated around $50 million of revenues in 2011 and they target $1 billion of market opportunity. Our track record with these products in highly competitive markets like poultry feed and fuel ethanol and the opportunity of our environmentally, friendly, product for the fracking process in oil & gas, demonstrates we have significant opportunities for growth.

Regarding the products we will develop in the future, we have no single model for how we approach an end market. At times we may partner as we have an animal feed and at times we may sell directly to customers as we do in core ethanol. One side benefit of the DSM deal is that, based on the feedback we have had so far, our financial stability as a result of this deal makes us a more attractive partner for development projects because there is no longer the risk of the debt hanging over the company.

I now like to comment on the most important component making all this happen, our people. Over the past 18 months our employee base grew from 70 to 100 people. Even with the uncertainty of the past several months, I am honored to say that the powerful belief that our people have in our mission, has meant we have had no significant attrition, giving us a motivated and excited team today. As a result of this transaction, eight of our employees will be joining DSM, creating a stable transition for the business.

Looking forward, here is what you can expect from us in the remainder of 2012. We expect to grow revenues from our strong product portfolio. We expect to develop new adjacencies, which is our term for taking our current products and launching them into new industry areas. We expect to provide more clarity on the depth of our product pipeline to position us for future growth.

From a manufacturing perspective, we expect to complete a series of process improvement at Fermic to increase product supply and reduce product cost. From an operational standpoint, we expect our pilot plant and robotics lab to come on line this summer. These assets will not only support the development of our pipeline products but also to optimize the manufacturing of our current commercial products. And through all of these objectives, we will continue to consider partnerships as a means for accelerating opportunities across the business.

As previously announced over the past several months, we have explored a number of alternatives and can only say that having evaluated all of the options; we believe the transactions we announced this morning provides the resources we require and represents the best way of creating value for our shareholders.

I would like to conclude with a comment on our market valuation. As I said on previous calls, I continue to believe we are a business that should be valued today at a multiple of our 2011 revenues, based on our products, our pipeline and most important, our demonstrated world leading technology, which allows us to create repeatedly products with the type of value demonstrated today. Looking at our current market value and net cash position and the anticipated retirement of our convertible notes for cash next week, I look forward to announcing future partnerships and business performance that will bring that value into sharp focus.

With that, we will open up the call to your questions. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Laurence Alexander of Jefferies. Your line is open.

Laurence Alexander - Jefferies

I guess, first question would be, can you give us just a very quick snapshot of the embedded aggregate value of the various deals you’ve done to get to this point and some of your deals have had embedded value separate from the cash proceeds and I am wondering if you could just give a little bit of perspective on that and what that tells you about the value of the rest of your pipeline?

Jamie Levine

Sure. I think that as I commented, we don’t tend to have a single approach to partnering. So when you look at some of the partnerships that we’ve done in the recent past, they all tend to have, and because we’re going to market with products that are already advanced to certain stage of development. It means that often when our partner comes in, there is a cash component, which effectively creates kind of a catch up so to speak. And so when we announced the transaction to develop new animal feed enzymes with Novus International last June there was a guaranteed upfront component of around $ 5 million.

Similarly in January we announced the transaction with Tate & Lyle where that was for an existing marketed products. So that was not a product that we are developing but rather one that we have already been marketing and that involved certain guarantees around a $1.5 million for the product as well as a backend royalty for that product.

I think Laurence it is difficult to try to put together one number, because so many of these things are in different stages of development and involve different time line for the future. But in general when you look at each deals every time that we announce something we argue that it demonstrates that there is just a unique value in the products that we bring and part of what we thing enables us to get those kind of terms is the scarcity value. The fact that we are really the one independent company that is looking to partner in the industrial enzymes space as a core part of the strategy and so that enable us to strike these type of partnerships repeatedly.

That is different than the type of deal we are talking about today with DSM where they said before it is more of a sale and I wouldn’t think that that’s likely to be a core part of our business model going forward. Its because of obviously special circumstances they were in now, but going forward as we look at partnerships we are likely to see some more things along the line of what we did with Novus International last June, which involved an up front payment and then the ongoing co-funding of development and the sharing of operating profits into the future.

Laurence Alexander - Jefferies

And just a second question the new adjacencies that you mention as a possible extra news flow in the balance of 2012, is that new adjacencies for the eight products that you have in pipeline or are you trying to flag the actual pipeline might if you want two extra additions as well.

Jamie Levine

I would actually look to signal both. I would like to signal both that first adjacencies in the way that we use the term is specifically relating to taking products and applying them to new markets, so we did just announce in January that we were taking our alpha-amylase for corn ethanol and applying it towards the oil and gas drilling area as a crop that has value in the removal of filter cake.

So I think we see other opportunities for our existing products through the adjacency process, but also I mean as a result of the transaction with DSM, we have resources today that we will be able to redeploy in terms of bringing products to market and we have partners who are interested in exploring new areas for us to develop beyond the three that we have today of animal feed, grain processing and oil and gas. So I think that for us 2012 is about more announcements around both of those opportunities.

Operator

Thank you. (Operator Instructions) We have a follow-up question from Laurence Alexander of Jefferies. Your line is open.

Laurence Alexander - Jefferies

Just to take advantage of this and can you -- for a long time your focus has just been dealing with the debt overhang. Now that that's cleared can you give us some sense of your priorities for cash flow and particularly your view about any future use of leverage, what your philosophy will be?

Jamie Levine

Well, I think the five year anniversary is of issuing the debt and the convertible that we are going to retire in a week is coming up and I think that as a focus new convertible debt is certainly not likely to be something that we can embark on in the near future. I do think that with some equipment financing and some working capital line, somewhat I would call far more plain vanilla and manageable debt that may be a possibility. If we think that’s just more efficient way to approach capital needs, but certainly nothing along the lines as the converts that we have outstanding are in expected future.

I think fundamentally what we are focused on is maintaining flexibility for the company and I think that’s one thing that the convert did not allow. And as I said, one of the most powerful elements of the convert has been the reaction from potential partners who now see as far more sustainable given the fact that we have the ability to control our destiny and to finance the company with equity and the cash that we have on the balance sheet, the way that we have right now.

So I think that with this transaction we see ourselves as having the resources we need for the foreseeable future. I think that as we look out into the future, our focus is going to be on business performance and partnerships. And we think that certainly we have been very careful in terms of how we think about any dilution to shareholders and this deal I think is a great outcome, as Jeff said we haven’t issued any shares in order to fund the capital needs that we have now. But obviously, as we go forward, looking to share cost with partners and looking to develop products with partners to increase revenues, is certainly the core focus.

Laurence Alexander - Jefferies

And then not to put you on the spot ahead of the quarterly call, but just doing a very rough cuts based on your prior comments about the amount of working capital needed to get various other products launched and to support sales growth going forward. It looks like is you should now have the sufficient balance sheet to get to profitability. And is that without even needing any leverage, is that fair or have your working capital assumptions changed over the last year or so?

Jeff Black

This is Jeff and what I will say and obviously you are right, we have not provided any forward guidance, but we have said and continue to say that growing revenue and focusing on profitability continues to be a mantra of management. We’ve not updated guidance and we don’t plan to update guidance until our May conference call.

Operator

Thank you. There are no further questions at this time. I would like to thank everyone for participating in today’s conference. This concludes the program. You may now disconnect. Good day.

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