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Executives

Adalia Rodriguez - VP of Integrated Corporate Relations

Rick Eno - President and CEO

Joe Hill - CFO

Oliver Peoples - Co-Founder and Chief Scientific Officer

Analysts

Pamela Bassett - Cantor Fitzgerald

Brian Millberg - Piper Jaffray

Michael Carboy - Signal Hill

Laurence Alexander - Jefferies

Thomas Stickley - Signal Hill Capital

Jinming Liu - Ardour Capital

Metabolix Inc. (MBLX) Q1 2008 Earnings Call May 7, 2008 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Metabolix Incorporated First Quarter 2008 Earnings Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided to you at that time to queue up for questions. (Operator Instructions)

I would now like to turn the conference over to Ms. [Adalia Rodriguez], Vice President of Integrated Corporate Relations. Please go ahead.

Adalia Rodriguez

Thank you, Katie and good afternoon, everyone. Metabolix released first quarter financial results after the market closed today. If you do not have a copy, one may be found on the website at www.metabolix.com in the investor relations section. Making the presentation today will be Rick Eno, President and Chief Executive Officer of Metabolix and Joe Hill, Chief Financial Officer of the Company. They are joined by Oliver Peoples, a Co-founder of Metabolix and currently the 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 will refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition.

With that, I would like to turn the call over to Rick Eno, President and CEO of Metabolix. Sir?

Rick Eno

Thank you, Adalia. I would like to welcome all of you to the first quarter fiscal 2008 earnings call for Metabolix. It is a pleasure to be joining you on what is my first earnings call following my appointment as CEO in mid March. Over the last several weeks, I have had the opportunity to meet many of you on the call with us today and I look forward to meeting many more of our current and potential investors over the coming months.

Before I begin my discussion of the company's quarterly results I would like to thank Jay Kouba, who served as the company's Chairman, President and CEO, since May 2007. The last year was a pivotal year for Metabolix, and Jay's contribution to the development of our various platforms has been invaluable.

I am also appreciative the significant amount of time that Jay has spent with me, which has enabled a very smooth management transition. We are very pleased that Jay will remain on as Chairman of the Board, and look forward to his continued insights into the ongoing growth of Metabolix.

I would also like to take a moment to introduce and welcome Joe Hill, who joined Metabolix as Chief Financial Officer on April 8th. Joe is an ideal choice for managing the financial affairs of our company with experience across a diverse range of industries and global markets, which will be particularly important as Metabolix works with the growing number of international partners. I look forward to working with him as Metabolix moves closer to commercialization of Mirel and accelerate other platforms for growth.

In my first six weeks, I have spent a lot of time getting to know our investors, analysts, employees and partners. I reviewed all of our longer term technology programs including oilseeds, switchgrass and C4 chemicals. But most of all, I focused on the Telles venture, and the wide range of activities surrounding the commercialization of Mirel. I have met with ADM's Telles leadership, as well as representatives of six joint ADM-Metabolix teams, which are working on all aspects of commercialization of the business. These teams have almost daily interactions.

As part of my initial review, I also spent two days at the Clinton, Iowa site reviewing the progress of the construction. We will speak in more detail about the market development and construction activities later in this call. My conclusion from my initial review is that I am now more enthused than when I started about the potential for the firm. We are making excellent progress on the commercialization of Mirel, including advances in polymer performance and ongoing high interest by potential customers. We are also achieving our internal technology targets for our longer term platforms.

While I understand the external challenges of evaluating a company with along term time horizon for technology development, we will be working to provide more clarity in our progress as soon as possible, so that you can all appreciate the gains, which have been made.

We will now get into the details of the business. I will first discuss Mirel, focusing on the value proposition, market development activities, FDA food contact approval and the construction schedule. I will then briefly touch on our longer term technology platforms. I will then turn the call over to Joe, for a discussion of our financial results.

While we have talked about this in the past, I think it is a good time to remind investors of the value proposition that Mirel presents, which we are actively demonstrating to our existing and potential customers. Though there are other biodegradable plastics in the market today, Mirel is the latest generation, which offers many unique advantages.

Mirel biobased plastics combine the broad functionality and performance of petroleum based plastics, like heat and water resistance, with the broadest spectrum of biodegradability including soil, home and industrial compost, septic systems, wetlands and the ocean. We have targeted our market development activities towards specific segments, where the combination of these properties results in a unique offer.

These segments are packaging, compostable bags, consumer products, which include cosmetics and gift cards, consumer electronics, agriculture and horticulture, and green and water applications. For these reasons, we expect to command a premium price for Mirel by building a premium brand. Because our customers will be marketing with us, including co branding their products with the Mirel name, they are helping us to create value in the brands in terms of consumer awareness, preference, imagery and interests. Our ultimate goal is to evolve the Mirel brand as the Teflon or Lycra of the bioplastics industry, creating equity in the brand with innovative products at the forefront of sustainable biobased technology.

Now, on to our pipeline. We continue to grow and evolve our customer pipeline during the first quarter around our targeted segments that we are focused on in the near to intermediate term, with an addressable market potential in our target segments of approximately 2 billion pounds per year that is estimated to be growing at a rate of about 5% per year. The growth rate alone would fill our initial plant.

As we have done in previous calls, one of the ways we measure progress towards customer purchase commitments is to monitor the identified potential demand for each perspective customer application for the 2010 production year. I want to remind you that this provides a forward looking estimate of potential, which is used for internal purposes, and is based on discussions with and analysis of our customer prospects. This is not to be construed as an estimate of future sales or guidance on our expectations. Our customer prospects are not committed to purchase these amounts, nor have we received orders for these amounts.

During our last call in March, we reported that our pipeline related to non-food contact applications was about 63 million pounds, reflecting growth of 24% over a four month period. Since then, with the realignment of our development efforts to address the needs of our customers as well as our marketing efforts, we have grown this estimate of non-food potential demand for 2010 by 18% to over 74 million pounds.

It's important to note that the growth of 18% represents growth in the pipeline since our last earnings call of two months ago. Additionally, there is a large and emerging opportunity set that's not yet reflected in these numbers, and we look forward to providing you with some more insight as to those opportunities over time.

We are confident enough in the performance we are seeing both from our product development efforts and the customer interest across numerous applications that we are now beginning to accelerate our commercial hiring processes. We continue to work towards achieving an indicted level of 2010 demand that is a multiple of the 110 million pound capacity of our commercial manufacturing facility. As we continue to focus our efforts around our greatest near term competitive advantages, we are confident that the capacity at Clinton can be sold out with non-food contact applications.

Now, let me spend a moment discussing the Clinton facility. As previously discussed, construction work on our Clinton facility had been impacted by this year's harsh Midwest winter. After reevaluating construction timing over the last several months, ADM recently announced that they expect product to be ready for shipment to customers in the second quarter of 2009.

I spent two days at the Clinton site in late April, and construction continues to progress very well. The plant is well laid out. It's adjacent to an ADM corn wet mill, which offers us access to integrated site services, as well as an adjacent source for corn, sugar, raw material. It also offers significant room for future expansion.

Nearly, all major equipment has been received on site, much of the structural steel is in place, and piping and utilities development is well underway. Shift supervisors, who will ultimately lead the day to day operations of the site, have been hired and their training will begin in mid May.

We have commenced regular discussions with the ADM manufacturing team on our initial product marketing mix, shipping and logistics options to customers and supply chain management. In essence, we are accelerating the establishment of the commercial business. You will be able to see recent pictures of the site in our Mirel plastics website.

Now, let me bring you up to date on the FDA application process. As you know, we are pursuing FDA approval for food contact notification, which will help us to further expand the market potential of Mirel. Since our last call in March we have conducted sample preparation and extraction studies following FDA protocols. We would also indicated on our last call that we intend to meet with the FDA during the second quarter to discuss our conclusions and present the detailed approach for food contact notification. Following this session, we intend to be in a position to submit our food contact dossier. After submittal, the FDA then has 120 days to recommend any additional testing.

While our guidance and overall timing is still broadly consistent with our previous call, we are still unable to precisely determine the timing of food contact notification as it is clearly dependant on the specific recommendations by the FDA. During our next earnings call, we expect significantly more information on this process. In summary, we remain confident that we will have food contact approval for Mirel, and we also remain confident that we can fill Clinton capacity with non-food applications.

Now, on to longer term platforms. One of my key initiatives as CEO will be to move some of the other longer term Metabolix technology platforms closer to commercialization. We have ongoing technical activities in several areas, including switchgrass, oilseeds and C4 chemicals.

In switchgrass, some of our recent accomplishments in transforming switchgrass for PHB polymer production were presented at the Biotechnology Industry Organization Conference in Chicago, last week. Further details have been approved for publication. At the same conference, progress made by our collaborator on sugarcane, the Australian Cooperative Research Center for sugar industry innovation through biotechnology was also presented.

Our oilseeds program is proceeding ahead with the partnership with the Donald Danforth Plant Science Center in achieving our internal technical targets. We have also established a Metabolix laboratory in St. Louis for the purpose of this research. While oilseeds are a longer term project, the commercial infrastructure for non-food applications of oil in biodiesel and oleochemicals is well developed.

Co-production of other valuable materials, including bioplastics promises to improve the economics of these industries. In addition, in oilseeds we have a number of other ongoing activities beyond technical work, including discussions with potential partners ongoing.

As I mentioned earlier, we have achieved a number of our internal technical milestones for these longer term platforms, and as such, we have the confidence to further build our commercial development capabilities.

With that, I will now turn the call over to Joe for a discussion of the financial results for the quarter.

Joe Hill

Thank you, Rick, and thank you all for joining us today. It's a pleasure to be here for my first earnings call as CFO of Metabolix. Before I discuss the financial results of the company, I would like to say how excited I am to be part of Metabolix at this important time in the company's growth. I look forward to working with Rick and the team as we bring Mirel to commercialization and advance other projects underway.

Now, on to the financial results. As most of you know, Metabolix currently manages finances, with an emphasis on cash flow. For the three months ended March 31, 2008, our net cash used in operating activities was $4.5 million, as compared to net cash used of $3.5 million for the comparable quarter in 2007.

We spent $400,000 for capital expenditures during the first quarter of 2008. Our cash burn rate associated with operating activities continues to grow and to track in line with plan. We expect our cash utilization will continue to increase quarter over quarter, as we expand our pre-commercial production, expand our sales and marketing infrastructure, as well as expand our research and development.

Our GAAP loss from operations for the first quarter of 2008 was $9.6 million, compared to a net loss of $6.2 million for the first quarter of 2007. As expected, our first quarter loss was greater than the cash used in operating activities. As we have discussed before, all of the payments we received from ADM are recorded as deferred revenue for GAAP purposes, and therefore, do not appear in our income statement.

The deferral of recognizing payments from ADM will continue until first commercial sales from the Clinton plant are reached. We also recognized non-cash stock-based compensation expense on a GAAP basis, which also leads to reported net loss exceeding cash used in operations.

Let me now give you some additional detail on the company's financial results for the first quarter 2008. For the three months ended March 31, 2008, revenues totaled $400,000, which was approximately the same as in the first quarter in the prior year. Revenues for the first quarter of 2008 include revenue recognized from sample sales of Mirel. We account for this in research and development revenue, which was a nominal $68,000 in the quarter.

As we grow the business, our expenses continue to ramp up. Total operating expenses increased from $6.7 million during the first quarter last year to $10 million this year. This primarily reflects increased expenditures for product development and pre-commercial manufacturing. It also reflects new hires across the board in R&D, sales and marketing and administration to support growing the business.

While we do not provide financial guidance, we think it would be helpful to provide some insight on certain matters that may be useful to investors. As noted above, we presently emphasize cash flow rather than GAAP net loss in our management of the company. Thus, the cash used in operations, a $4.5 million for Q1, is indicative of our current operating profile, excluding capital expenditures. However, as we mentioned earlier, we expect to continue to add to our headcount and other activities as we approach commercialization in Mirel.

Now, on to the balance sheet. Our balance sheet remains strong. On March 31, 2008 we had cash and short-term investments of nearly $105 million, and we have no debt. This capital should be adequate to build our sales and marketing infrastructure, conduct pre-commercial manufacturing and make necessary commercial formulation investments, and to expand our research and development to build the company.

In summary, we are pleased with the progress we made during the first quarter on the commercialization of Mirel with the increased interest by customer prospects.

With that, we will open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we'll go to Brian Millberg with Piper Jaffray. We'll go to Pamela Bassett with Cantor Fitzgerald.

Pamela Bassett - Cantor Fitzgerald

Hi. Thanks for taking my call and congratulations on the progress. A few quick questions. One, Rick, in your opening remarks introducing Joe; you suggested an increasing international focus. I wonder if you could elaborate on that. And also, does the current increase in customer pipeline reflect new formulations?

And last, with respect to the oilseed program, did I hear that you're confident in this opportunity in proceeding with commercial preparations, and what does that mean?

Rick Eno

Okay, Pam. Thank you very much. Good hearing from you. The first question on international, we continue to market and analyze the markets for Mirel on an international basis. In fact, last week we had a whole team off at the InterPack Conference in Dusseldorf, where I understand some 400 new leads came to them for potential applications of Mirel.

So we clearly have to start thinking about our approach in our preferred targets internally. We still see pursuing the same market segmentation that we've communicated to you, but we do see those applications broadly applying globally and we see some of the potential customers working with being global customers, which would imply that we'd be able to -- we'd want to be able to serve them globally.

So, clearly, we're beginning to think about the international equation and we're learning the markets and we're making ourselves having a presence in those markets to attendance of conferences and trade shows.

Pamela Bassett - Cantor Fitzgerald

400 leads is a lot.

Rick Eno

Yes, it's a lot. We constantly -- we get some what just short of 100 leads a month generally and we got a -- we usually get a big tranche, as we did last week, at the show.

With regards to the customer pipeline. I think -- I wouldn't say quite so much new applications, we're still focusing on those six market segments, but we continue to see expansion of the estimated volume from the customers that we had worked with, as well as adding new materials to that.

We haven't been broadly searching for more applications. We think we got the right ones in the right specific targets for Mirel. But we're seeing deeper penetration into those accounts, and expansion of some of the potential volumes from the customers that we're working with.

Pamela Bassett - Cantor Fitzgerald

Right, I think I'm hearing the answer, but I was referring to the formulation, rather than the applications.

Rick Eno

Oh, the formulations -- it's a good question -- good question, Pam. In developmental polymers, if you look at any polymer in its early stages of development, be it polypropylene or PET, these materials evolve fairly rapidly and we're seeing the same here as we're working with our developmental partners, we're continuing to identify what specific formulations work best in the given applications, and each week we're learning more.

So, in that sense, our base resins are relatively consistent, but the developmental process goes on, as we continue to understand how to tweak them to meet the specific needs of our customers. So, there continues to be a gradual evolution of the product properties as we're learning more and more about the markets.

Pamela Bassett - Cantor Fitzgerald

I guess what I'm getting at here is, I'm making a based assumption that each formulation will drive penetration into specific types of applications. So, right now we know that Target is creating Gift Cards from sheets. So, what I'm wondering is, if in this increased customer pipeline, does any of that reflect something beyond sheets? For example, injection molding or --?

Rick Eno

Oh, sure. Okay.

Pamela Bassett - Cantor Fitzgerald

Thin films, or --

Rick Eno

Okay, if that's the question, we have active developmental programs to cross sheet injection molding and film, and making good progress across all three. What I was describing was the developmental process within any given one of those processing applications.

So, we're well beyond sheet right now and we're actually to take the Target example, we're learning a lot about sheet and its performance, and continue to incrementally improve that offer as well.

Pamela Bassett - Cantor Fitzgerald

Okay. Great thanks.

Rick Eno

And your third question was on oilseeds?

Pamela Bassett - Cantor Fitzgerald

Yes.

Rick Eno

And, what does commercial activity mean? We have managed to achieve some of our internal technical targets in oilseeds and by commercial activity, I mean developing our business model for our oilseeds business, beginning to identify, which partners make the most sense to work with us, starting to have conversations, which we have been having with potential partners, and starting to understand the value that we can bring to an oilseeds venture. And that requires some work, and we're beginning to staff up in order to execute on that work.

Pamela Bassett - Cantor Fitzgerald

Okay. I have some follow-up questions, but I'll go back into the queue. Thanks.

Rick Eno

Thanks, Pam.

Operator

We'll go next to Brian Millberg with Piper Jaffray.

Brian Millberg - Piper Jaffray

Yes, can you hear me now?

Rick Eno

Can hear you, Brian.

Brian Millberg - Piper Jaffray

Excellent, real quick question, I was under the impression that your grant revenue was going to be significantly higher. Didn't you still have about 730,000 left on one grant, and 1.1 million that you were dividing up on a quarterly basis?

Joe Hill

If you can hold on one second please.

Brian Millberg - Piper Jaffray

Sure. I’m Sorry I don't know the names of those two grants, but -- and while you're doing that, in the past, you had been willing to tell us kind of numbers of customer, who were moving along various stages of the pipeline. Are you willing to give us any of those numbers this time around?

Rick Eno

Okay, on the customer question, we've moved away from giving numbers of customers, because it’s not as meaningful as indicative volume. Because we are in somewhat of a resource constrained state, and we don't want to see how many customers we can develop, we want the most strategically important customers, who are making a constant triage process of the customers that we -- of the opportunities that come our way.

So, what we're focused on is moving, as I mentioned, in a response to Pamela's question, deeper in developing breadth within customers, which is really what we would prefer to do, rather than add a whole services of additional customers at small volumes to our marketing mix. So, we've moved away from talking about numbers of customers and focused largely on the volume.

Brian Millberg - Piper Jaffray

Okay.

Joe Hill

Okay, and on the grant revenue, we do have about $2.3 million remaining in grants, but that's going to be recognized over a two year period.

Brian Millberg - Piper Jaffray

Okay. All right, I'll --

Operator

We'll go next to Michael Carboy with Signal Hill

Michael Carboy - Signal Hill

Good afternoon, ladies and gentlemen.

Rick Eno

Hi, Michael. How are you?

Michael Carboy - Signal Hill

I'm well, thank you. Couple of questions for you. Let's sort of step back to the issue of limit of pre-commercial production volumes as a way to give customers a taste so they can experiment with products. My sense is you've been somewhat bound by your ability to explore new product initiatives -- new customer initiatives by your early manufacturing capacities, or pilot manufacturing capacities.

Are you planning in your other initiatives, specifically in the oilseed arena to perhaps be planning a little bigger pilot facilities?

Rick Eno

Well, you're exactly right, Michael, that right now with Mirel commercialization our pilot facility clearly limits the amount of product we can source to customers. It causes us to be extremely specific about the type of applications and the customers we choose to work with. We're looking for highly innovative customers that are really understand the value proposition of Mirel.

I think the oilseeds venture; the answer to your question will depend on exactly what business model we end up choosing for that development and we really have not landed on one right now. So, depending on what model we choose, we certainly will take into consideration how we could potentially get an -- material to market the way wouldn't allow us to constraint as we're seeing in Mirel. But there's a whole range of different approaches we could take for oilseed. So, it's a little premature to comment on what kind of pilot facility we would use.

Michael Carboy - Signal Hill

Okay. And when you talk about tweaking formulation, I'm wondering if you can draw distinction for me in any quantifiable way as to what proportion of those tweaks are more, what I'll call manufacturing processing tweaks, or application engineering tweaks, rather than a basic polymer science tweaks.

Rick Eno

Yes, that's a good distinction, its very much -- its much more on the former as we're working with a company in injection molding or sheet, we have people out working with the converters and working on moving commercial processing throughputs to -- as fast as possible because that's beneficial to the converter. And it's much more like that than actually moving the base polymer, the formulation. So that's a very good insight.

Michael Carboy - Signal Hill

Perfect. Thank you very much.

Rick Eno

Thank you, Mike.

Operator

We'll go next to Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies

Good afternoon.

Rick Eno

Hi, Laurence. How are you?

Laurence Alexander - Jefferies

Pretty good, I guess. Two questions. First, can you give us a bit of an update on the various studies that might be released later this summer? I believe there's one coming out on the switchgrass platform, and I believe there was also an updated life cycle analysis. Do you have any sense of the timing on those?

Rick Eno

Yes, Ollie, are you on? You want to take that.

Oliver Peoples

Yes, I'm on. So, on the switchgrass, I believe that's accepted for publication. It will describe our first significant results in terms of polymer production directly inside the switchgrass slot itself.

On the other issue, the life cycle analysis, I think Bruce Dale was giving the first public presentation of the details of his analysis, I believe, this week sometime at the meeting down in -- I think its down in Louisiana, the big bioenergy meeting. And I think he'll be publishing that in the somewhat near future.

Rick Eno

Yes, that was presented this morning.

Oliver Peoples

So that was this morning.

Rick Eno

Yes.

Laurence Alexander - Jefferies

And then, just to help put some context for the switchgrass versus the oilseed. What yield would you need to be seeing in the switchgrass plans for you to describe it in the same terms as you've just described the oilseed project?

Oliver Peoples

So the switch -- it's not quite as straight forward as that, Laurence. The issue is, is that in the oilseed case there's a well advanced infrastructure and acreage potential that's sort of realizable. The complexity in the switchgrass is something everybody in the biomass, biofuel sector is understanding, it's really infrastructure does not yet exist in a meaningful way.

I think in terms of the numbers we've done and quoted in the past, based on the assumptions we were making around the engineering recoveries, yields, etcetera. We were sort of feeling comfortable that if we got any good north of 7.5% dry weight in the total plant, we would be at a very interesting position to get that technology off the ground commercially. I don't know that that's where we're at in the whole plan, but we've made considerable progress on the expression of PHB and switchgrass now.

Laurence Alexander - Jefferies

And then, I guess, lastly one other question on the technology side and then I'll jump back in the queue. Can you discuss a little bit the other companies that are trying to produce PHAs, whether in Asia or in Europe, and the different in the process economics? Because my understanding is they are using more primitive fermentation processes and so on, that they should give you a nice umbrella from a cost perspective.

Oliver Peoples

Yes, so -- we've never actually -- as I'm sure you're aware, we've never really revealed what our cost structure is. We probably won't do so now. Most of what we understand is going on, particularly China, relates to essentially fermentation processes, somewhat similar to the original Biopol technology, which Metabolix does not use, but in fact acquired that base technology from Monsanto a few years back.

And so we have very -- we have a very good understanding of the performance of that and we think that we have a significant advantage in the cost of manufacturing, and with our partner, ADM, the ability to scale way beyond this first plant, whatever decisions is made for that. So, we don't see that as a particular constraint.

The other thing that's very important to understand is that unlike other parties, Metabolix, actually doesn't make a single polymer. We make a family of these which allows us access to a very broad, if you'd like, polymer applications designs space. So our technology is much more broadly applicable. We believe we have a significant cost advantage, and we believe we also have significant advantages in processing as we go forward as well.

Laurence Alexander - Jefferies

Okay. I'll hop back in queue. Thank you.

Operator

(Operator Instructions)

We'll go next to [Thomas Stickley] with Signal Hill Capital.

Thomas Stickley - Signal Hill Capital

Hello, thanks for taking my question. My first question really has to do with customer applications for the quarter. I wonder if you could just provide a little bit of insight as far as how many applications you explored, what kind of -- how those ended up. Do you explore some that perhaps didn't pan out? And, if so, what those reasons were -- whether economics or product characteristic related, perceived value propositions?

And then kind of a third part is, what do you do with that information and how do you adapt those no-goes into a viable business?

Rick Eno

Thomas, its Rick. We've not provided specific information on exactly how many projects we have ongoing, and we're focusing on the volume number. But I can say, certainly, what I've seen is there is no one that I'm aware of significance that we're working with that we're not working with any longer due to any issues.

The people that we are working with are innovative and we're following a very iterative approach with the, just like we did with Target in the early stages of the Gift Card. So, if there are any setbacks -- if there are any, we work through and we continue to resolve them and move towards commercialization. So, the number of projects is not decreasing and none have really -- none of the serious ones have fallen out of our pipeline.

We've added a few, but the big jump up in volume has been largely due to getting deeper at existing customers, and getting more clarification on the market potential for those applications.

Thomas Stickley - Signal Hill Capital

Okay. Thank you. A couple more questions. As you get closer to planned operations, when and how do you plan at these financial disclosures?

Rick Eno

Sorry, you just cut out there, if you could repeat the question that'd be helpful.

Thomas Stickley - Signal Hill Capital

Sure, as you get closer to planned operations, when and how do you plan to adapt your financial disclosures in the quarter? Am I cutting out here?

Rick Eno

We're always looking at what we believe the right level of disclosure to provide the right level of information to all of our investors is. As we move more towards an operating model, where we believe that disclosing operations -- more operational financial information will be more meaningful, we certainly will be sharing with that.

As we said before, right now we think the most meaningful financial disclosures is some information on our cash flow, and as we get closer to commercial operations and get closer to recognizing our deferred revenue and other expenses, where our net income becomes a meaningful financial number, then we certainly will be sharing further financial information.

Thomas Stickley - Signal Hill Capital

Okay. One last question, as customers look to the greenness of Mirel for their prospected use, how do you address concerns about or rather questions about the full product lifecycle carbon footprint?

Rick Eno

The work -- I guess that it's a fairly complex question. The work that Dr. Dale has done has been really -- he calls it cradle to gate, so we have some fairly significant documentation on the environmental benefits from -- in this case, corn field to the time the product is shipped out of the plant.

I understand there were actually some questions this morning to Dr. Dale about how do you -- basically, to get to the point to answer your question, Tom, and that actually gets into exactly what is the specific use? Is it an application that is meant for immediate biodegradability, like a compost bag, or is it something that is a cosmetic case that could be around for a number of years?

So, the specific application would dictate the cradle to grave impact of Mirel. And what we'll be doing is talking to Dr. Dale about how we extend the analysis that he's done, which has been documented to the cradle to grave case, and hopefully be in a position to provide you some more facts around that when that analysis is complete.

Thomas Stickley - Signal Hill Capital

Okay. Thank you very much.

Operator

We'll go next to Jinming Liu with Ardour Capital.

Jinming Liu - Ardour Capital

Hello, everybody.

Rick Eno

Hi, Jinming, how are you?

Jinming Liu - Ardour Capital

Good, good. I have a couple questions related to competition. First, is how does the starch-based bioplastics compare to Mirel? The other one is actually a follow-up question. I noticed there are a couple other companies producing PHA using different feedstocks actually in the North America. Can you comment on that?

Rick Eno

Well, I'll take the starch based question and Ollie perhaps can take the PHA question. Starch-based materials typically are generally seen as a lesser performing material than Mirel, they do not have the -- generally the moisture resistance that Mirel will have. And, I think, that's clearly recognized by many of the customers, who are coming to us in cases, where near application would potentially take one into a moisture rich environment, and we're much more stable in that case. And, I think, we have a broader array of processing applications we can pursue than most starch based materials.

So, its really a -- there will be different markets that the starch-based materials go after, a different performance window, and we're seeing quite a separation in the marketplace, where we're not directly as, to the best of my knowledge, competing head to head with starch in many applications, and those that we're selecting are ones, where the Mirel properties are actually unique for those applications. Starch will be a less expensive material, and therefore typically and I would expect this to be true, fall into less demanding applications than what we're pursuing.

Jinming Liu - Ardour Capital

Okay.

Rick Eno

Ollie, PHA?

Oliver Peoples

Yes, on the other question. So, they're bit of a couple things. So, north America, there is a company, NOVAMER, I believe, is a [VC] backed operation up in somewhere in New York State using a chemosynthetic root to produce PHAs. I think it’s based on some modification of propylene oxide, or carboxilation or something like that.

But those synthetic PHAs really do not have anywhere near the performance of Mirel, because pretty much all of the chemical polymerizations have been done with beta-butyrolactones, typically give a variable molecular weight. And our experience has been that without molecular weights above a certain few hundred thousand, you really just don't get the performance, because the (inaudible) seems to play a major role and the actual use of the materials.

I am aware that there some basic research activities ongoing in universities in addition to that in North America, but I'm not aware of any other commercially driven or company driven activity at this point in time. Other than polylactic acid, which is an entirely different technology being developed, commercialized by NatureWorks the Cargill operation. So, that's really what I'm aware of. If there's another one, I'd be interested to hear about it.

Jinming Liu - Ardour Capital

Okay. All right and another thing is about FDA approval process. The news I heard was that the solvent you used in purification step are kind of toxic, that's why got you guys into the delay and got approval. Is that correct or not?

Rick Eno

Yes, I think the issue is there is -- as we've disclosed in earlier calls, there is solvent used in the recovery process, and the issue is just residual solvent in the product and, that's the issue. And then, the FDA looks at how those extracting studies indicate, what applications it could be used for. And we're also working on knocking that residual solvent level down quite -- to wherever we have to get to.

So, it was -- the question was more just -- the issue was more raised on residual solvent, than it was on anything else around toxicity or anything to that effect.

Jinming Liu - Ardour Capital

Okay. I have a couple different questions. One is, can you give us some ideas like how long its going to take for you to take a customer from they showed interest to a product development? What the time frame?

Rick Eno

Yes, it's a good question, and I think the way I think about it is there -- and I think this builds on Michael Carboy's question as well, is that there is only so far you can take a customer, when you don't have the resin available to give to them. So, if you figure that somewhere between one to two quarters -- say four months, four or five months, you can begin talking to customer about their needs. You can talk to them about the technology issues, you can begin to develop with them a product concept.

Once they get material, then it takes about -- anywhere between six months to a little over a year, depending on the nature of the application to allow them to produce it, to test it in its specific application. Usually, in the polymers world, there is some minor changes they would like to make to get the properties they want and sometimes there's test marketing, like Targets been doing. And, once that process is complete, they have a very good understanding of the market size, and that’s have able to very clearly predict their requirements.

So, the overall process can take anywhere between 12 months to a year. A lot of it depends on the specific application and how it's being used. Part of our strategy of course, is to select customers that we can scale with more rapidly than that. So, if a customer has multiple product lines and we're working with the customer on a single product line and they're comfortable with it and they understand it, the scaling is much, much faster than developing a whole series of product lines independently.

So, and there are other cases, where the opportunity to further displace incumbent materials with Mirel at a customer will allow us to grow rapidly. So, as we select customers, not only are we looking for their innovative nature, but we're looking at the scalability of those customers so that we can work with the shortest development time cycle we possibly can.

Operator

And we'll take a follow-up with Pamela Bassett with Cantor Fitzgerald. We'll go to Brian Millberg with Piper Jaffray.

Brian Millberg - Piper Jaffray

Yes, you mentioned on the switchgrass that I think, Oliver, you mentioned 7.5% dry weight was a goal for the plastic.

Oliver Peoples

Yes.

Brian Millberg - Piper Jaffray

Do you say something about the seeds earlier in the call? I must have missed that.

Oliver Peoples

The switchgrass seeds, no. In oilseeds I…

Brian Millberg - Piper Jaffray

Seeds, yeah oilseeds.

Oliver Peoples

We have not announced any specific target for the oilseeds, but I would, I guess, we just haven't done that yet.

Brian Millberg - Piper Jaffray

Okay.

Oliver Peoples

There wouldn't be a number so far away from the switchgrass number.

Brian Millberg - Piper Jaffray

Okay. And then, can you guys give us a little color on the number of employees and how fast you’re hiring is going?

Rick Eno

You can go ahead, and I'll follow.

Joe Hill

Yes, so to-date at the end of Q1, we had 81 employees. A year earlier, we had 60, so that was a growth of 21 employees year-over-year. We've mentioned that we are expanding. We are carefully looking at where we should be expanding, and we are prudently expanding our expense base. But we haven't given any firm indication as to where we think those numbers are going to go.

Rick Eno

But the two areas of focus for growth that I can see, moving forward in the near term will be commercial sales and development activities for our Mirel commercialization and business development or commercial individuals for our longer term technology platforms, based on the successes we're seeing in both sides that we feel we now are in a good position to begin to add capabilities to start to ramp up both of those.

Brian Millberg - Piper Jaffray

And then you mentioned this lab down in St. Louis, I was under the impression that you guys were going to be doing this with postdocs and there wasn't going to be much of an investment.

Oliver Peoples

Well, actually, just so we are very clear on this. So, what we are doing is we have an activity at the Danforth Center, where in fact scientists, including postdocs at the Danforth Center are recently working on this project funded by, actually the State of St. Louis.

We also have an operation at the Nidus Center, which is adjacent to the Danforth Center and our proposal is, I think, in fact I think we've hired both of them. We have two postdocs, and we adding two additional research scientists -- research assistants. So, that's exactly what the plan was and that's exactly what we're doing.

Brian Millberg - Piper Jaffray

And then, are you guys willing to give any more timing on the Clinton plant in terms of second quarter. I mean, are we just basically saying this thing is three to six months out from the original Q4?

Rick Eno

Yes, I think the best guidance we can give right now is product will be available for shipping to customers in Q2, 2009 and we have a very active dialogue with ADM around understanding critical path items for the plant, and if it makes sense to expedite certain components we will consider doing so. But we're working with them pretty extensively on that, but that's the guidance we're providing.

And just keep in mind that before a product gets shipped to customer there is a number of things that happen. The plant is mechanically completed, there is a commissioning step, there is initial material that's produced on a test basis. So, when we say product ready for shipment to customers in Q2, all those steps have been completed at that point.

Brian Millberg - Piper Jaffray

Okay. Thank you.

Operator

We'll go next to Pamela Bassett with Cantor Fitzgerald.

Pamela Bassett - Cantor Fitzgerald

Just two quick follow-up questions, one on the oilseed program, can you hear me all right?

Rick Eno

Sure can.

Pamela Bassett - Cantor Fitzgerald

Okay. With respect to the oilseed program and the business model there, are some of the considerations creating a completely proprietary product, versus partnering either on an exclusive or non-exclusive basis across the board or by co-product or maybe just as a manufacturing partner? Have you separated any of those possibilities yet?

Rick Eno

Pamela, we've considered those options and a few others, but we've not -- we're not at any point right now where we can say we've ruled anything out or we've selected a preferred model. We have very active partner discussions going, potential partner discussions going on right now if we choose to take that route, but we're looking at all options right now.

Pamela Bassett - Cantor Fitzgerald

Okay, thank you. And then, with respect to sugarcane, Ollie, I think you were talking about infrastructure versus no infrastructure and there is an advanced infrastructure for oilseed that makes moving that program forward commercially quite viable. Similarly, there's a structure for sugarcane, it's particularly in Brazil, and I'm wondering whether that program may become a commercial opportunity within the time frame of say, oilseed?

Oliver Peoples

Yes, I don't think so, but you're absolutely correct, the infrastructure is in place in a big way in Brazil, but also in Australia, where we're doing the actual R&D effort. The major difference is that the genetic engineering of sugarcane, like switch, they're very similar to switchgrass. Takes about, you can actually only do experiments pretty much on an annual basis.

Whereas with the oilseeds, we have a much faster, we can probably do four different experiments per year. So, the issue is really the growth of the plant, and that's the major restriction. So, I definitely agree that sugarcane probably is ahead of switchgrass, but I would say oilseed's ahead, is definitely ahead of both.

Pamela Bassett - Cantor Fitzgerald

Okay, great. Thank you.

Operator

We'll go next to Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies

Hello, I guess two quick questions. The first is on the productivity gains that you might be able to achieve at Clinton. To what extent would you be relying on next generation versions of your fermentation process, as opposed to de-bottlenecking the plant toward traditional chemical de-bottleneck?

Rick Eno

I think some of that, Laurence, will depend on exactly the constraints that we see on start up. And certainly when that plant first comes on we'll have a significant amount of product that will allow us to alleviate the constraint we're seeing in our custom development process, which is a good thing.

And then, as we get into selling that plant out, some of the approach will depend on what constraints we're seeing. I would expect that the recovery section may likely constrain us beyond the fermentation section of the plant. So, our initial techno, if that's true, and if that's the case when we see the plant start up, then our initial engineering efforts will be placed at working on de-bottlenecks and ways to get more capacity through the recovery section of the plant.

We're already, as I think many of you know, have advanced the fermentation technology so that we have things we can do best turns out to be a constraint as well. So, our approach will depend on exactly what constraints we see coming up. My initial expectation is it maybe first focused on the recovery section then fermentation.

Laurence Alexander - Jefferies

Then secondly, as you look at the learning curve involved with learning how to handle and process the PHA polymers, is your perception that it is easier or more difficult than other polymers that you're familiar with, or that you're familiar with companies having wrestled with?

Rick Eno

I've heard anecdotes from our customer base being quite pleased with processability. But I would certainly expect that when a material has been around for 25, 30 years, the converter base is going to be very comfortable with how that material runs through its equipment. PHAs are going to, will then require perhaps some slightly different conditions.

We're trying to get to a point, where there are very few modifications required to handle the material on conventional processing equipment. But at least from what we've seen, the processability should be similar going forward. There maybe cases, where it could be better, there maybe cases where it could be worse, but I think some of that's the nature of where we are in the development cycle of the polymer family.

Oliver Peoples

Just one point to add to that, Laurence, and that is that we have not seen, at any of our applications, any need to actually install any new equipment. That's basically how you operate that equipment.

Rick Eno

That's exactly right.

Laurence Alexander - Jefferies

Okay, good. And then just lastly, on the comment about the higher molecular weight in the Mirel PHAs, that, if I remember properly, just want to confirm that is a property that you dial into the bug early on, it’s not a downstream addition.

Oliver Peoples

Yes, so the biologically produced material is very high molecular weight because it's an enzymatic process. And, in fact, what we do is, we can actually bring that molecular weight down to pretty much anywhere we want.

Laurence Alexander - Jefferies

Okay. And then just to make sure I had this right. But then the rival processes besides being higher cost, also have the disadvantage of not having the --

Oliver Peoples

Just don't have the flexibility in terms of materials.

Laurence Alexander - Jefferies

Perfect. Good. Thank you.

Operator

We'll go next to Thomas Stickley with Signal Hill Capital.

Thomas Stickley - Signal Hill Capital

Hello, again. Just two questions, the joint venture. Can you give a little bit of sense of what proportion of your costs are tied to energy? You know kind of what I'm getting at what -- how much would might energy costs have to increase to cause a price change?

Rick Eno

Well, I think, one thing, just in terms, where we said price change. We're not basing the pricing strategy for Mirel on a cost, I mean, clearly we're going to be aware of costs, but it's not based on a cost foundation, it's a value oriented pricing.

And we've not provided specific discussion of the various components of the cost structure, which we said they are at the higher end of petrochemical production economics. But energy costs are a relatively small part of it, but it's not even really considered as a factor, when you think about our pricing structure of the product.

Thomas Stickley - Signal Hill Capital

Okay. And back to the carbon footprint question. Does the ADM's use of coal to power the Clinton facility influence the footprint at all for Mirel PHA?

Rick Eno

Well, we will be using a mix of materials. We're still trying to optimize based on relative pricing, but there will be conventional materials and biomass used there at the site. And we're still dialing in what that is, but there will be a mix of materials there and yes, that would potentially influence the footprint, anything that we're not, any energy we're not providing based on biomass sources we'll be purchasing RECs to offset that and ADM is researching that right now.

Thomas Stickley - Signal Hill Capital

Thank you very much. That's all I have.

Operator

We'll go next to Jinming Liu with Ardour Capital.

Jinming Liu - Ardour Capital

Hi there. I just have one follow-up question. It relates to our carbon footprints. Recently there is report say, there is more methane gas released when the bioplastic is decomposed in the landfill or decomposing facilities than these, based on that, that people thing that bioplastics is actually not that environmental friendly because methane gas is more potent, I mean, in term of damage compared to CO2. What is your take on that?

Rick Eno

I'm not familiar with the amount of methane that could come off on our degradation. I don't know, Ollie, you going to comment about this?

Oliver Peoples

Yes, so basically typical composting facilities, Mirel will degrade the CO2 and essentially water. Under anaerobic conditions with any of these things you could get methane formation, you're absolutely correct, methane is worse than CO2 -- easy worse a greenhouse gas than CO2, that's for sure.

Rick Eno

I think there is an action, based on the earlier question raised, to extend the analysis that's done on the footprint and the lifecycle of Mirel from the cradle to gate analysis that people are well aware of to start looking closely at cradle to grave, which will, as I mentioned earlier, be application specific.

Oliver Peoples

Yes, and so, I think, just we're very clear about that, in their initial set off between ADM and Metabolix and the discussion with Professor Dale to do these types of analysis, its always been clearly understood that we will do what we can do today based on date and information we have on engineering of the Clinton site.

And as we get clear market, as we get clarification around the conversion technologies and the life scenarios for its very major applications, we will complete a full lifecycle inventory for each of those, and we will publish that as well. Obviously, we would not be interested in marketing it to areas, where we have a negative or we have a sort of a bad impact on the environment.

Operator

This concludes today's question-and-answer session. At this time, I'd like to turn the conference back to Mr. Eno for any additional or closing comments.

Rick Eno

Thank you very much. Just to wrap up, I personally I am excited about the tremendous opportunities that lie ahead for Metabolix. During a time here, when the demand for alternative energy sources and biobased products is rapidly accelerating. We are well positioned to capitalize on the growing demand, particularly with our diversified platform of technologies.

Industrial biotechnology is only at the early stages of its infancy, but we are at the forefront of the field. I am real excited to be joining Metabolix at this time, and I look forward to leading the company through its next stage of growth. I would like to thank you all for joining us and appreciate the questions, and be talking to you at the end of next quarter. Thank you very much.

Operator

This concludes today's conference. We appreciate your participation. You may now disconnect.

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Source: Metabolix Inc. Q1 2008 Earnings Call Transcript
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