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Executives

Kathleen Heaney – IR, Integrated Corporate Relations

Richard Eno – President and CEO

Joseph Hill – CFO

Analysts

Michael Cox – Piper Jaffray

Michael Carboy – Signal Hill

Lucy Watson – Jefferies & Company

Pamela Bassett – Cantor Fitzgerald

JinMing Liu – Ardour Capital

Metabolix, Inc. (MBLX) Q2 2008 Earnings Call Transcript August 11, 2008 4:30 PM ET

Operator

Welcome to the Metabolix Incorporated second quarter 2008 earnings conference call. Today’s conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, there will be a question-and-answer session. Instructions will be provided at that time for you to queue up for your questions. Now I’d like to turn the conference over to Kathleen Heaney. Please go ahead.

Kathleen Heaney

Thank you. Thank you and good afternoon, everyone. Metabolix released second 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 presentations today will be Richard Eno, President and Chief Executive Officer of Metabolix, Joseph Hill, Chief Financial Officer of the company. They are also joined by Oliver Peoples, Co-Founder of Metabolix and 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 refer all of you to the recent filings with the SEC for a more detailed discussion of the risks that could impact future operating results and financial condition.

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

Richard Eno

Thank you, Kathleen. I’d like to welcome all of you to the second quarter 2008 earnings conference call for Metabolix. Today I will be providing you with the review of the Metabolix vision and update on our progress with Mirel, our first commercial product, and highlights of recent activities across our other platforms. Joe will then take you through the financials. All in all, I’m quite pleased with our progress in the current financial position of the firm.

For those of you new to these calls, Metabolix is a biotechnology company, which is focused on bringing environmentally friendly solutions to the energy, chemicals, and polymers industry. We are developing and commercializing pathways and products that lessen the world’s dependence on oil, reduce the CO2 footprint of traditional materials, and address critical solid waste issues.

We have founded on hard science and have exceptional capabilities in plant science, in fermentation of microbial and polymer engineering, and in market development. We currently have three business platforms. First, Mirel, a bio-based biodegradable plastic currently being commercialized with our partner Archer Daniels Midland; second, C4 chemicals platform; and third, our plant-based activities, which include switchgrass, oilseeds and sugarcane.

With that context, I will now provide you with highlights of recent activities across all three platforms. First, Mirel. Mirel is our initial commercial product, a bio-based and biodegradable polymer being commercialized through Telles, our joint venture with ADM. During the second quarter, we made significant strides in our development of the Mirel business.

I’d like to summarize Mirel’s value proposition and highlight the great opportunity that it presents. Mirel is the latest generation of biodegradable plastics, which offers many unique advantages that other bioplastics do not have. Mirel bio-based plastics combine the broad functionality and performance of petroleum based plastics such as heat and water resistance with the broadest spectrum of biodegradability, including soil, home and industrial compost, septic systems, wetlands and the ocean. It is the high-performance bioplastic.

To validate this, Mirel resin recently received Vincotte OK Biodegradable Soil and OK Biodegradable Water certifications. These certifications demonstrate that Mirel-based resin is inherently and ultimately biodegradable in soil and water at ambient temperatures. Vincotte is an international certification body headquartered in Belgium. It provides a wide range of services in quality, safety in environment related areas and is internationally recognized as certification body. According to Vincotte, we are the first US polymer company to receive these certifications. We are quite excited about this validation of the biodegradability of Mirel.

Let me now review the market entry strategy for Mirel. Our market development activities remain focused on six specific segments where the combination of Mirel’s properties results in a unique offer. As a reminder, these segments are packaging; compostable bags; consumer products focusing on cosmetics, gift cards and other products you would commonly find on the retail shelves; business equipment; agriculture and horticulture; and marine and water applications. These six segments represent over 2 billion pounds of annual demand growing at 5% per year. Just the growth in our target markets is sufficient to fill out our first plant.

As we pursue the market development for this product, we are currently product constrained. We have hundreds of opportunities on a whole until world scale plant begins commercial production in Q2 of 2009. As such, our market development strategy has focused on proving out the material across three critical enabling technologies that allow polymer to be converted into usable products. These are sheet, film, and injection molding. These three processing technologies allow us to serve the six market segments that I described a moment ago. While our work with Target in its gift card effort has indicated the viability of our sheet product, this latest quarter was very important to us and the future growth of the business as we signed two agreements. These indicate our capabilities and the ability [ph] to keep processing technologies, film and injection molding.

First, we entered into an agreement to supply Mirel resin to Heritage Plastics for the production of BioTuf compostable film. Heritage Bag Company, the largest US manufacturer of compostable trash bags, can liners, and kitchen compost bags, is working in conjunction with Heritage Plastics to develop a new line of BioTuf compostable bags using Mirel. The global compost bag market is in excess of 250 million pounds per year and growing at 15% per year. This market is highly aligned to Mirel’s value proposition and we are excited to be working with the North American market leader. The work we are doing here will be a springboard into other film applications across our target market segments.

We also announced an agreement with Labcon North America, a manufacturer of laboratory supplies, will use Mirel for the production of its new Pagoda pipet reloading system. This system uses Mirel for the injection molded tray that holds the pipets in place. This application indicates our ability to perform commercially in precision injection molding applications requiring heat and chemicals resistance, dimensional stability, and durability. Labcon is enthused about Mirel and is expected to utilize the product across a number of its applications. Labcon offers over 800 products globally and produces over 1 billion units per year. We look forward to providing customer updates as the year progresses.

Now onto our pipeline. Another way that we measure progress towards an effective Telles business startup is to monitor the identified potential demand for each prospective customer applications for the 2010 production year. This process enables us to forecast a forward-looking estimate of potential, which is based on discussions with and analysis of our customer prospect.

As a reminder, our customer prospects are not committed to purchase these amounts, nor have we received orders for these amounts, but is an important exercise that helps us gauge demand. The last time we spoke we reported that our pipeline related to non-food contact applications was about 74 million pounds, reflecting growth of 18% over the previous period. Since that time, non-food contact applications have grown to 85 million pounds, an increase of 11 million pounds or 15% over this period. We expect this volume will continue to grow.

In the near-term, we will be focusing our business development efforts in utilizing pilot plant material to drive the current 85 million pounds for its current purchase commitments. Note that all of the above volume is non-food contact and we are confident there is more than enough non-food contact demand to fill out Clinton 1.

I’d now like to update you on the FDA process. As you know, we are pursuing a food contact notification process with the FDA. During the second quarter, we prepared and submitted a pre-notification document to the FDA as planned. While we requested a meeting with the FDA, they wished to provide a written response to us in lieu of the meeting, and we are still waiting on the FDA response. We believe that the response will contain much more detailed feedback than would have possible in a face-to-face meeting that’s been constructed towards the preparation of the formal dossier.

Preliminary peripheral feedback from our FDA outside council is very optimistic of our application and its ultimate prospects. And we expect formal written comments from the FDA in the coming weeks. Assuming that the written comments are consistent with our expectations, we will move ahead with the preparation of our formal dossier. After submittal of the dossier, the FDA has 120 days to recommend any additional testing. If no additional testing is required, we are free to pursue specific food contact segments consistent with our business strategy.

While our guidance is broadly consistent with our previous call, we are still unable to precisely determine the timing of the food contact notification, as it is very dependent on specific recommendations by the FDA. We still are very confident that we will ultimately receive food contract approval, but remain focused on non-food applications reflecting the uncertainty associated with the process.

I’d now like to discuss the progress of our Clinton plant. The facility remains on track to deliver product to customers in the second quarter of 2009. The weather has been quite good for construction over the last couple of months and the Clinton site was not affected by the flooding reported in other parts of Iowa. In coming calls we’ll be providing more detail on startup schedules and commissioning plans for the asset.

In addition to the above accomplishments, Metabolix and ADM have been working together extensively to establish the infrastructure and operating processes for the business. We have ongoing work teams establishing our fundamental business processes around quality assurance and control, supply chain and logistics, compounding, and customer service. All laboratory, maintenance and ship supervisors have been hired by ADM and they are currently undergoing training and working on detailed operating manuals of the business. We are ensuring that the structures will be in place to support our Q2 2009 startup.

Let me now move on to the other Metabolix platforms. These represent other value creation opportunities for us beyond the Telles venture. In C4 chemicals, we are making good progress on execution of our ATP grant, which is a $2 million grant aimed at producing C4 chemicals from renewable sources. We are pleased with our technical accomplishments and are applying for patents around some of our more recent inventions. We aim to update you in more detail on this program during future calls.

In Metabolix, we have a wide range of ongoing plant science activities. A major milestone this quarter was the publication in a technical journal of our ability to transform switchgrass. In recently completed greenhouse trials, we applied our multi-gene expression technology to produce PHA bioplastics in switchgrass. Switchgrass is considered a premier craft for conversion into cellulosic ethanol. We believe we are among if not the world leader in being able to transform this craft to express value-added trade. We are working to further apply this technology to maximize the potential of biomass crafts with both bioplastics and biofuels production, as well as to increase the overall profitability of the cellulosic ethanol value chain.

We’ve also made good progress on our oilseeds work. While we cannot provide you with much detail at this point, we are quite comfortable with our technical success. We are preparing strategy for regulatory approvals and examining options for commercialization. All in all, we are very excited about our plant science capabilities.

In summary, we continue to make steady progress this quarter against our milestones. We have moved Mirel closer to commercialization and manufacturing, and market development and in establishing an operating business infrastructure. We feel that our longer term portfolio is aimed in the right direction and we are making good progress against our internal milestones. And our switchgrass announcement is a good indicator of our future progress.

With that, I’ll now turn the call over to Joe for a discussion on the financial results of the quarter. Joe?

Joseph Hill

Thanks, Rick. And thank you all for joining us today. The past four months has been an exciting time for both me and my new role as CFO and for the company, as we have made significant progress towards the commercialization of Mirel. And as Rick mentioned, we continue to move along advancing other projects. Our goal at Metabolix is to continue to deliver on our commitment to grow the company. We are accomplishing that across various platforms with our overwriting goal to develop and commercialize products that reduce our dependence on fossil fuels while at the same time reducing our CO2 footprint of additional materials.

During the second quarter ending June 30, 2008, we made significant progress across our three platforms and are excited with the great opportunity it presents. We are highly focused on key segments of the market where the opportunity is greatest.

Now onto the financial results. As most of you know, Metabolix currently manages its finance with an emphasis on cash flow. We maintain a strong up focus on cash flow and take a disciplined approach to managing our operating cash. We ended the second quarter of 2008 with over $100 million in cash and investment balances. For the three months ending June 30, 2008, our net cash used in operating activities was $3.8 million as compared to net cash used of $4.5 million during the first three months of 2008.

Capital expenditures in the quarter were low at $100,000. Our cash burn rate associated with operating activities does continue 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 and invest in our sales and marketing infrastructure, as well as our research and development.

Our GAAP net losses for the quarter – for the second quarter of 2008 was $8.9 million as compared to a net loss of $7.7 million for the second quarter of 2007. As expected, our second quarter loss is 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 on our income statement.

During the quarter ended June 30, 2008, we received a payment of $1.6 million and through June 30, 2008 we’ve received support payments totaling almost $16 million from ADM. The deferral of recognizing payments from ADM will continue until commercial sales from the Clinton plant are reached. We also recognized non-cash stock-based compensation expense $1.1 million 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 second quarter 2008. For the three months ended June 30, revenues totaled $400,000 as compared to $200,000 in the second quarter of the prior year. This revenue was mostly attributable to our grant revenue payments from ATP, the C4 chemicals research, as well as from a strategic environmental and development program. Revenues for the second quarter of 2008 also include a nominal amount recognized from sample sales of Mirel.

As we grow the business, our expenses do continue to ramp up. Total operating expenses increased from $9.4 million during the second quarter last year to $10.1 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 the growing 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 of $3.8 million for Q2 is indicative of our current operating profile, excluding capital expenditures. However, we expect to continue to add to our headcount and other activities as we approach commercialization of Mirel.

Now onto the balance sheet. Our balance sheet remains strong. On June 30, 2008, we had cash and short-term investments of $101 million. We have no debt. We expect this capital will be adequate to build our sales and marketing infrastructure, conduct pre-commercial manufacturing, and to expand our research and development to build the company. Our work with companies such as Target, Heritage, and Labcon speak for the importance and validity of our product and the benefits that will bring our company and more importantly the environment. Our C4 chemicals and other initiatives also speak to other value creating opportunities for Metabolix.

In summary, we are pleased with the progress we made during the second 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

Very good. (Operator instructions) Our first question will come from Michael Cox with Piper Jaffray.

Michael Cox – Piper Jaffray

Good afternoon, gentlemen, and congratulations on the quarter. First I was hoping you could provide an update as you are looking at pricing of the Mirel product. With oil prices falling here recently, does that have any implications as you are discussing potential contracts with customers?

Richard Eno

Yes – no, thanks for the question. We’ve been (inaudible) volume and price guidance of $2.00 to $2.50 a pound. And it is really value-oriented price disconnected in effect from the cost of oil. And we feel quite comfortable with that pricing level and the deal that’s being validated through all our activities with customers.

Michael Cox – Piper Jaffray

Okay, that’s very helpful. And then on the FDA process, I certainly appreciate the color you provided. But if you could venture, I guess, what would be a likely scenario for receiving either approval or new marching orders on the food contact?

Richard Eno

We’ve – I mean, I think we’ve been as clear as we can be about outlining the timeline. And as our experience (inaudible) we don’t have control of all steps of the process. So we are going to move it ahead as quickly as possible and keep you updated, but to – we can’t really have [ph] them I guess as to exactly when that process will be complete. I think the communication we’ve had clearly outlines the steps. And when we get written feedback from the FDA, we will move right ahead along that plan.

Michael Cox – Piper Jaffray

Okay, that’s fair. And then in terms of the opening of the facility, it sounds like you will be in a better position next quarter to provide a little bit more definitive guidance on the opening of the facility. Is that correct? Should we expect that in the third quarter conference call, whether at the beginning of the second quarter or the end of the second quarter when we start to see product going out of the Clinton facility?

Richard Eno

No, I wouldn’t expect that much more detail certainly for the third quarter. I think as we get closer, we’ll be able to provide you with more detail. But as we’ve communicated in this call, we feel quite confident in Q2 2009, but it is premature at this point to try to pick which month in Q2 of 2009 we’ll have product coming up.

Michael Cox – Piper Jaffray

Okay. And then my last question, just housekeeping, could you give us the headcount at the end of the quarter?

Richard Eno

Our headcount at the end of the quarter was 85 heads.

Michael Cox – Piper Jaffray

Okay. Very good. Thank you very much.

Operator

Our next question is from Michael Carboy with Signal Hill.

Michael Carboy – Signal Hill

Good afternoon, ladies and gentlemen.

Richard Eno

Hi, Michael.

Michael Carboy – Signal Hill

Rick, could you elaborate a little bit on the switchgrass situation, give us an idea – is the PHA yield from the bacteria in the switchgrass, or I should say from I guess the cells of the switchgrass are at a similar level of what we are seeing coming out of the bacteria that are being fundamental for its applications in Mirel?

Richard Eno

Let me give you some further color – thanks, Michael – on the switchgrass announcement. The technical journal indicates the results in quite a bit of detail, but in essence we’ve achieved 3.7% PHA in the leaves of the plant, 1.2% in the overall plant itself. And it’s interesting when you actually take reasonable yields and you can run your calculations, but at a 3% recovered polymer level in the plant, a 100 million gallon cellulosic ethanol facility that being fed by switchgrass would produce about 100 million pounds of polymer. That gives you an indication of what that 3% number would apply to in the cellulosic ethanol value chain.

Michael Carboy – Signal Hill

That’s helpful. Is there anyway to sort of compare that, Rick, back to the current brew of bacteria that PHA is now grown in?

Richard Eno

Not really. In the microbial size, it really – there is no coal product other than renewable energy. The product is the PHA, whereas in the biomass cellulosic case, the PHA bioplastic inside the coal product, it’s a minor component. It’s different [ph].

Michael Carboy – Signal Hill

All right. And Rick, could you elaborate a little bit on the FDA written response issue? Have your FDA attorneys given you any idea as to how often the FDA responds in, let’s say, the meeting form rather than in written form?

Richard Eno

I don’t have the statistics on that, but I believe that the FDA – these pre-notification submittals are rather lengthy. And I think the FDA wanted to ensure they had a chance to go through it rigorously. And we’ve been told to expect a very detailed comment on every page of the document, but the guidance that we’re getting is that we’re quite optimistic about the submittal. And we really even can predict when they will get back to us. We expect in the next couple of weeks, but we don’t have control over that part of the process.

Michael Carboy – Signal Hill

And there is no time queues on that response requirement from them, is that–?

Richard Eno

That’s right, Michael, because certain parts of the FDA process have very specific time queues like after the submittal of a formal dossier, you have a 120 – that they have a 120 days to comment. On these pre-notification documents, it just fits in with the queue with what they are working, but it’s an important step to ensure that the dossier meets all their expectations. So we are actually looking forward to the detail that the FDA provides us.

Michael Carboy – Signal Hill

Okay. And Joe, could you give a little bit more insight into the increase in OpEx? How much of that was tied to people rather than spending on specific research or development projects?

Joseph Hill

Yes. And as we outlined in the Q – and in the Q, it does speak about each of the areas as to how much of our expenses are pay roll related versus program related. But if you recall, our headcount at the end of Q1 was about 80 heads and our headcount at the end of Q2 was about 85 heads. So the payroll spending was five additional heads, and then the rest of it was program spending and product spending.

Michael Carboy – Signal Hill

Okay. Thank you very much.

Richard Eno

Thank you, Michael.

Operator

Our next question is from Laurence Alexander with Jefferies & Company.

Lucy Watson – Jefferies & Company

Hi, this is Lucy Watson speaking for Laurence.

Richard Eno

Hi, Lucy.

Lucy Watson – Jefferies & Company

Hi. I just wanted to ask which non-food application verticals are you guys targeting at of those six?

Richard Eno

We are targeting them all together. We are not picking one or another. Our entry strategy works across all those different – all those six segments we outlined. So we are not sequentially going across one segment and another. If you look at our pipeline, it consists of applications across all six of those segments.

Lucy Watson – Jefferies & Company

Okay. And I guess I’m wondering would there be a difference in product unit gross margins for film, sheet, and injection molding applications or would they all be similar?

Richard Eno

We haven’t disclosed anything about the relative economics of any of the grades. We’ve been pretty consistent in our messaging around our production costs and selling price.

Lucy Watson – Jefferies & Company

Okay. And any updates on your longer term strategic plans for oilseeds?

Richard Eno

Not much more, Lucy, than what we talked about in the call. We’ve been at it for about eight months now. And we feel that in an eight-month period, we’ve made exceptional progress. The Danforth institute and ourselves are working well together. We’re starting to get a really close look at the regulatory pathway, but that technically we can’t really communicate much right now other than to say that we are moving ahead and quite pleased with what we’ve managed to accomplish in an eight-month period.

Lucy Watson – Jefferies & Company

Thank you.

Richard Eno

Thank you.

Operator

Our next question is from Pamela Bassett, Cantor Fitzgerald.

Pamela Bassett – Cantor Fitzgerald

Hi, thanks for taking my call and congratulations on the announcement this quarter. You mentioned in the call that you received – Mirel is now certified for biodegradability by Vincotte. And I know that Mirel has also been certified by ASTM. Can you talk a little bit about how these certifications help you in your customer agreements or in negotiating with customers?

Richard Eno

Yes, sure. There is a couple of examples where we are working with potential customers right now, consumer product customers where they would like to certainly put the claim on the product that this is biodegradable in soil, in the ocean. And having that independent certification is a huge step forward in just being able to say an independent party, not Metabolix, not ADM have validated these claims. And that’s been quite a positive attribute to have when we are in discussions with these parties, because it gives them further confidence of the attribute of the material.

Pamela Bassett – Cantor Fitzgerald

And each time you come up with a new grade and go to ASTM, is there – what’s the lead time?

Richard Eno

I’m not sure if we are going to be taking each grade to ASTM, but – run ASTM testing our each grade, but the example is the base polymer and it’s on the order of month, not years, if that would help.

Pamela Bassett – Cantor Fitzgerald

Okay. Can you give us an idea of what we should be thinking about in terms of next customer announcements? More coming in Q3 or are we’re going to wait until Q4?

Richard Eno

We are not going to provide specific targets with X number of announcements of customers for each quarter. What we will do is we’ll be making announcements as they indicate the effective growth of the pipeline of the business approaching the Clinton startup or to indicate specific accomplishments either in technology speaking or penetration of one of our specific segments. One of the issues, Pamela, that we talked about on these calls in the past is that certain, for example, consumer product companies don’t want announcements made. And that is in order to give them a first move or advantage in utilizing product like Mirel in its applications. So, even if we move ahead on a contract with a company that is a brand name consumer products company, often we can’t even announce it anyway. So what we will be doing is making announcements as they indicate our progress so people can gauge our progress, but we won’t be promising X number of announcements over X period of time because again we don’t have full control of that process. In many cases, we can move it right ahead and not announce if just that’s what the customer wants us to do.

Pamela Bassett – Cantor Fitzgerald

And what can you tell us about plans for plants 2 through 4 in Clinton?

Richard Eno

Pamela, that’s a good question because in the past we’ve noted that the footprint at Clinton is capable of handling us a facility for ex the size of Clinton 1. And we’re beginning – we have not yet launched a formal effort to look at the growth plans for the business, but we’re beginning to get a deep insight into the market potential for the material and looking at what configuration options we could pursue in the future for the facility. But it’s a little premature to put anything more formal out there right now. I do expect in the coming months we’ll begin some more detailed work about the expansion of Clinton, but we really have just started talking about it concept at this point.

Pamela Bassett – Cantor Fitzgerald

So, let’s say, you make a decision to move forward with one or even three more plants there. What kind of lead time are we looking at for the completion of those plants? I assume it’s going to be shorter because the footprint is there.

Richard Eno

Well, it is somewhat shorter, but in reality these facilities usually take two to three years from the time you give it the go-ahead to the time you are actually producing product out of them. And even with the footprint there, we would still have to presumably construct fermenters, would have to add some recovery capacity, which requires concrete structurals, field fabrication. And that process is typical with any construction process in the polymers or chemicals industry, which should configure two to three years. And what we would like to do is to be in a position that we are able to push that to the shorter end of that time if at all possible, but it is a reasonably rigorous construction process you have to go through even for a significant expansion like that.

Pamela Bassett – Cantor Fitzgerald

So, how much yield improvement do you think you can get from the first 110 million pound plant?

Richard Eno

I don’t think we talk much about yield improvement. What we have said is, when a new process gets commercialized in the chemical industry, or polymers industry for that matter, as it comes on stream and gets sold out, typically the type of engineers we have in ADM and in Metabolix could try to figure out how to get additional capacity beyond the name plate in that at modest capital levels. And we’ve not predicted what that level could be, but it in typical experience, as I’ve seen across the chemical industry, could be 10% extra capacity or so. But we’ve not studied that for our specific plant. We’ll have to wait till we start up and indicate what we can expand the initial capacity incrementally.

Pamela Bassett – Cantor Fitzgerald

Okay. And did I hear correctly that in the switchgrass journal article, at 3% recovered polymer level and you can get 100 million pounds – 100 million gallons of ethanol and 100 million pounds of polymer, or did I–?

Richard Eno

Let me – as I said, the article – the technical journal itself describes in detail the technical accomplishments. And those accomplishments are 3.7% polymer in the leaves of the plant and 1.2% across the whole plant on a dry weight basis. The example I gave is if you want to get in an order of magnitude understanding of what that means for the cellulosic ethanol value chain, a 3% recovered polymer level in plants, in switchgrass, when that switchgrass is fed to a cellulosic ethanol facility, would produce – for a 100 million gallon cellulosic ethanol facility, would produce on the order of 100 million pounds of polymer. It’s just largely to give an indication of what does that 3% or 1% mean from a commercial perspective. And those numbers will be refined over time, but it just starts to put an order of magnitude on the potential business opportunity.

Pamela Bassett – Cantor Fitzgerald

So it will [ph] give a chance to this kind of co-product strategy could become commercialized in the same time frame that you would build out your additional plants in Clinton?

Richard Eno

We haven’t talked much about the commercialization timeline for switchgrass. It would certainly take longer than what we could do with Clinton, no doubt about that. Our goal for the switchgrass process is to have commercially viable plants in field trials in three to four years. And just that timing would be – just to get to those field trials, we could certainly be in a position to have Clinton expanded almost at that time as well from that time and I just provided to you earlier in your question.

Pamela Bassett – Cantor Fitzgerald

Okay, great. Thanks very much.

Richard Eno

Thanks, Pamela.

Operator

Our next question is from JinMing Liu with Ardour Capital.

JinMing Liu – Ardour Capital

Hi there.

Richard Eno

Hi, JinMing.

JinMing Liu – Ardour Capital

I have a couple of questions related to your switchgrass program. I’m wondering what kind of costs are you looking at for you to isolate PHA from switchgrass at the 3.7% yield from leaf.

Richard Eno

We haven’t – we’ve not provided any guidance on that cost level. And clearly there is a lot of technical work that goes into actually putting a cost level together that we would feel comfortable communicating. So I think more what we want to highlight at this point is that our long-term technical programs are moving ahead quite nicely and we are actually beginning to formulate a business concept around switchgrass with some real significant proof of concept numbers. But we’ve not gotten at the point where we provided any technical guidance around the recovery cost.

JinMing Liu – Ardour Capital

I mean, the reason I asked you is to try to look at a clue whether at the 3.7% or 1.2% level or expression level, whether purification of PHA from switchgrass will be accretive or dilutive to a cellulosic ethanol plant.

Richard Eno

And I think the other thing I’d just mention to be clear, we have not done – provide any guidance on those economics. But our goal is beyond what those numbers are quoted. Those numbers are those that are quoted within the technical journal, and we’ve said in other places that we would like to 5% to 7.5% in the whole plant. So our program in switchgrass is continuing and that technical publication is a very clear proof of concept of our company’s capabilities to modify switchgrass.

JinMing Liu – Ardour Capital

Okay, thanks. My last question is about the two new contracts you announced during the last quarter. What’s the timing of supply for those companies? Is it next year or this year?

Richard Eno

The primary supply for those companies – I mean, we’re going to (inaudible) our developmental partners, Heritage for film and Labcon for injection molding. And the real significant volume, of course, is when Clinton starts up in Q2 of next year. We are going to keep working with them through the startup of Clinton because they are great customers to have and they would continue to work with us on the nuances of the resin. But the real significant commercial volumes will occur only after Clinton starts up.

JinMing Liu – Ardour Capital

Okay. Do you have any update [ph] on what we should look at for the (inaudible) Clinton County in the second half of ’09?

Richard Eno

No, we’ve not provided any guidance on that. We talked to the polymer development cycle, which when you get a new customer, it can take anywhere from nine to 18 months to move a potential concept into full production, because the company has to test the resin, has to test market it and then scale it. But we’ve not specifically talked about the volume in second half of 2009.

JinMing Liu – Ardour Capital

Okay. That’s all my questions. Thanks.

Richard Eno

Thanks, JinMing.

Operator

And we’ll next go to a follow-up from Laurence Alexander with Jefferies & Company.

Lucy Watson – Jefferies & Company

Hi. Just I guess a follow-up question on production volume, do you guys have any more of a sense for what the impact of product mix might have on plant capacity? In other words, what your upper and lower limits might be on volume depending on what kind of applications you are producing?

Richard Eno

No, Lucy, we think that 110 million pounds capacity is a very good number to use at this point. So I would utilize that number independent of specific application at this point.

Lucy Watson – Jefferies & Company

Okay, thank you.

Operator

We’ll go to – or return to Michael Carboy with Signal Hill.

Michael Carboy – Signal Hill

Thanks for the follow-up. My question concerns the potential to expand on the C4 technology. And think about some of the comments should frame [ph] partners have made with (inaudible) biocrude, I’m wondering whether that is a more likely direction for other sugar sources outside the country and the fabrication perhaps of other polymers, if I guess you could talk a little bit more about that?

Richard Eno

Michael, I’m not sure I quite get your question. Could you just clarify that for me?

Michael Carboy – Signal Hill

Sure. Some of your trade partners have talked about their intended uses for sugar streams outside the country. In particular, ADM has talked previously about biocrude. And I’m wondering whether that is a likely area for the C4, acknowledge that you [ph] folks are working on to be played out or whether you will explore use of sugar elsewhere outside the US as the feedstock really for plastic rather than for petrochemical intermediate?

Richard Eno

I think as we – our intention would be to use sugars in that particular process of the feedstock for the people who kind of grow (inaudible). I think when you retract to biocrude, I know that ADM, for example, has a program on pyrolysis of biomass to make the biocrude to feed into existing refinery structures. But we haven’t been into biocrude as we thought [ph] we’ve looked, in this case primarily the sugar feedstock.

Michael Carboy – Signal Hill

Okay, great. Thanks.

Operator

And we return then to Pamela Bassett, Cantor Fitzgerald.

Pamela Bassett – Cantor Fitzgerald

Hi, thank you. Any plans about how you might move forward with both C4 and oilseeds in terms of partnering versus maintaining proprietary programs?

Richard Eno

Yes. It’s a good question, Pamela. The C4 chemicals, the scope of our work is largely around the existing C4 chemicals is up. We’re not creating a new molecule here. For example, we are working the butanediol value chain around tetrahydrofuran, PBT resins, GBL. And we are working all the various pathways between them as we look for advantage ways to displace petroleum based materials. Assuming technical success there – and again, we’ve been at that program for I believe about ten months now. Assuming technical success, my expectation is we would be looking to partner with someone that already participates in C4 chemicals. But again, we’re not creating a new business here. We’re actually coming up with a better way to produce existing C4 chemicals. So, in that platform, I would expect a partnering strategy would make a lot of sense. Now in royal fees, we are doing something that’s pretty novel and different there where we actually feel we can produce polymer within an oilseed crop. We can add a lot of value to that through providing a different revenue source to potential biodiesel feeds. We’ve got multiple revenue streams coming out of an oilseeds crop. And that’s quite different than what’s out there now. So in that case, I would expect we would certainly play a pretty key role in certainly the technology formulation along that chain and along many steps of that chain. I think we’d be keenly looking for partners along the core agricultural part of that chain such as the planting, the harvesting, the crop origination. But when you look at the technology and you look at the actual processing in oilseeds, I can see Metabolix driving that pretty extensively. C4 chemicals, on the other hand, I think drives us towards a partnership as we are going to be basically playing an existing chemistry with a different route, of course.

Pamela Bassett – Cantor Fitzgerald

Okay, great. That’s helpful. And as far as the types of deals you might do around C4, could it be for the entire platform or might you parse out individual chemicals or groups of chemicals?

Richard Eno

We hadn’t quite gotten to that point of setting that up, but my expectation at this point is some of the various pathways would be more advantage than others from the routes we’re looking at. And clearly we would be picking where we think the biggest economic advantage is to focus our commercialization efforts there. So, it probably will begin with a subset of the C4 chemical platform, driven by where technically we have the greatest advantage versus incumbent processes.

Pamela Bassett – Cantor Fitzgerald

And would you be seeking multiple partners or one partner for the entire platform?

Richard Eno

Yes, it depends exactly. I mean, there are multiple pathways than it would depend on what the technical results prove out against those multiple pathways. So, as I mentioned, it would be driven by where the economic advantage is greatest versus the incumbent. So it could be cases where we are successful across multiple pathways, in which case it could be a broad-based for partnership or it could be a case where we have one specific pathway to a given product in that value chains that is really advantage and that may drive – we think that would definitely drive and ensure the partnership.

Pamela Bassett – Cantor Fitzgerald

Okay, great. Thank you very much.

Richard Eno

Thanks, Pamela.

Operator

(Operator instructions) We have an additional question here. It is Michael Cox with Piper Jaffray.

Michael Cox – Piper Jaffray

Thanks. Just my last quick question on the FDA – the food contact product. I’m curious if you have been working with customers as you are on product testing, as you are going through this FDA approval process or is that premature at this point, and then once the approval is granted, then you start that process?

Richard Eno

Yes. We’ve put all of our food contact work on hold. (inaudible) we get calls from our potential food contact customers. But we are running a pretty tight operation and we’re trying to be careful. We’ll probably pursue this. And our resources are clearly aimed at non-food contact right now reflecting that there is – we feel there is sufficient non-food contact to sell out at Clinton 1 and there’s a lot of uncertainty with the FDA process. When we walk away through the FDA process, then we’ll clearly look carefully at what we have on hold. That’s food contact inside [ph], which ones to pursue. But at this point, we’re not putting very significant resources at all at any food contact applications.

Michael Cox – Piper Jaffray

Okay, thanks.

Richard Eno

Thank you.

Operator

With that, there are no further questions. I’d like to turn the call then to Rick Eno for any additional or closing comments.

Richard Eno

Thanks a lot. Well, in summary, thank you for all the questions and thank you for attending our call. We continue to move forward on both near and long-term business platforms at Metabolix and we are enthused about the potential, and we’ll keep you updated on the progress. And we look forward to having you all join us again for our next quarterly call. Thank you for attending.

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Source: Metabolix, Inc. Q2 2008 Earnings Call Transcript
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