Metabolix, Inc. (NASDAQ:MBLX)
Q3 2012 Earnings Call
November 1, 2012 4:30 PM ET
Richard Eno – President and CEO
Joseph Hill – CFO and Treasurer
Oliver Peoples – VP, Research and Development and Chief Scientific Officer
Laurence Alexander – Jefferies
Enrique Akashi – Piper Jaffray
JinMing Liu – Ardour Capital
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Metabolix, Inc. Third quarter 2012 Earnings Conference 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 at that time for you to queue up for questions.
I would like to turn the conference over to Ms. Allison Townsend of ICR. Please go ahead.
Thank you and good afternoon to everyone. After the market closed today, Metabolix issued its third quarter 2012 financial results press release. If you do not have a copy of this press release, a copy may be found on the website at www.metabolix.com in the Investor Relations section.
In addition today we have provided several slides to accompany the presentation. These slides are being webcast live and will be available on the Metabolix website in conjunction with today’s call.
Making the presentation today will be Richard Eno, President and Chief Executive Officer of Metabolix and Joseph Hill, Chief Financial Officer of the Company. They are joined by Oliver Peoples, a Co-founder of Metabolix and 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. Investors are also cautioned that statements from the discussion today which are not strictly historical statements constitute forward-looking statements.
Such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated including the other risks and uncertainties detailed in Metabolix’s filing with the Securities and Exchange Commission including the company’s 10-K filed on March 12, 2012 and 10-Q filed on July 27, 2012 and risks related to international business activities particularly in Europe. 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 the conference call.
With that I’d like to turn the call over to Rick Eno, President and CEO of Metabolix. Rick?
Thank you Alison. I’d like to welcome all of you to the third quarter 2012 Earnings Conference Call for Metabolix. We’re particularly cognizant of and appreciate the efforts of our New York-based investors and analysts who have joined us today. We wish you and your families the best as you recover from Hurricane Sandy. I look forward to describing the progress we are making and the momentum we are building across each of our three business platforms. After my remarks Joe will take you through the financials.
I will first remind you that at Metabolix we are focused on three business platforms. Our first Metabolix biopolymers, a family of bio-based and biodegradable polymers. Second biochemical initially focused on the family of C4 and C3 chemicals as drop-in replacements for conventional chemical and third, crop-based activities which include our programs and switch grass, oil seeds and sugarcane.
All of these efforts are enabled by our PHA or Polyhydroxyalkanoates technology around which we have over 700 patents either awarded or pending.
In our review of the business I will begin with our biopolymers business. After the ADM termination of the Telles joint venture in January, I outlined our plans for you. I told you that we would launch biopolymers under the Metabolix nameplate; I said that we would initially target a 10,000 metric ton-per-year plan, maintain the ability to engage multiple partners, deploy our most recent technology and retain the potential to create an integrated value chain.
We continue to be well on our way to delivering upon all of these objectives at a very rapid pace. I also told you that we would pursue high-value market segments. In today’s call I will begin by outlining the key aspects of our commercial strategy for the biopolymers business, specifically our focus on value-added applications and then I will address the results for the quarter.
Over the last nine months we’ve taken the time to take a close look at the biopolymers business in order to define our focus and priorities. We look at the markets, our customers, our product portfolio and the commercial options available to us. In summary, we’ve identified a number of compelling opportunities, aligned our team to pursue them and are very enthused about the potential.
I am now on slide two. This graphic illustrates a typical price-volume relationship in the polymers industry. Our earlier vision in business strategy was established on the basis of a large 50,000 ton-per-year initial plan. It aimed us towards markets and applications where volume was key. Similarly, it drove us towards pursuing a relatively broad set of processing technology such as thermal forming, forms, (nonwovens) and others.
With a smaller initial facility we have the opportunity to focus on applications which are more oriented towards value and volume, near-term in nature and based in areas where we have historical customer experience. We also have the ability to focus on a limited set of opportunities and be more selective around our resource deployment. I’ll emphasis that we still have the opportunity to pursue the many applications which we have described to you earlier and we’ll do this commensurate with our future scale and cost structure.
We believe the focused approach we are outlining will offer us near-term profitability plus considerable growth potential as we continue to build the business and gain economies of scale. Our launch strategy will be built around three primary areas. Each is large, offers high-valued opportunities and has market needs that align very well with the characteristics of our biopolymer products. The first two, film and plastic additives, will be receiving the majority of our business focus. As our third area we’ll be pursuing very specific customer opportunities with a biodegradation properties of PHAs offer exceptional value.
I’m now moving to slide three where I will describe this opportunities to you in greater detail. Films are the largest single processing application in the plastics industry representing approximately £100 billion per year of demand. Bio-based and biodegradable are compostable films are an evolving subset of this market showing substantial growth. This is approximately a £200million-a-year market growing in about 15% - 20% percent per year. Growth is driven by rapid technical advances across the entire value chain, consumer demand of a bio-based solution and in some cases, Government regulation banning non-biodegradable bags.
Since the ADM launch in 2011, the majority of our sales have been in the film market so we understand it well. We have a very sense of the customer needs and how our product can meet them. We understand price elasticity as well as formulation techniques which allow us to enhance margins. We have a series of offerings in the film market which offer a range of performance depending on the specific customer requirements. In general, we have roughly comparable in performance to a petroleum-based film such as that produced by C4 Linear Low Density Polyethylene but our product is based in a renewable feedstock depending on grade either biodegradable or compostable.
We also have seen opportunities to continue to expand our margins in this sector. Our initial products target the compostable bag market, but we see substantial room to utilize our film capabilities to pursue higher performance film applications such as: barrier film, protective wrap, agricultural multi film and high strength films. We have encouraging early results in each of these high-valued applications.
Our second focus area will be the use of our Mirel biopolymers as performance plastic additives. After evaluating our historical sales, we concluded that many customers were buying our Mirel products due to these unique property attributes above and beyond their classic biodegradation properties. These properties include and characteristics include, our products are miscible and compatible with a broad range of materials both bio-based and petroleum-based. Our products can positively impact a range of performance attributes typically demanded by plastics customers. This include impact strength, barrier properties such as for odor, heat distortion temperature, process ability, plasticization and in addition, we provide bio-based content which is increasingly in demand. In summary, we learn that we can do a lot of current petroleum-based polymer additives do but do it with a renewable differentiated material.
Additives are widely used in the plastics industry as a tool to improve the performance of basic materials. The plastic additives market has a volume of about £25 billion with selling prices ranging from $1 to over $5 per pound depending on the properties being brought to bear. We’ll be initially pursuing the performance polymeric additives segment which reflects about £1.5 billion of annual demand with the tract of selling prices.
As an example, last week we announced some very encouraging results where our Mirel biopolymers substantially improved the properties of PVC. PVC markets demand as much as £77 billion per year and a compounded product is typically formulated with about 20% - 40% performance additives.
Our testing shows that our Mirel product has the potential to PVC impact resistance beyond that achievable with leading polymeric modifiers and at the same time serve as a non-migrating, non-(falle) plasticizer. This offers numerous value propositions including lower migration through the reduced use of (falle) plasticizers and the creation of tougher PVC compounds. In addition, our product is bio-based which is a further differentiator. In aggregate, these are very compelling properties and we are already seeing substantial interest. We were supported in this work by Alpha Gary, a leading compounder of PVC.
Finally, our third area of focus will be on supplying customers that are pursuing high-valued applications where biodegradation is key. These include products specifically designed for use in anaerobic digesters, for use in water treatment, marine applications and soil degradation. While our product is very differentiated and valuable in these applications the supply chains here tend to be embryonic and as a result development cycles can be longer. We will be very selective here and qualify our opportunities based on margin potential and development time.
Market price is very widely based on the level of performance brought to bear. As you know, our historical pricing guidance has been $2.25 to $2.75 per pound with significantly higher pricing in certain niches. Given the early stage of our launch we see no reason to change these expectations, but we’re currently seeing a number of applications where our Metabolix biopolymer products are currently commanding over $3 per pound.
Our goal is to continually work up our selling prices to the pursuit of high-value differentiated applications some of which we have highlighted here. It’s important to note that we are not walking away from the hundreds of opportunities we have seen over the years. We firmly believe as our technology moves down the cost-cure band the market and supply chains mature, we’ll be supplying many of these applications in addition to those I outlined today.
We believe our approach office has the ability to generate margins in the near-term by offering substantial long-term growth opportunities as the cost structure continually improves.
With that context let me now review the results for the quarter.
Let’s turn to slide four of the accompanying slides. I’ll begin with our market activity, Joe will explain the implications of our new revenue recognition policy that we communicated to you last quarter. Product shipped and built in Q3 were substantially higher than in Q2 $69, 000 versus $373,000. This is an indication of our reengagement of the customers and the interest we have seen since the Antibioticos announcement.
As I have mentioned in previous calls, we’re not trying to sell the product as quickly as possible but ensure that we enable a smooth transition to product that will be produced in Antibioticos. We have also built up our active customer list to about 50 customers who are buying products in advance of our Antibioticos startup. If you recall we had about 57 paying customers at the time of the ADM termination, so I believe our team has done a good job of maintaining relationships and transferring customers over from Telles to Metabolix. The customers have found the product to be valuable in their applications. Looking forward we expect increased sales in Q4 as well as the number of customers to increase as we build the market and launch our latest film product Mvera B5008. Mvera B5008 is a next generation compostable film product which will help us to prepare the market for Antibioticos production.
Now onto manufacturing I am now on slide five. As I described in our last call we anticipate two phases of our relationship with Antibioticos. We are on track to produce demonstration quantities of Mirel in the demonstration phase by early 2013. Equipment has been ordered, technology transfer is continuing and plans are well underway for startup. We are still on track to enter the second phase commercial production later in 2013.
With regards to investment, we have completed enough of the engineering to discuss an indicative capital budget for our launch. This is the early stage but should provide you with a sense of the required investment. We’re currently anticipate startup cost including facility modification in the range of $10 - $13 million. Included in this estimate is approximately $3 million for the demonstration phase which is nearly all-applicable for the commercial phase. For those of you doing the calculation this is approximately $0.45 - $0.60 per pound of capacity based on 10, 000 tons per year or £22 million per year of capacity.
For the ADM facility you pay have calculated that the facility had a capital cost in the range of $3.50 per pound granted much of this capital efficiency is due to the fact the Antibioticos has existing capacity. But because of that we can execute our strategy for very limited capital investment and aim to generate substantially higher returns on capital for our shareholders.
In addition, we have a further performance lever as we have the choice to sell either straight, uncompounded PHA, or compounded product where our PHA is blended with other products as in the case with our new MveraB5008 product. This option will allow us to sell more than 10,000 tons per year of products from Antibioticos. Potentially delivering more than the $50- $60 million in revenues I described to you in earlier calls.
We will be optimizing this compound decision based on where we generate the greatest margin. We see the Antibioticos operations ultimately being profitable for metabolic, a key contributed to driving the company to positive cash flow and a foundation for growing a significant biopolymers business. Well it should be clear to you that we are enthused about the potential for the biopolymers launch in making good and rapid progress. We are well aware of the many challenges in front of us and are working aggressively to overcome them. Our key areas of focus include, first ensuring that effective technology transfer to Antibioticos goes in a smooth manufacturing start up. Selecting high valued applications with reasonable qualifications times. Third, transitioning the customer’s base to our new production supply and fourth, driving the business to early profitability.
To conclude on biopolymers, we’ve built momentum this quarter with positive developments in technology, manufacturing and commercial. We plan to enter the market quickly, at a reasonable scale in economics, free from the over $400 million ledger balance that existed under our previous relationships.
I’m now on slide six, to begin the update on our chemicals platforms. In industrial chemicals, we are leveraging our PHA microbial technology to enable chemicals that are currently being produces from fossil fuels to be produced from renewable raw material. We’ve selected the C4 family, followed by the C3 family of chemicals as our entry strategy into this space. Together the addressable market for this exceeds $10 billion.
Our technology is unique and that the same basic process can produce both familiar products with only relatively minor tailored purification modifications based on the specific molecule being produced. We believe that due to the synergy between the platforms and the simplicity of the recovery process, we can ultimately possess the most cost-competitive bio routes to both the butane dial and acrylic acid markets.
Over the last year or so, we’ve been in discussions with a number of chemical industry leaders about a technology for making bio-based GBL and BDL. Over the third quarter, this has intensified and we are engaged in detailed conversations with a number of parties each with multi-billion dollars in corporate revenue on the potential for an exclusive commercialization relationship for our C4 chemicals technology. Frameworks being discussed include cash contributions to Metabolix and a plan to jointly bring the technology to market. Discussions are proceeding and we will keep you informed of any major developments.
Our C3 chemicals program is also receiving significant interest. We are also now in a range of discussions with potential feed stocks, manufacturing, and off-take partners who are renewable C3 technology. With a global market estimating $8 billion and renewable solutions in demand, this is a very attractive market for our technology. In addition to our partnering progress, we have also worked to further our intellectual property around this field including some innovative, renewable pathways to keep C3 derivatives such as Butyl Acrylate which is use as a key ingredient in paints and coatings. We believe this will offer us a long runway for the technology and a range of options for commercialization.
I’m now on slide seven. Our third Metabolix platform is our crop based activity including our programs in oil seeds, switch grafts and sugarcane. In the long-term this is an exciting opportunity and as in the past, we continue to leverage Government brands and academic research collaborations to make this work ahead. This quarter we continue to make progress in our work in the $6 million department of energy grant for the development of our biomass program. This funding will allow us to work on increasing the PHB levels expressed in switch grafts and conduct pilot testing of the production of chemical intermediates via a fast process.
In addition, we continue to pursue opportunities for additional grants and collaborations to fund this work. We have seen numerous opportunities including those where our core plan science skills, specifically around multi (gene) stacking capabilities are being sought out for collaboration opportunities in the broader biofuels and food crop markets as well.
I’m now turning to slide eight. To summarize my remarks I’d like to outline our game plan moving forward and our key milestones. In biopolymers, we’ll deliver product from the demonstration phase, enable the customer base readiness in advance to the Antibioticos startup and begin commercial manufacturing.
As we launch biopolymers we’ll be selective focusing on value over volume. In biochemicals we’ll achieve technical milestones to enable industrial-scale production and pursue commercialization partnerships. In crops, we’ll advance the technology and meet milestones as well as secure grants to support crop research and evaluate commercialization options.
That wraps up the business review and I will now turn the call over to Joe for our review of our financial results for the third quarter.
Thanks Rick and welcome everybody to our Earnings Call this afternoon.
I’ll now focus on the financial results for our third fiscal quarter ended September 30, 2012. As always we managed our finances with an emphasis on strict cash flow management. We have maintained this focus and ended the third quarter with $53.6 million in cash and investments.
For the third quarter net cash used in non-operating activities was $6.3 million which represents an increase in cash usage from $5.9 million used during the second quarter of 2012 and a decrease in cash usage from $7.8 million to the comparable quarter in 2011.
The $400,000 increase in net cash usage in the third quarter of 2012 compared to the second quarter of 2012 is primarily attributable to inventory build as we compound current inventory. Till the first nine months of 2012 ending September 30, net cash used in operating activities was $24.4 million as compared to net cash used of $23.1 million for the comparable period of 2011.
The $1.3 million year-over-year increase in cash usage for the first nine months of 2012 is primarily attributable to the company’s payment if $3 million to Telles in March of this year to acquire all of the existing inventory from the ended joint venture. Offset by a decrease in operative (incentives) due to reduced (headcount).
On note now, I’ll give some additional detail on the company’s financial results for the third quarter of 2012 ended September 30. Total revenue was $700,000 and $500,000 for the three months end of September 30, 2012 and 2011 respectively. The third quarter revenue consisted of primarily revenue from Government grants and product sales.
Biopolymer product orders of $691,000 were shipped and billed throughout the company’s third quarter of 2012 of which $70,000 were recognized and $621,000 were deferred to the company’s fourth quarter as a result of the Company’s product to term return policy adopted in the third quarter ended September 30, 2012.
This is an 85% increase of the $373, 000 of orders shipped and billed during the company’s second quarter of 2012. Cost to product revenue for the quarter ended September 30, 2012 was $300,000. The cost of product revenue includes the cost of product shipped to customers, warehousing and freight cost. As discussed during the Q2 call, the cost of product revenue includes significant ongoing warehousing cost for the over £5 million of inventory we have on hand.
During the third quarter of 2012, we completed the consolidation of our inventory into fewer and less expensive warehouses. While this consolidation will decrease our warehousing cost going forward, I would like to note that we will incur freight cost in the coming months as we move some material from the U.S. to Europe. We expect to have to a positive product contribution as the sales volume increase.
The quarter-over-quarter increase in revenue also reflects an increase in Government research grant revenue which increased $200,000 over the same quarter of 2011. This was primarily as a result of work performed on the company’s $6 million DoE. Total revenue for the nine months ended September 30, 2012 was $40.9 million versus $1 million for the year-ago period. The year-over-year increase was primarily related to the $38.9 million in the third revenue which is recognized as a result of the termination of the Telles joint venture.
Increase in grant and product revenues during the first nine months in 2012 compared to the nine months of 2011of $800,000 and $500,000 respectively but partially offset by a $300,000 decrease in license and royalties piece received from (thither end 0:00:20). Total cost and expenses in the third quarter of 2012 were $8.4 million versus $10 million in the comparable quarter of 2011. Selling general and administrative costs in the third quarter of 2012, a $3.2 million versus $3.9 million in the third quarter of last year. Research and developing costs were $4.9 million versus $6.2 million in the comparable quarter in 2011.
For the nine months ended September 30, 2012 total cost and expenses for $27.8 million as compared to $30.2 million for the respective period in 2011. Research and development expenses were $16 million as compared to $18.4 million for the comparable nine months in 2011. The decrease of $2.4 million was primarily due to a decrease in employee compensation and related benefit expense for $700,000. Net of one-time restructuring expenses, $500,000 and a reduction in contract research expenses at $1.1 million. Selling general and administrative cost for the first nine months of 2012 were $11 million as compared to $11.9 million for the comparable month in 2011.
The decrease of $900 is primarily the result of the decrease in employee compensation and related benefits expense of $800,000 net of one-time restructuring expense of $400,000. Net loss for the third quarter was $7.7 million that’s compared to a net loss of $9.6 million for the third quarter of 2011. Our net loss per share in the quarter was $0.23 compared to a net loss per share of $0.28 in the year ago period. Net income for the first nine months of 2012 was $13.1 million or $0.38 per share compares to a net loss of $29.2 million or $0.96 per share in the same period of 2011. This increase in net income is mostly driven by recognition of different ground.
Now onto the balance sheet. Our balance sheet remains strong as of September 30, 2012 we had cash in investments of $53.6 million this compares to $59.9 million as of June 30th, 2012 and $87.2 million of September 30, 2011. Please not that our cash and investments are categorized on the balance sheet as both short-term and long-term. All of our long-term investments are AAA rated Government securities.
Now I’m on slide 11. This slide summarizes the key points which we just discussed and highlights our current expectation for cash usage for 2012. We estimate operating cash usage for the year, excluding startup cost related to the startup of biopolymer manufacturing and Antibioticos to be about $30 million. We anticipate ending the year with cash and investments balance of approximately $44 million. After $3 million of anticipated startup costs to facility modifications related to the demonstration phase of the Antibioticos manufacturing.
Once we move to the commercial manufacturing phase, we anticipate additional startup cost to be in the range of $7 - $10 million. We are currently undergoing engineering design for the commercial phase and we have a finding in these estimates. Most of the expenses we are incurring for the startup of the demonstration phase are directly (inaudible) to the commercial manufacturing phase. The company anticipates ending 2012 with an annual cash usage from operations run rate of about $24 million per annum excluding any additional partner funding, grant revenue, other sources of income or any additional one-time charges related to the Antibioticos startup.
We continue to have no depth. We are very excited with the progress we have seen on all the growth and with the preparation for manufacturing at Antibioticos. We see the supply of products from the Antibioticos as an important part of our business strategy. Our portfolio platforms in biopolymers, chemicals and crops put us in good position for growth and value-creation with our business model being that of one, growing the biopolymer business through manufacture with Antibioticos. Two, partnering for growth of the chemicals platform and three, advancing the crop program in the near-term to grant funding. We are confident that the manufacturing facility with Antibioticos will supply sufficient materials at costs that will lead us to profitability for the entire company.
I’d like to now share some thinking on the longer term financial strategy for the company. Note that we are well aware of the needs to manage our cash balances and believe that we have a number of levers in the business to do so. I’d like to highlight four of these levers in order of importance. One is appraisal effectiveness. In biopolymers we are pursuing a very capital efficient approach to launch Mirel. We do not intend to subsidize products in the market place. We need to produce it cost effectively and sell it profitably. Given our understanding of the product and markets, we believe we have an approach to operate this business profitably in a much smaller scale than possible in a large scale facility.
Two, with our partners. While we anticipate the biopolymers launch economics being manageable for Metabolix, we can now choose to open conversations if we wish with the number of customers who have expressed an interest in inventing with us in PHA biopolymers manufacturing. In bio-based chemicals we believe our technology is highly competitive and we’re in discussions with numerous partners, all of whom have significant financial wherewithal.
Partner relationships can take numerous forms ranging from direct cash payments to offset agreements. Three, is the timing of our programs. Our intellectual property extends in some cases for well over a decade. The further lever we have is to adjust the resources and timing of our numeral programs, commensurate with our financial resources recognizing that successful production and commercialization of biopolymers is our top priority.
Four, our alternative financing vehicles. We have a number of additional alternatives such as grants and loans which will be evaluated and pursued as required. We recognize that our operational effectiveness and partnerships are our strongest leverage points. Over the next 12 months, we anticipate that achieving milestones and producing quality product identity articles and demonstrating commercial success with biopolymers will directly translate into increased shareholder value.
With that we’ll open the call to questions.
(Operator instructions). Your first question will come from Laurence Alexander with Jeffrey’s.
Laurence Alexander – Jefferies
Good afternoon. On the Antibioticos relationship, I’ve got two questions. One can you give some initial sense for how quickly you estimated that can ramp up? Would it be over two to three years or would it take longer than that? Also can you address whether the benchmark economics for that are any different from what you had discussed previously with respect to ADM.
Lawrence, Rick here. Thanks for joining the call and thanks for the questions. I think to be honest both of those questions are a bit premature for us to answer. I think what we have said is we see substantial market opportunity, work on the average selling price, transition customers to the supply. We are getting … every week we are getting more and more insight into that ramp up and then be able to drive volume as quickly as poise. With regards to benchmark economics, as we noted in the call this is clearly a capital efficient approach we’re pursuing. We’ve got a very good relationship with the Antibioticos in terms of a cost structure to drive profitability and both of us see a lot of potential here.
There is as we mentioned in earlier calls a slightly higher sugar cost in Europe than in the US which we are well aware of and working to optimize. But I think Laurence incoming calls we will provide a bit more color as we feel very confident on the ramp up rate. We just wanted to make it clear on this call how we are thinking about it and our general commercial strategy. We will get back to and we will provide more information in future calls.
Laurence Alexander – Jefferies
Does the 10 to 13 million including working include working capital or is that the capital outlay?
It includes a portion of working capital. It’s a good question, working capital they will depend on the face of that ramp up which is exactly going back to the first part of your question. But it also depends on various terms that we negotiate with both suppliers and customers which we are actively working right now. But there is some working capital, base working capital included in that number.
Laurence Alexander – Jefferies
Then while it’s difficult to do a horse race for the C3 and C4, platforms can you give us a sense of which ones you think might move forward most quickly and in particular any update on the discussions of CJ.
Yeah. I think the C4 program we’ve always said has led to C3 program in terms of our technical development and the deal discussions are following that same pattern. What we said in the remarks today is that we are focused primarily right now on with the number of parties for the C4 platform while we continue conversations in C3. I would say Laurence, I would expect C4 to move potentially more quickly that C3 and the kind of companies that we are talking to here typically reflect those that have a strategic rationale for being in bio C4 chemicals. CJ could be a potentially a future manufacturing for us, but they may not be one of the primary partners in this discussion. I’ll just leave it at that.
From Piper Jaffray, we’ll hear from Mike Ritzenthaler.
Enrique Akashi – Piper Jaffray
Hi guys, this is Enrique in for Mike. If it comes down to it ,will you be willing to fund the Antibioticos project in the absence of partner funding?
Be willing to fund I think, Joe you can provide your comments but I think you’ve outlined the levers we have and the nice thing about our portfolio is we do have a number of different options within it. Our first approach is just operational, effectiveness, being very efficient as we get that facility launched at a very low amount of capital and wrap it up quite quickly, kind of back to Lawrence’s first question.
Then we’ve got partner conversations going on both in the C3 and C4 area but as well as with bio polymer customers. I guess your question Enrique would be if none of those came to pass would we still be willing to fund it? And the answer as we said in the call is yes. This is our top strategic priority and we are looking at another series of programs outside of those as an option to fund it. We believe that we are pretty focused in terms of how we are planning to do that. I think you want to add to that Joe.
No, I think that’s a good summary. It’s a top priority. We are proceeding ahead. We are making investments now on the demonstration phase and are planning on continuing to get into commercial phase as quickly as we can.
Enrique Akashi – Piper Jaffray
Okay. Great and on the PVC opportunity, since PHA are engineered to be great all the time, do you foresee any market adoption risk due to compound loosing constraints, that the session integrity of the PVC will break down overtime?
It’s interesting that you ask that it’s a question that I’d asked over here quite early in the development of this program. There are actually are quite a number of bio degradable additives already used in the PVC market. Many are encapsulated within PVC which prevents that type of degradation that you are talking about. Quite often there are bio sides that are compounded with PVC that prevent that, but the miscibility of our products with PVC is really exceptional and the performance attributes are quite strong.
But no there are a number of bio degradable aspects used in PVC. In addition, PVC market is huge as you well know and there are ranges of different applications. Some of the things which we are not pursuing initially would be the demanding building and construction applications that have the long qualification time so buyer degradation is really a risk that neither ourselves nor our customers want to take on.
But there are numerous shorter life cycle PVC opportunities, including protective clothing, protective gear, signage, there’s a host of applications where the kind of, even if there was a risk of degradation it’s not a key purchasing criteria in the near time. It’s a good question but, degradable components are already used in PVC. It comes down to application selection and the performance attributes are strong enough that it gives us quite a bit of opportunity to pursue that even with that potential issue which the industry has actually worked around already.
Enrique Akashi – Piper Jaffray
Okay. And so, given this proportion, the proportion of the additives that go on to the PVC, does that change the price of the end product?
When you buy PVC, most PVC compounds and what we said is it’s usually between 20% and 40% other stuff mixed in with the PVC in order to meet the certain performance requirements that the customer demands. I think one thing we’ve learned in our Telles launch is that no one buys these products just to be green they buy them to make money. Everyone makes money or else it doesn’t happen. The benefit of what we are talking about here is that if we can say for example generate greater impact resistance in PVC meaning that it’s a more durable product then potentially the customer can use less of the additive hence is willing is to pay more.
There is a calculation that goes on if you launch these new products around price performance, so I think that’s how these launches will occur that should we eliminate, require less material, we can charge more for that. Should we replace phthalates? That’s worth something as well. There is very attractive pricing in this area which we noticed in typically $3 to $5 a pound in certain performance part of the segment. That’s what we are looking at there. We see that there’s numerous value prepositions here but everyone has got to make some money for it to work and we think we can command quite a good bit of performance in that pocket.
Enrique Akashi – Piper Jaffray
Okay, thanks for taking that question.
(Operator instructions). From Ardour Capital we hear from JinMing Liu.
JinMing Liu – Ardour Capital
Thanks for picking my question. First of all is just a follow-up question on the additive opportunities. Rick, can you share with us, like give us some direction ones answer, like what percentage of PHA will go into other plastics like additive or synthesis that PVC has? Take that as an example.
Yeah, I think, are you taking JinMing about the mix, of the sales mix from the Antibioticos plant? Is that what you are getting at there?
JinMing Liu – Ardour Capital
No, what I was just trying to get I’m saying is that if PVC is compounded with other material, I was wondering say for a given pound of which PVC, what percentage of your PHA could be used in there?
Yeah. Okay, yeah. Again going back to our historical sales mix we have seen cases where there’s been 3% PHA mixed in with a specific opportunity where we get very good pricing because that small amount of PHA brings substantial value to cases where we are almost 50% PHA in the given application and a lot of things are blended as materials optimized. I think it’s a bit early right now JinMing to provide okay, we’re going to take X percent of that 20% to 40% compounding mix in PVC. But to the point Enrique asked, the question he asked, it would be an optimization around the performance properties and the cost that will occur. So I think it’s a little early to point that out. But I’d just highlight that historically as we looked at our strategy and we looked at why people were buying our product. We saw cases, value added cases where we were getting good pricing. We were anywhere from a few percent to nearly half of the additive package which depends on the specific opportunity and the specific product.
JinMing Liu – Ardour Capital
Okay, good. Regarding your approach to compounding in Europe, two questions here. First is whether the cost of company in Europe is comparable to the cost here in the States where I think of what you did before. Secondly is, you mentioned that you stationed because of the compounding, potentially you can sell more than the 10,000 metric pounds. Can we give us some color there to say whether that’s 10% more or 100% more or it’s too early to tell?
Yeah, it’s a good question. First of all, the compounding, we are not, I don’t have on my fingertips the exact compound and cost in Europe versus the US. But we are getting some very competitive offers and we are currently working through three different compounders in Europe and all of whom are high quality, all of whom are being relatively aggressive in pricing which is giving us the ability to get some good economics.
And I pointed out in the prepared remarks that our decision to compound is going to be based on where we generate the most margins. For the cases where we’ll let someone else do the compounding just because it’s something they can do more efficiently. In other cases we’ll do it because we can make more money that way. But the core structure we’ve not found any significant penalty versus that in the US.
On your second question of whether we can sell more, a little too soon to give you a precise number, but there are some products we are selling on a compounded basis where the PHA is 50% roughly of the total blend which would mean 1,000 tons of that product on a PHA basis would generate 2,000 tons of sales. I think it’s too early to apply that to the whole mix because some of that will evolve as the products evolve. I think the additives bit, it’ll be mostly pure PHA. Some of the film products will get that kind of volume uplift. But you can envision, for certain products pretty significant uplift on volume, but that mix is still evolving as we move to watch.
JinMing Liu – Ardour Capital
Okay. Switch to your C4 platform.. I think I read your slides (inaudible) and 60,000 liters. What kind of yield we’re having there? Like say whether that’s in kilograms or that depends?
We are not, JinMing disclosing the yield, but we have said one of the compelling parts of our process is that we have produced tonnage quantities of the material and we can be able to get product to market even as we are improving yield and we can see cases where we could be profitable in some application quite soon. You want to add anything on that?
Yeah. So JinMing, we haven’t been very specific on some of the yield numbers. But that’s fermentation process that was run does generate over 120 grams per liter of the immediate C4 chemical precursor. It’s a pretty efficient process, although it’s not yet where we want it to be..
JinMing Liu – Ardour Capital
Okay, good. Excellent. Thanks.
And at this time, there are no further questions in the queue.
No more questions, okay. Just to wrap up, I’d like to thank all of you for joining our call today. In numerous ways our technology portfolio is very well aligned with the global trends towards sustainability, the use of renewable materials. We at Metabolix are fortunate that we possess a high value technology platform which offers us numerous commercialization in partnering options.
Just to summarize, today we outlined our commercial strategy for biopolymers and provided an update on our progress with Antibioticos which is aimed in establishing commercial manufacturing capacity in 2013. We selected three target markets which share the common characteristics of being large, offering high valued opportunities and providing an excellent fit with our bio polymer capabilities.
Our customers are with us. In our chemical platform, the attractive potential cost position for our technology has been increasingly validated by the strong interest demonstrated by perspective, sophisticated partners with whom we aim to structure a win-win relationship in which we both benefit. As we continue to move our crops towards cash neutrality, we’ll optimize that technology for the long term and we’ll maintain a lean corporate overhead structure. In aggregate we are driving the company towards cash positive operations while establishing a very strong foundation for growth. We anticipate tangible progress across each of our business areas in the coming in the coming quarters and look forward to keeping you informed.
Thanks again for joining the call and have a nice evening.
Ladies and gentlemen, that does conclude today’s presentation. We do thank everyone for your participation.
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