Yield10 Bioscience Inc (YTEN) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Metabolix Inc. Third Quarter 2007 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 Kathleen Heaney from ICR. Please go ahead, ma'am.

Thank you, and good afternoon, everyone. Metabolix's released third quarter financial results today after the market closed. If you do not have a copy, one may be found on the website at metabolix.com in the Investor Relations section. Making the presentation today will be Jay Kouba, Chairman and Chief Executive Officer of Metabolix. Also available during the question and answer period will be Ollie Peoples, Co-Founder and Chief Scientific Officer and Tom Auchincloss, Head of Business Development.

Before we begin our formal remarks I need to remind everyone that part of our discussion today may 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 as of 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 conditions.

With that I'd like to turn the call over to Jay Kouba, Chairman and CEO of Metabolix. Jay?

Thank you, Kathleen. I'd like to welcome you all to the third quarter earnings conference call for Metabolix. The past year has been an exciting one for Metabolix, one in which we have made significant strides in moving the business ahead. November 10 will be our one-year anniversary as a public company. We're pleased with the considerable progress that was made in the third quarter as well. We were awarded a $2 million Advanced Technology Program, or ATP grant, to develop a commercial viable process for biobased C4 chemicals.

For Mirel, customer development activity grew and advanced. Construction on the Clinton facility is moving ahead as planned. We have been actively performing evaluation and testing of Mirel on physical properties, fossil energy usage, CO2 emissions, biodegradation and for the FDA food contact notification. The balance of outcomes from these efforts has led us to greater focus in our marketing strategy, which I will describe in a moment.

Now let me provide you with some details on these developments. First the ATP award, one of my priorities as CEO has been to accelerate the development of additional platforms for growth. I'm extremely pleased that the Company recently received a $2 million ATP Award from the United States Department of Commerce National Institute of Standard and Technology and that this will help us develop a new platform for the production of renewable based chemicals.

Over 600 proposals were submitted and we were pleased to find out that Metabolix was one of just 56 companies that were selected. This award will help fund technology development for a new Metabolix platform in C4 chemical intermediate, the demand for which is estimated at 2.5 billion pounds annually and growing at a rate of 4% to 5% per year. Today C4 chemicals are produced almost entirely from fossil-based hydrocarbons and are used to make spandex fibers, polyurethanes, engineering resins, personal care products and solvents.

Our plan is to create sustainable biobased routes to these important industrial chemical intermediates, creating competitive advantage for Metabolix and providing another option for reducing both our dependence on fossil feedstocks and adverse environmental impacts. For the Company we now have three core platforms for growth, Mirel biobased polymers, engineered plant crops such as switchgrass and sugarcane and renewable C4 chemicals. This is a testament to the breadth and strength of our underlying technology and intellectual property.

Now, on to the Clinton facility, construction continues to progress well. The on-site fermentation, fabrication and assembly are progressing on schedule. All major equipment has been ordered and detail design of piping and control systems are currently under way. Based upon the current status and plans, ADM estimates that commercial operations will start in December 2008, in line with our previous indication for completion.

Now, Mirel evaluation and testing, over the past months we have been exhaustively evaluating and testing Mirel to understand where we have the greatest market potential and the strongest competitive advantage. Our evaluation and testing has revolved around five areas, the physical properties of Mirel, its biodegradability, low carbon footprint, high renewable carbon content and FDA food contact approval. We have been doing a number of things within that context including physical testing, joint development with universities, third-party evaluation studies and sampling product to market.

From all this we have identified six markets that will be our primary near-term focus. Those six markets are card stock, which includes gift cards, cosmetics packaging, consumer electronics, compostable bags, agriculture and horticulture and marine and water applications. These six areas have approximately 2 billion pounds per year of addressable market potential and are estimated to be growing at a rate of about 5% per year. The growth rate alone would fill our initial plan. In the near term we will accelerate our efforts in these markets while continuing to explore other markets we would be subsequently added to our focus list.

Stepping back for a moment, let me discuss the five criteria and why they are important to us. In evaluating the physical properties and fabrication to Mirel, we have found film, sheet and injection molding applications to have the greatest near-term potential. Other fabrication technologies continue to be developed, but these are the application areas we will focus on first. We recently announced the findings of an independent Life Cycle Assessment, or LCA, for Mirel bioplastic resin which exceeded our expectations and substantiated the sustainability of Mirel.

The LCA study was completed by Dr. Bruce Dale of Michigan State University, a recognized leader in this field. His study determined that the production of Mirel reduces the use of nonrenewable energy by more than 95% and provides a 200% reduction in greenhouse gases compared to production of conventional petroleum-based plastics.

Mirel actually has a negative CO2 footprint. In this study the specific supply and production situation at Clinton was evaluated from a cradle to plant gate perspective. Because Mirel is made from corn and utilizes renewable energy in its production, the environmental benefits are significant. We were excited by these findings and believe that the findings from this study will lend further confidence to prospective customers.

Results of the independent testing have also shown that Mirel has a broad range of biodegradability. Consistent with our brand strategy, we have completed certification for municipal composting, which is ASTM D6400, soil and coal composting, ASTM D5988-96, marine degradation, ASTM D7081, and aquatic testing, ASTM D5209 and ASTM D5271.

We also have two formal independent studies in progress testing actual products in marine and compost environments. We're very excited about the preliminary results from those and we expect to be able to announce the findings shortly. In addition, we have received informal data as well, which can give you an idea of the sense of what we are learning.

Alcan Packaging, a leading plastics packaging company recently conducted a preliminary biodegradability study in fresh water in Lake Winnebago in Wisconsin and was kind enough to share those results with us. Alcan's test showed that a 3 ml thick Mirel film had totally biodegraded in just 18 days in a fresh water lake environment. While this is a singular test, it is encouraging. And it's also important to understand with this that it is preliminary and it does not conform to any ASTM or regulatory standards.

I spoke earlier about the six near-term markets that we are focusing on. Those markets do not currently include applications that involved food contact, such as coffee cups or food packaging. Although these are applications that we anticipate for the future based upon considerable customer interest. The process of FDA approval, however, will take longer than we had initially expected. We had planned to submit our dossier in 2007.

As part of that process we had an official pre-notification meeting with the FDA in October. At that meeting the FDA requested additional information about Mirel to be included in the submission, which we had not anticipated. It will take us some time to gather the information they have requested and we will submit for approval as soon as we can. Resolving this is a high priority for us.

Food contact applications will be among those markets that we will continue to pursue while we focus our efforts on the six markets I previously discussed. The most mature part of our application portfolio is non-food contact. It aligns with our competitive advantages and has an addressable market far larger than our production capacity.

During the last conference call we reported on one of the ways we measure progress towards customer purchase commitment. It is to monitor the identified potential demand for each prospective customer application in 2010.

I want to remind you that this provides a forward-looking estimate of potential, which is used for internal purposes and is based on discussion 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.

At that time of our last call, the identified potential demand for 2010 was estimated at 108 million pounds or about 1 times coverage of the capacity of the plant. The comparable number for this quarter is 172 million pounds. This is a significant increase. It primarily reflects an increase in the number of customers indicating potential demand to us but also reflects an increase in the number of customer applications at a more advanced stage of development. We are very pleased with this progress.

It is, however, important to recognize that this figure is premised on food contact approval being received by mid next year and that approximately two thirds of this estimate is related to food contact applications. In the coming quarter we will be reevaluating time lines and focusing our attention on the six key markets. Our estimated potential demand for 2010 may well decline as some food contact related volumes get pushed out beyond 2010.

Our goal remains to achieve a forecasted level that is seven-times greater than the 100 million pound capacity of our commercial manufacturing facility in order to facilitate achieving full production in an orderly fashion.

The bottom line is that our near-term opportunities for Mirel are likely to be driven by the six non-food contact market areas we have identified and others that we may add to the focus list. As our focus markets represent 2 billion pounds of market potential, we remain excited by the response we are seeing in the marketplace and are comfortable with our prospects for a successful product launch and plant production grants.

Before I move into the financials, I want to cover one more important topic. When I assumed the CEO role I stated that my three priorities were to ensure the successful commercialization of Mirel, accelerate the development of additional platforms for growth and develop the organizational capability of the firm. We are well along in achieving those objectives. As we indicated at the time assumed the role of the CEO in May, I entered into a one-year contract after which time I intend to return to my prior role of serving the Company exclusive as Chairman of the Board.

In order to ensure that we have an effective transition in leadership at that time, we've official begun the search for a successor. To help us with this process we have engaged a search firm and are currently in the early stage of a candidacy search. I would like to ensure our investors that we are being very diligent in our search for a thoroughly qualified candidate and provide you with an update when that process is complete.

I will now discuss the financial results of the quarter. As most of you know, Metabolix currently manages its finances with an emphasis on cash flow. For the three months ending September 30th we experienced net cash used in operating activities of $0.9 million, as compared to net cash used of $0.1 million for the comparable quarter in 2006 and $2.9 million for second quarter of 2007. Our net cash use was lower in quarter three as we had an early receipt of a quarter four payment due from ADM.

We spent $3.9 million for capital expenditures during the current quarter, primarily for the expansion of our pre-commercial manufacturing facility to produce market development material. 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 net loss for the quarter was 8.3 million as compared to a loss of 4.2 million for the third quarter of 2006. As expected, our third 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 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 recognize non-cash stock compensation as an expense on GAAP basis, which also leads to a net loss exceeding cash used.

Now let me give you some additional detail on the Company's financial results for third quarter 2007. For the three months ending September 30 revenues totaled $0.2 million, which compares to $0.4 million in revenue during the third quarter of 2006. An increase in research and development revenue due to the recognition of revenue from a joint project was offset by a reduction in grant revenue as we had completed the department of energy program in the second quarter of 2007.

As we grow the business our expenses continue to ramp up. Total operating expenses increased from $4.9 million during the third quarter last year to $10 million this year. The increase reflects new hires across-the-board in R&D, sales and marketing and administration to support growing the business. In addition, we grew our expenditures for product development and pre-commercial manufacturing. Lastly, we experienced increased costs associated with being a public company as well as FAS 123R stock compensation expenses.

Our balance sheet remains strong. On September 30, 2007 we had cash and short-term investments totaling $113 million. This capital should be adequate to build our sales and marketing infrastructure, conduct pre-commercial manufacturing, make necessary commercial formulation investments and to expand our research and development to build the Company.

In summary, we are pleased with the progress that we made during the third quarter in identifying the markets that play best to our competitive advantage and we look forward to focusing our efforts around those markets going forward.

With that we will open the call to questions.

Thank you.

(OPERATOR INSTRUCTIONS)

And we'll take our first question from Eric Larson of Piper Jaffray.

Yes good afternoon everyone.

Hi, Eric.

I have a couple questions. First you didn't make any comments regarding the capacity of your pilot plant, can you give us a quick update of where you sit with Jay?

Yes we completed the construction phase of it and we're currently in start up. We have a couple of challenges around two of the pieces of equipment and we're in the process of resolving those right now. We expect it to run at its 50,000 pound per month capacity shortly.

Okay. And I know this question will get asked, are any of your current customers that are far along the curve in a position where they can make announcements, maybe co-announcements with you, on further uses of your product, of Mirel?

Well Eric, as you know, we're under confidentiality agreements with all of our customers and the customers will define it and when any of those disclosures occur. So we're obviously interested in having disclosures of the customer trials and advancements and as soon as we have them we will make those announcements.

Okay. And a question for Oliver. Oliver could you just spend a minute discussing C4 industrial chemicals? Does that include things like [diesis], long-chain carbons? I mean are there more specifics that you can give us directly related to the technology?

Yes so I think we've had a -- we're actually very delighted to have this program finally getting under way and we're particularly pleased that the ATP folks saw the merit in what we had proposed and the basic science and technology behind it. I mean these are basically C4 chemicals, sort of think of the 1,4-butanediol train of chemicals and all the intermediates that come out of that. There would not be long-chain molecules unless we used, for example, 1,4-butanediol in polyurethanes and polymerized them up to get higher molecular weight.

But really the technology is focused on a novel manufacturing technology based on essentially renewable sugars and a fermentation platform of activities is now under way here. We have proof-of-concept already well in hand and it's a question now of driving towards a commercially viable production organism. We have a proven track record of doing that with our things and we are very, very pleased to have this finally under way.

Yes that sounds great.

Can I add a little bit to that?

Sure I'd love you to.

The specific chemicals in the C4 chain are today made by three different routes. The traditional route is from a [sedaline] and that's been around for many, many years. There's a second route that has been developed using maleic anhydride as a raw material and there's a third route that uses propylene oxide.

All of these routes make the same set of chemicals which are all related to each other and they are 1,4-butanediol, gamma buterol lactone, tetra hydro furan, N-methylpyrrolidone, vinylpyrrolidone and polyvinyl pyrrolidone. So there is a series of chemicals in this sequence and they are used for a variety of different commercial applications.

Okay. And obviously sugars are your feedstock as well?

Yes our process will be based on sugars.

Okay. Is it also then linked to your project in Australia?

No not at this time, no.

Not at this time.

(inaudible)

Okay thank you, everyone, I'll pass it along. I'll catch you offline.

And we'll go next to Pamela Bassett of Cantor Fitzgerald.

Hi thanks, hello everyone, congratulations on a good quarter. Can you talk a little bit more about time lines with the C4 program and what we should expect, or stages that the program will go through?

Okay the grant that we got is in support of a technology effort to create the technical basis for being able to do the genetic engineering of an organism to these products. In parallel with that we will be looking at engineering technologies to separate, isolate and purify the materials.

And thirdly, we will be looking at commercial development activities and trying to understand whether there is an alliance or partnership that we should be making. So as we make specific progress in those areas, we may well [give some indication]. We're fairly early on in the development of the technology, although we know exactly what we want to do. So my view is that this is still a couple of years out.

Okay. So am I correct in understanding this is all work that will be done pre-scale up? This is all still --.

Yes we're not ready to --.

You're not even -- scale then would be maybe two years out.

Yes.

And how that would be done is still a subject of internal planning.

Correct.

Okay great, thank you very much.

And we'll go to Laurence Alexander of Jefferies & Company.

Good afternoon.

Hi, Laurence.

I guess first of all just to follow up on the food contact issue, can you give us a rough sense for how much of your backlog might potentially get pushed back a couple of years?

At this point in time, Laurence, I just don't know.

But currently what you have booked out of the 170 million pounds, it's probably less than a quarter, is that sort of roughly the right ballpark?

That's food contact?

Right.

No two thirds of--.

Two thirds.

-- and 170 is food contact.

Okay perfect. And second, in terms of --.

Although I'm not going to say that all of that is going to disappear or be pushed back.

Right. And I guess secondly, in terms of the six key end markets, can you scale them roughly in terms of which ones are most attractive from a pricing perspective and in terms of current customer indications or feedback?

Well we actually haven't got the pricing discussions on any of these markets because that will happen with sales and purchase agreements. But we are indicating, as we've said before, pricing north of $2 a pound for all of the fabrication.

Or maybe just more broadly then in terms of levels of customer interest, are you already discussing with customers in all six areas?

Yes we are.

And which ones are you getting the most positive feedback?

Well the things that we are hearing that I think is probably more new information is, and I think we discussed this before, is that we really have two different value propositions at the firm. We have one value proposition which is the brand proposition where brand owners for consumer products want to utilize Mirel to enhance their own brand. And cosmetics is a perfect example of this where an all natural cosmetics manufacturer may well want to use a Mirel biobased plastic to fortify their own brand proposition.

There is a second value proposition that we have which is really about the functional attribute of biodegradability. And in these cases the simple example here is the stake, which is already a commercial product that actually allows the elimination of sending a crew out to recover metal stakes out of the field.

And what we're actually finding is tremendous interest in the broader area of biodegradable products for agriculture and horticulture. There's a tremendous amount of interest. There's also a tremendous amount of interest in film products. And again those are fairly new, things that we've seen that actually gives us confidence that the market areas that we're looking at are going to be very fruitful for us.

Okay actually that's very helpful. Can you also give us an update on the sugarcane program?

Ollie? Do you want to take that?

Yes basically it's been under way now for a few months, it's progressing along, I think the interaction at some of the science levels, so the interaction with our scientific team, has built [what they call in Australia] seems to be working very well. A

nd I guess we're in the process of shipping things over to Australia periodically that we have sort of developed and proven in switchgrass and then we transfer them over there and they begin to put them into sugarcane. But just like switchgrass transformation and all the rest of it, it's quite time consuming in the sugarcane as with switchgrass. And so I think it's still early days yet in the Australia thing.

Okay thank you. And Jay, just one last question if I may, is out of the different traditional chemical C4s that are produced from the different feedstocks, are you targeting all of them equally? Or is there one or two that you are targeting in specific?

Well I think what we will be able to do is actually get access into the chain through either producing butanediol or gamma buterol lactone. And from that that basically gives us access to all the rest through traditional chemical processing.

Wonderful. Thank you.

And we'll go next to Michael Carboy of Signal Hill.

Good afternoon, ladies and gentlemen. Jay, I'd like you to elaborate a little bit if you would on the FDA request for further information. Do you believe that this is potentially driven by perhaps competitive pot stirring? Or are there aspects of the product evaluation that are simply so new to the FDA that they simply are asking for more information?

Yes I happen to have huge respect for the FDA and I think our interactions with the FDA have only demonstrated to us just a highly professional and technically astute approach. Mirel is a new material and I think that the FDA is being cautious and thorough. And they haven't asked us to do anything extraordinary or unreasonable, they're simply asking for more information. So I think this is perhaps in retrospect an expected outcome.

Okay so you don't feel as if you've been sort of put in the penalty box here.

Oh no.

Okay good.

In fact I would say that the FDA was very helpful to us, very helpful to us in defining very clearly what their interests were in (technical difficulty).

Okay good. And let me shift to C4s for a minute here, can you elaborate or share with us how the fermentation process that will lead to C4 precursors will be different than the process now used for Mirel? Will we expect a different, capital intensity associated with that process? How should we think about it from a how you're going to build this rascal perspective?

Yes so what we will be doing in the C4 process is to make a different polymeric material than Mirel in essentially exactly the same kind of a fermentation. So you can have an expectation that it will perform similarly and have a similar cost structure to Mirel. Once we make that polymer, it's a different polymer than Mirel and we expect to be able to unzip that polymer into the C4 chemicals so it will have very simple back-end processing after purification.

Okay. And then a last question for you if I may, it sounds like we have both a CFO and a CEO transition under way. You'll be continuing on in your role as the Chairman of the Board, is that correct?

I am, yes.

And Tom is remaining, at least until we hear otherwise, in the role of interim CFO and he will continue as sort of a strategic planning, strategic business officer?

Well Tom is technically the Head of Business Development for Metabolix now. He is assisting in the transition and assisting in Investor Relations.

How does the Board feel about --.

Until I hear otherwise.

Well hopefully not. How did the Board feel about having two key roles like this sort of in flux at the same time?

Well the Board is very up to date in the progress of the firm and my view is that the Board is pretty confident in our executive team being able to execute on our promises. We are making progress. they are actively assisting in a structured and deliberate transition process, so we don't actually see a lot of disruption.

Okay. Well congratulations on the ATP C4 award and on the careful cash management. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

And we'll go next to [Ginling Liu] of Ardour Capital.

Hello everyone.

Hi.

Hi, I have a few questions. The first one is about ADM, they recently announced the former industrial chemical group, my question is does that affect your relationship with ADM?

No it's not. Our relationship with ADM is specific to Mirel and the relationship with ADM is specific to fermentation-based Mirel-type polymer products. So as we pursue C4 chemicals, that is not covered under the ADM alliance. And they have many opportunities as well to look at industrial biotechnology beyond Mirel because of their vast enterprise in corn wet milling and oil seed crushing. So they have many opportunities that they're interested in pursuing as well, independent of Metabolix.

I see. In terms of future collaboration, whether ADM forming that group has any affect to you?

Well they just actually just appointed their Head and I don't really want to speak for ADM. We have continuing dialog with ADM on our current relationship and the potential for future relationships. And you know our relationship with ADM is great and it's open and we talk about all sorts of things.

Okay. My next question is about your C4 platform, my question is the final product from your C4 platform, are those products biodegradable or not?

Most of those will not be biodegradable any more so than the existing materials. So for example, if you were to make a polyurethane from our materials, it would have a rubber segment in it that would be polytetramethylene ether glycol. That's a item of commerce today, it's made from THF, it is not biodegradable and the polyurethane is not biodegradable. So these would be biosourced materials.

Okay. Have you considered using non-sugar feedstock in the production of your bioplastics?

We're obviously beginning our production at Clinton with 110 million pounds of production capacity of Mirel. I know we've stated previously that the plant is being designed such that potentially we can make four times as much material at that site and that there is sugar available at that corn wet mill site in Clinton Iowa to make four times as much Mirel. Any subsequent investment at Clinton would have the advantage that investments in the infrastructure have already been made for the first plant and so subsequent plants will have a great, capital efficiency than the first.

As we look forward to where do we go from here, we will balance the capital efficiency of Clinton versus opportunities or potential opportunities for all alternative feedstock supplies and cost structures elsewhere. And we will consider all of those in making the best possible investment decisions going forward.

All right. My last question, do you have any indication about the demand for Mirel bioplastics for the year 2009?

At this point in time we're just disclosing those for 2010.

Oh okay, got it. All right thanks.

We'll go next to Brant DeMuth of Mazama Capital.

Hey guys, thanks for taking my call.

Hi, Brant.

A quick question on Target, any updates, maybe milestones set or feedback from them?

We have feedback from them but we're not free to disclose it, I'm sorry. Target is making their own plans and will announce their intentions themselves. I'm sorry, but I can't comment on that.

Okay, thanks.

Thank you.

And Mr. Kouba, there are no further questions in the queue. At this time I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you very much. I really appreciate you all participating in our conference today. In summary, we continue to set and meet our milestones and we will keep you updated on the progress on all of these fronts. We look forward to talking to you again at the end of next quarter. Thank you.

Ladies and gentlemen, that concludes today's conference, you may now disconnect.