Yield10 Bioscience Inc (YTEN) 2009 Q3 法說會逐字稿

Welcome to the Metabolix Inc Third Quarter 2009 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. At this time, I would like to turn the conference over to Miss [Lori Shute]. Please go ahead.

Great, thank you, and good afternoon, everyone. Metabolix released third quarter 2009 financial results after the market close today. If you do not have a copy, one may be found on the website at www.metabolix.com. in the Investor Relations sections. 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. 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 our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition. With that, I would like to now turn the call over to Rick Eno, President and CEO of Metabolix. Rick?

Thank you, Lori. I would like to welcome all of you to the third quarter 2009 earnings conference call for Metabolix. Today, I will provide you with a review of the Metabolix vision and a broad update of our ongoing activities. Joe will then take you through the financials. We continued to make good progress on our commercialization and development activities and have maintained a strong financial position.

For those of you new to these calls, Metabolix is an innovation-driven bioscience company which is focused on bringing environmentally-friendly solutions to the plastics, chemicals and energy industries. We are developing and commercializing pathways and products that are intended to lessen the world's dependence on oil, reduce CO2 emissions relative to traditional materials and address critical solid waste issues. We are founded on hard science and have exceptional capabilities and plant science in fermentation, microbial and polymer engineering and in product and market development.

We currently have three business platform. First, Mirel, a bio-based and biodegradable plastic currently being commercialized with our partner, Archer Daniels Midland, through a joint venture called Telles. Secondly, Industrial Chemicals, initially focused on C4 chemicals, and third, our crop-based activities, which include our products in switchgrass, oil seeds and sugarcane.

Let me begin with the Telles business. We have made substantial progress since our last call. I'd first like to update you on the progress of the Clinton plant, the production source for our first commercial product, Mirel. I visited the plant last week and was very pleased with progress. ADM is well into the startup process. There are numerous systems already in operation and the plant is looking more and more like an operating site than a construction project. The schedule for the plant remains consistent with the timing outlined in our last call. Construction of the initial phase of the plant is planned to be completed in November, at which point the entire facility will be in the hands of the ADM operations team. The plant will then move into production with initial fermentations conducted in December and recovery operations to immediately follow.

Over the last two months, the ADM operations team has been commissioning a range of systems, primarily in utilities, fermentation and polymer offloading. In general, the commissioning process has gone quite well. While startup plans and initial production slates are being finalized with a great deal of detail, we must point out that a new production process of this type and scale will always possess initial startup risks which could affect the schedule. We of course are working closely with ADM to minimize these risks and as issues are identified, we will work together to resolve them.

The highest priorities for the ADM operations team are to execute a very safe startup and to produce high quality product for Telles customers. ADM has operational staff working around the clock on commissioning activities. It is difficult to provide the precise date of actual on-spec production from the site, as there will be hundreds of operational decisions to be made over the coming weeks, with safety and quality being the primary drivers. We will be providing a detailed update on the Clinton plant operations during our next earnings call.

We are currently maintaining our guidance for the capital cost of the Clinton plant as north of $300 million. It is important to think of this capital investment in the context of growing the Mirel business. Consistent with most process facilities of this type, about two-thirds of the Clinton 1 capital investment will be in the actual processing equipment, in our case, fermentation and recovery. About one-third of the capital investment will be in supporting infrastructure and utilities, including electrical, cooling water services, control rooms, maintenance facilities and basic site development.

As we've mentioned before, Clinton was selected and laid out with the vision of a 4X expansion. As such, a good portion of the supporting infrastructure investment to support future expansion is being made with Clinton 1. We expect that the economics of expansion beyond 110 million pounds per year will reap substantial benefits from this Clinton infrastructure. We should also benefit from a more normal environment for the cost of construction materials and labor than what was experienced while ADM was proceeding with construction of the majority of the plant in 2007 and 2008, as well as the application of next generation technology, which is currently being developed.

Let me now shift to our market development activities. Mirel is a superb product, offering superior biodegradability, bio-based sourcing and performance levels exceeding other available bioplastics. Our market development activities remain focused on six specific segments, where the combination of Mirel's properties result in a unique offering. 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 aquatic applications.

These six segments represent over 2 billion pounds of initial addressable annual demand. This quarter, Newell Rubbermaid, the customer we disclosed during our last earnings call, launched its PaperMate green writing set, bio-based, biodegradable pens and pencils based on Mirel. The initial launch is taking place in Canada. The website, www.papermategreen.com, is a very good example of the co-branding approach we are pursuing. We aim to create and then capture the brand value for Mirel, a unique biodegradable material. This strategy is similar to that which built other industrial brands, such as Kevlar and Teflon. We are excited to have Newell Rubbermaid, a leading brand owner, as a customer for Mirel. We look forward to broadening Mirel's use into other Newell Rubbermaid product lines.

This quarter, we also announced a new customer for Mirel. PharmaFilter BV, a bioenergy technology company based in Amsterdam, has signed an agreement to purchase Mirel to produce a suite of disposable products for hospital use. PharmaFilter is currently commercializing its patented pharmafilter system as a cleaner, more efficient ways for hospitals and the healthcare industry to reduce the volume of contaminated solid waste, food and waste water as well as to create bioenergy through anaerobic digestion.

The pharmafilter process reduces solid waste first through a series of grinding stations located in each ward and then through a series of purification steps, including anaerobic digestion. Outputs of biogas for fuel or power generation, biomass for energy conversion and clean water. The initial products to be made from Mirel include a range of single use applications, including service ware items, bedpans and trash bags. Use of disposable service ware products made from Mirel can create a safer work environment by converting reusable items to single use items, thus reducing human contact with contaminated service ware. Mirel products will be disposed of with the hospital waste and fed to the pharmafilter system. The initial pilot project is scheduled to begin operation in March 2010 at Delft Hospital in Amsterdam.

While PharmaFilter's system is specifically designed for hospital applications, Mirel products could be integrated into bioenergy production in many anaerobic digestion applications, including those utilized in institutions, municipalities and at large public facilities such as stadiums and convention halls. We are excited about our relationship with PharmaFilter and the potential this could offer for broad-based use of Mirel and anaerobic digestion systems.

This quarter, we were also pleased to announce that Metabolix received a grant from the US Department of Agriculture to advance the development of bio-based, biodegradable blow molding resins. This is a subsequent grant to one received by Metabolix in 2008 to develop blow molding resins at a laboratory scale. This new grant is aimed at scaling up the resin development from laboratory to commercial scale. Commercial grade blow molding resins are used in a variety of bottles, including shampoo, oil and juices. According to the American Plastics Council, in the US, over 4 billion pounds of high density polyethylene plastic per year is used for blow molded bottles, containers and other products and are major components of the traditional petroleum plastics manufacturing industry. The grant is for $350,000 and will be executed over the next 12 months.

Now onto our pipeline. Another way we have measured progress towards an effective Telles business startup is to monitor the identified potential demand for each perspective customer application for the calendar year two years out, currently 2011. This process enables us to forecast a forward-looking estimate of potential, which is based on discussion with and analysis of our customer prospects.

As a reminder, our customer prospects are not committed to purchase these amounts, nor have we received orders for these amounts, but it is an important exercise. It helps us gauge demand. This in effect is our pipeline of development activities, some of which will be realized, some of which may not. As we have described before, new polymer market applications in general take nine to 15 months for development. Hence, a metric which looks two years out will provide a good view of those applications which we are developing and which will also be enduring beyond our initial plant startup.

Currently, we are looking at 145 million pounds of indicative demand for two years out versus 142 million pounds shared in our last call. This is all non-food contact volume. As we have focused primarily on our existing customer base and prospects, the slight growth in indicative demand is due to greater opportunity seen at some of our existing accounts.

With the Clinton plant production, we will be able to being our transition to world-scale commercial operations. This will include meeting the growing production requirements of our existing customers as well as providing product to accelerate the commercialization process for the high impact potential customers to whom we have not had sufficient resin to supply. In terms of product pricing guidance, we are maintaining our $2.25 to $2.75 per pound guidance. All of our contracts fall within this range.

Fundamentally, Mirel's unique combination of biodegradability, bio-based sourcing and performance properties results in premium pricing relative to most petroleum-based plastics. In our targeted consumer applications, the cost of plastic is small relative to the value that it brings to the brand. In our targeted industrial applications, the economics of a bio-based, biodegradable plastic adds value to that created by incumbent plastics. In both consumer and industrial applications, customers are seeking to use Mirel to create products and product lines that were not possible with incumbent products. Mirel is a premium product.

Let's now shift to the FDA process for food contact. The FDA process for food contact requires the submittal of a dossier, known as a food contact notification, FCN, which is made up of the results of a number of extraction studies conducted under specific guidelines as well as a thorough review of a range of polymer characteristics. After submittal of a dossier, the FDA has up to 120 days to ask for clarification of information included in the dossier, additional testing, or to modify the submitted approach. Once this time period has elapsed, assuming no objections from the FDA or required additional analysis, one is free to pursue the submitted food contact segments.

In early October, we submitted our dossier to the FDA for food contact notification. Our dossier addressed applications for all food types and conditions, ranging from frozen up to contact with boiling water. Based on the 120-day process, we should have an update during the first quarter of 2010. We have not yet included food contact applications into our two year indicative demand outlook, but we are currently investigating how food applications could integrate into our existing non-food contact pipeline and have activities ongoing with potential food contact customers. Keep in mind, as stated in previous calls, that our entry strategy for Clinton is not designed around food contact applications and does not depend upon it, as we do not have control over many factors that impact the overall timing of the FDA process.

During our last earnings call, we were asked several questions on the process for expanding the business. Let me address those. The initial Clinton capacity at start up is expected to be sufficient to meet our current customer and development needs. Together with ADM, we will be finalizing the plans to complete the incremental work required to stay ahead of market demand up to Clinton's 110 million pound per year design capacity. We expect that this incremental expansion effort is relatively minor compared to the scope of the construction completed to date.

While the vast majority of our time and ADM's time is clearly focused on the start up of the Telles business and the initial phase of the Clinton plant, there is some long lead time work going on relating to expanding the business. This primarily relates to the development and testing of next generation Mirel technology, which may be deployed in one of the next phases. This work will continue for the foreseeable future as we look to continually expand the business and improve margins.

Next year, after plant startup, we will validate the technology as implemented in Clinton 1 as well as the market potential for Mirel. That information, plus the long-term technology work being pursued, will be key inputs into a plant and expansion decision. We continue to be very enthused about the potential for Mirel. Demand for the product remains strong in the current economic environment and product application work is continuing to illustrate the increasing breadth of potential applications for Mirel.

Let me now move on to the other Metabolix platforms. These represent meaningful value creation opportunities for us beyond the Telles venture. During the third quarter, we hired an executive who will be responsible for the development of our business strategy and commercial relationship activities for the non-Telles portion of our portfolio. Johan van Walsam has rejoined the Metabolix team as Vice President of Commercial Development. Many of you know Johan. He was a key member of the team responsible for bringing our Telles platform to market and we look forward to his leadership as we do the same with our industrial chemicals and crop platforms. The Metabolix team is very excited about having him back on board and the prospects it brings as we accelerate the commercialization of our long-term technology portfolio.

Next the Industrial Chemicals platform. In C4 chemicals, a key part of our industrial chemicals platform, we completed all work under our ATP grant, a $2 million grant aimed at producing C4 chemicals from renewable sources. C4 chemicals are a large family of chemicals enabling a wide range of end use applications, including engineering resins, urethanes, solvents, and personal care products. There were a number of technical milestones outlined in the ATP program and we achieved them all. Based on the accomplishments of this work, we believe we have the technical foundation for an attractive C4 chemicals business. The initial entry is planned around a series of specialty C4 products, including the proladones, offering an addressable market of about $800 million.

Our analysis shows that our pathways to these targeted C4 chemicals are robust in the range of 60 to $70 per barrel crude oil and of course, at higher levels. Economics will vary somewhat based on the chosen site location, whether we utilize existing capital in facilities, as well as the pricing of sugar raw material. We are pleased with our technical accomplishments and we are continuing work to advance this important technology in our commercialization strategy. We have ongoing discussions with various potential partners as we examine commercialization options. We are also beginning to frame out our next set of industrial chemicals targets and plan to outline these in greater detail in 2010.

Our third Metabolix platform is our crop-based activity, including our programs in oil seeds, switchgrass and sugarcane. All in all, we are excited about the platform, as we can see the pathways we are developing ultimately replacing capital-intensive operations such as oil and gas exploration and production, refining, olefins and polymerization by producing polymer directly in crops. Our crop programs offer numerous options to produce low-cost chemicals, plastic and fuels in a very sustainable manner.

During this last quarter, we announced the execution of and results from a field trial which we conducted with tobacco. Tobacco is essentially a test crop for our plant science activities and is currently not a long-term commercial target for us. However, tobacco is well understood from both a science and regulatory perspective and learnings from our tobacco experiences are readily translated to our commercial targets, oil seeds, switchgrass and sugarcane.

Metabolix obtained the necessary permits from the US Department of Agriculture Animal Plant Health Inspection Service, or APHIS, to perform an open-air field trial in March of 2009 and field trial experiments were completed in early October. The trial was performed on eight-tenths of an acre of land and provided valuable data and information relating to polymer production, with the best plants producing 3% to 5% PHA polymer. This further develops -- this further development of Metabolix crop technologies for the co-production of bioplastics in non-food bioenergy crops.

The field trial is a substantial milestone for Metabolix. The experience and knowledge we have gained during the process is expediting the planning and permitting activities for further field trials for our commercial targets, non-food, oil seed and biomass crops producing PHA. Our crop programs offer a number of commercialization options and hold significant potential as a low cost pathway to produce polymers.

We are excited to continue to push this technology forward and believe it will ultimately support a diverse array of bioengineered, environmentally conscious, and economically viable alternatives to petroleum-based products. In terms of overall timing for the commercialization of our programs, we are comfortable with our previous estimates of having commercially viable crops in field trials within two to three years. We are pleased with our technical progress on our crop programs and will communicate important milestones to you when reached.

In summary, we continued to make steady progress this quarter against our milestones. We are moving rapidly towards the startup of the Clinton plant and are making good progress against our internal milestones for our other platforms. We are very enthused about the potential for both Mirel and our longer-term platforms. I will now turn the call over to Joe for a review of the financial results for the quarter.

Thanks, Rick, and thank you all for joining us today. As Rick mentioned, we are very pleased with the progress that we have made towards the commercialization of Mirel this quarter and excited to be working with our newest customer, PharmaFilter. Our partner, ADM, is on track to complete the Clinton manufacturing facility in November and we continue to see substantial interest from potential customers. Our plant science and industrial chemicals platforms have also made some exciting progress during the quarter and we continue to view the commercialization of these as important goals of the company.

I will now focus on the financial results for the third fiscal quarter ending September 30, 2009. As mentioned previously, Metabolix currently manages its finances with an emphasis on cash flow. We have maintained this focus and taken a strict approach to managing our operating cash. We ended the third quarter of 2009 with over $70 million in cash. For the third quarter, net cash used in operating activities was $7.3 million, which represents a plan increase in cash usage from $4 million used during the second quarter of 2009 and an increase over the $6.4 million used during the comparable period of 2008. This is consistent with our intent to continue to invest in additional operational capabilities in connection with the planned production startup of the Clinton manufacturing facility.

Cash usage was also affected by the timing of pre-commercial cautionary payments received from Archer Daniels Midland and by reduced investment income driven by lower investment yields and investable cash balances in 2009. Through the first nine months of 2009 ending September 30, net cash use in operating activities was $19.9 million, as compared to net cash used of $14.7 million for the comparable period of 2008.

The increase in cash usage for the first nine months of 2009 is attributable to the increased operational needs of the business, as detailed before, and to the decreased cash receipts in 2009 versus 2008. The decrease in cash receipts for the first nine months of 2009 is a result of lower pre-commercial cost sharing payments received from ADM, the decrease in funds received from investment income, the decrease in proceeds received from the exercise of stock options and lower grant revenue from the Strategic Environmental Research Development Program grant that expired in February of this year.

I will now give some additional detail on the company's financial results for the third quarter of 2009 ending September 30th. Total revenue was $611,000 versus $351,000 for the three months ended September 30, 2009 and 2008, respectively. This revenue resulted from revenue recognized from our delivery of Mirel sample product, license fees and royalties, and government research grants. However, the increase in quarterly revenue was primarily attributed to a significant increase in grant revenue related to the integrated bioengineered chemicals program that is now being completed in November 2009.

Total operating expenses in the third quarter of 2009 were $10.1 million, a decrease of $500,000 relative to the comparable quarter in 2008. This year-over-year decrease is primarily attributable to the lower research and development costs, which at $6.2 million, were $400,000 lower than Q3 2008. This is partially offset by an increase associated with the hiring of additional personnel needed to support the company's planned launch of the commercial manufacturing process for Mirel bioplastic in December of this year. Selling, general and administrative costs in the third quarter of 2009 remained consistent with the third quarter of 2008 at $4 million.

Net loss for the quarter was $9.4 million, as compared to a net loss of $9.7 million for the third quarter of 2008. As we have previously discussed, modestly higher research and development expenses this year is being offset by lower selling SG&A costs. As a result, through the first nine months of this year, total operating expenses of approximately $30.1 million are running pretty much in line with the first nine months of 2008 at $30.7 million. However, the aforementioned year-over-year decrease in grant revenue and lower interest income for the first nine months of 2009 is contributing to a slightly higher year-over-year net loss.

Net loss for the nine months ending September 30, 2009 was $28.2 million compared to $27.1 million in the same period in 2008. As seen last quarter, the 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, they do not yet appear on our income statement. Net loss per share was $0.41, compared to a net loss per share of $0.42 in the year ago period. Through the first nine months of 2009, the net loss per share was $1.23 compared to $1.19 net loss per share in the same period of 2008.

Now, a few words about our balance sheet, which we are glad to say remains strong. On September 30, 2009 we had cash and short-term investments of over $70 million. We have no debt. We still expect this capital will be adequate to build our sales and marketing infrastructure, deduct pre-commercial manufacturing, and to expand our research and development to build the company. We continue to work with a roster of successful companies that are partnering with us to create alternative and change the way they bring their products to the marketplace. We are pleased with the progress we have made during the third quarter as we continue to get closer to the commercialization of Mirel. With that, we will open the call to questions.

Thank you. The question-and-answer session will be conducted electronically.

(Operator Instructions)

Our first question comes from Michael Cox from Piper Jaffray.

Good afternoon. Thanks for taking my questions and it is certainly encouraging to hear the update on the Clinton facility.

Thanks, Michael.

In terms of looking past the completion of the facility, I was hoping to ask a couple of questions about the production ramp. And I understand it is difficult to provide specific guidance around at which day you will begin production, but as we look at 2010 as a whole, is it possible at this point to begin to talk about volume expectations or at least the number of different customers that will receive product next year?

I think it is a little premature to talk about volume expectations and we have been pretty consistent with that throughout, just in the fact that we would like to begin to get the product to market, in the hands of customers and then at that point, we'll be able to be much more clear and precise on our projections. We have been saying in terms of number of customers, we have been doing a fair amount of work on prioritizing our lead stream. As many of you know, we have probably 3,000-plus leads right now of people interested in using Mirel and over the last few quarters, we have really focused on about 100 or so that we will give priority product to at least initially upon Clinton startup.

The vision right now and we will certainly update you as we go into commercialization, is to have some 40 or 50 base customers for Clinton 1. That would provide a nice diverse mix of end use applications and processing technologies with enough growth embedded in that customer base to see us through for a foundation for expanding the business. That is how we're thinking about it right now and I'm sure as we get up and running and get some experience, we will be able to start to sharpen some of the guidance on ramp up rate.

Okay, that's helpful. And on the cash burn, could you maybe provide a little bit of color on once commercialization begins, considering you will ship those expenses over, should we expect cash flow breakeven, say, in 2010, is that a realistic expectation?

So we aren't giving specific guidance as to what the net cash flow will be for 2010, but we have been saying that after we go -- after production starts up and we get through a transition period with the manufacturing facility in 2010, there will be a shift of expenses for the sales and marketing expense on the product, development expense of about $5 million per quarter and will shift from the Metabolix cash flow into the Telles cash flow.

Will there be -- I understand that there will be a shift, but will there be incremental cost as you're building out your other programs that will offset that? Should we expect that or--

There would not be a full offset. There will be an increase in some of the R&D spending we're doing on our other science that will somewhat offset that, but it won't be a complete offset.

Yeah, it is a quite modest increase, just, Michael, planned right now for the other programs in terms of growth for next year.

Okay, thank you very much.

Our next question comes from Laurence Alexander from Jefferies & Company, Inc.

Good afternoon.

Hi, Laurence.

I guess, first a detailed question, then a couple of philosophical ones. First, do you have an updated ADM ledger balance?

Yeah, and that was filed, hold on one sec. It will be filed in the 10-Q. So when the 10-Q is filed, which will be early next week, that ledger balance will be disclosed.

Okay, do you have a rough ballpark flag?

When we file the Q is when we'll be releasing that number.

Okay, fair enough. Then I guess just to -- I understand that precise forecasts for 2010 are difficult, but if we can focus on the objective rather than the trajectory, if you don't build any additional plants and you don't expand Clinton 1, do you -- how long would it take for Clinton 1 to pay off what you think is a reasonable range for the ledger balance? That is, do you think that you would switch to having a fully operating JV by say, 2015 or any sort of rough deadline that you would be willing to set?

Okay, so let's just quickly go through how the joint venture structure works, right? So once we get through this transition period and Mirel is selling commercial product, that Telles is selling commercial product, Mirel, all revenue goes through Telles. Telles purchases the raw material from ADM, which ADM is producing from the plant. Telles pays Metabolix a royalty. Telles has other operating expenses and then operating profit.

We have not given any guidance yet on two things. One is, when we are expecting Telles will be at full capacity, but as we have discussed, that is a product constraint of getting our prospects through the sales cycle, which Rick explained is a nine to 15-month process. And the other is what would be appropriate operating margins at which to model the Telles operations and until we really have the facility operating and have good visibility over what those gross margins are going to be, we haven't given an indication as to what the gross margins or operating margin would be.

But, Laurence, I am sure you could run some models. We wouldn't expect the operating margins to be much different than other type facilities like this, that if you were to take 110 million pounds, saying you weren't going to do any more expansion, if you took 110 million pounds at $2.50 a pound and made an assumption as to what the -- an appropriate operating margin would be, it is pretty easy to get to a back of the envelope calculation there. It is important to remember that the Telles operating entity is pretty much following a cash operating entity. They don't have any depreciation or amortization expenses associated with the facility. ADM builds the facility, runs the facility and always owns that facility.

Okay, no, that is actually fairly helpful. I guess secondly, just to come at that from another angle, if you assume that you are not going to significantly change your R&D expense in the new platforms, what do you see as a rough sway to the nearest, say, $10 million on your cumulative free cash flow burn before you could get to free cash flow positive? I mean, I am sure you have had--

That is a good question and we have all sorts of models internally, but we haven't disclosed any financial models yet for Metabolix. But what we have said is if we were not investing in our other platforms and all we were doing was commercializing Mirel, we would be cash flow positive very quickly; so pretty much all of our spending is discretionary on all of the other sciences.

Perfect. And then lastly, have you discussed with ADM any proposal to report Telles financials on a pro forma basis?

No, we have not discussed with ADM how they are going to be presenting their financial statements. We do understand though, going forward, there are certain things that people want to see. As we're presenting our financial statements after the plant is open and there is information about what royalties we're receiving, there is information about what the ledger balance is, then of course, there is going to be visibility into what is the volume of the product that we're selling and what is the cash flow of the Telles entity.

Perfect. I will hop back in queue. Thank you.

Our next question comes from Jeff Osborne from Thomas Weisel Partners.

Great, thanks for the question. And congratulations on getting the FDA document in. I am sure that was an arduous process. Just following up on Michael and Laurence's question, at what point do you think you will be able to, Joe, to provide some color on the volume and operating margin guidance? Would that be in conjunction with the fourth quarter call or at some other point?

What we are saying is, we would like to be able to get some good gross margin experience under out belt to give some information with that. So at a minimum, of course we would be giving some information as to what is happening with the ledger balance and we will be giving some information as to what is happening with the royalties, but I'm not sure it's going to be at the year end financial statements that we are going to be giving much information on operating expenses of the Telles business.

Yes, this is a first-of-a-kind process at this scale and we really would like to make sure we are very comfortable in our projections of costs and operating expenses and such and that is the internal work we are going through. As soon as this starts up, we'll be sure we test the performance relative to our models and at that point, we'll feel much, much more comfortable talking about projections and giving appropriate guidance. But we understand the concern and desire from you folks.

Okay, so it sounds like maybe a couple of quarters after it is fully up and running and that may be a more reasonable projection made '10, is that fair?

Yes, I think that is fair.

Okay, and then for Joe, you mentioned that fermentation. It sounds like that is up and fully handed over. Could you just talk about the recovery? Is that going to be in late November or will that be done this month?

Yes, the schedule, I will go through the schedule and a couple of things to keep in mind about the schedule of the handover and the startup of the Clinton plant, first of all, there is two things to keep in mind. One is, there is a handover from construction to operations and then it's a modular facility, as we have talked about in earlier calls. Different parts of the plant are handed over to operations at specific times. So, throughout the course of probably from just after July through now, various things -- systems have been wrapped up and have started to shift from construction over to operations.

The current target within the plant is to have everything basically out of construction into operations' hands in November, in mid-November, in which case, all of the facilities will be in the final startup process. So we expect to have initial fermentation batches in mid-December and recovery will go just after that.

So it is getting very close. It is very exciting out there watching the energy of the ADM team as they are getting ready and as they are working through the startup process. The only variable we tried to note in our prepared remarks is that in a big facility like this, it is on a 30-acre site, that this is now, there are hundreds of decisions being made out there around making sure that product quality is just where we want it to be and above all, safety. So when it gets into what's happening as it is in the hands of the operations, they are going to make sure that they maintain a safe site and it gets a little hard to know exactly what happens day to day, but the plant is looking great and there is a lot of energy out there.

Great, and just one last question and one request. On the request side, it would be helpful if you could post on your website any pictures of the exterior of the plant, just so that people could track the final stages of the construction and get a sense of the 30-acre facility. That would be helpful, just something to consider perhaps for the next call. And then you mentioned, around the FDA dossier, that you were looking at -- talking with initial food contact customers in the pipeline. Could you just kind of quantify the size of that food contact market relative to your non-food contact market that you're going after, with the six initial markets that you are focused on?

Yeah, so, Jeff, we are looking at -- we have taken a fairly conservative approach we believe of defining what an addressable non-food contact market is for Mirel in our pricing range of 225 to 275 and as you are leading to, over 2 billion pounds. Early examination of food contact using a similar methodology probably would roughly double that. We are going to be sharpening that over the coming months.

We have, as of, I think, early 2007, late 2007 had a number of conversations going on with food contact customers and we are in the process of reinvigorating those and that will help us further sharpen that addressable market demand. But there are a variety of things in the food contact realm such as coffee cup lids, cutlery, bags for sandwiches, foam plates, there is a range of things that our commercial team is looking at. We are starting to dig into more details about the addressable market at our price point and selectively starting to talk to customers about their continued interest in Mirel.

Great, thanks so much.

Your next question comes from Pamela Bassett from Cantor Fitzgerald.

Hi, everybody, thanks for taking my questions and congratulations on a wonderful quarter. I want to ask about -- can you hear me okay?

Yeah, hi, Pamela.

Hi. I want to ask about what the focus is for next generation technology? I assume here you are talking about optimization of the upstream and the fermentation process as well as downstream recovery. Can you talk in a little more detail about what the focus is and what the timing might be?

Sure. I think one thing, for those of you familiar with these type of processing industries, the early years of commercialization typically show great gains and over the long haul, there is tremendous payoff to continually focus on improving process technology. I think Exxon is one of the best examples of companies that are very good at this.

What we are working on now and with ADM and certainly the people that helped develop the initial technology is just as you hinted, Pamela. We are focused, if you think about fermentation, we are working on next generation microbes that can help increase the productivity of a fermenter so that we can continually get more pounds of plastic resin out for fermentation batch. And we are also looking at next generation microbes that can help us alter the polymer properties and help simplify operations, so that it continues to allow the process to be robust and help us to expand the market. And all of the things you can think about with regards to microbes and next generation microbes is ongoing right now.

The back half of the plant is recovery, by which the polymer is recovered from the fermentation broth and that is a series of unit operations to recover the product and there we are looking at ways that we can increase throughput of that back end of the plant. We are looking at ways we can continually drive down energy consumption and cost and we are looking at ways we can modify and improve product quality. All of the things you would think of and we believe and ADM believes that we should continue to keep focused on, next generation, second and third generation technology. So we have a clear view of the technology roadmap for this business, all with the intent of expanding market adoption of material and enhancing margins.

Okay, great, thanks. And to what extent do these activities factor into the C4 program? I am assuming here that initially the C4 program would be -- would use fermentation, is that a correct assumption?

Yeah, that's right, it is a fermentation-based process, and given certainly our firm's experience in developing fermentation systems, our firm's experience in scaling up those systems, as proven through the Telles operations, we are applying those skills to the C4 chemicals market. So I think it is a -- different bugs and everything, but it is clearly building on the skills that we have, which give us confidence in being able to project where we can take that to. And the early data we have, as we indicated in the prepared remarks, is pretty encouraging.

Okay, that's great. And C4 falls outside of Telles or because of fermentation, within Telles?

No, it is outside of Telles.

It is outside of Telles. And then, and can you talk a little bit about timing with partners there?

Yeah, sure. Where we are -- we have finished our ATP grant, which was largely core technology development for industrial chemicals and as a result of that, we managed to define appropriate pathways and be able to get to the point that we've got good proof of concept for what we'd like to do. 2010 is aimed at largely scaling that, beginning to operate at larger scales so we can get comfortable with the scale-up and continually refine the technology.

In parallel to that, we will be pursuing traditional commercial development activities looking at potential partners in the C4 chemicals area. These partners could be either producers of these chemicals, they could be consumers of these chemicals, or they could be a company with a fermentation capacity wishing to access these markets.

And after that, Pamela, the timing is really dictated a lot on our success in defining that commercial relationship and the nature of it. By that, I mean if we end up working with a company that has fermentation capacity, it would be a shorter time frame to commercialization because we would save some of the capital cycle. And we were looking at the industry structure and we are looking at how that would unfold as we start to screen through what an ideal partner would be.

So for that kind of existing infrastructure, can you use a plant that may be repurposed from biotherapeutics or--?

No, I don't think so.

It would have to be an industrial site?

Yes, I think that is right. And we would still -- we are still working on recovery processes and that type of thing as well, which would, depending on exactly what we come up with there, we would obviously like to find a way to use brownfield recovery facilities, but may be some capital, I would expect, required for recovery and upgrading. But it would be more of an industrial site and given the scale of these industrial chemicals, that would make sense.

So most of the input on C4 from a processing standpoint, if you used brownfield, would be on the downstream, you think?

Well, brownfield fermentation. That's right. If we found -- that's right.

Okay. And is that -- I don't know if you can share this, but is that downstream process probably distillation, filtration, or a combination or something else?

We are not at the point to talk about that. I mean, we have got a series of options we are looking at and as we define, it we will be able to perhaps talk a bit more about it.

Okay. And the C4 program then sounds like it's on deck with the crop-based partnerships to later in the timeline?

Yes. I mean, we have our milestones for crop-based businesses of commercially viable crops in field trials in two to three years, which we feel good with. We haven't given the complexities around brownfield versus greenfield in scale and we have not yet put out a timeframe for C4 chemicals, but I would expect that if there was a brownfield solution for C4 chemicals, it would potentially be ahead of the crop programs for commercial viability.

And from a partnering standpoint, do you expect to partner the crop-based programs after the C4 program?

We don't know, Pamela. We are working a series of things in parallel and our primary focus is in the crop programs is bringing the technology forward and the field trial was just a great milestone for the Company because we are starting to now build internally the capabilities to execute on these field trials and we know over the coming years, we will be spending a lot of time in field trials.

Okay, great, and last question. Do you expect to somehow segment the fermentation technology that you are using in Telles and somehow leverage older technology as well as new technology in your strategic options as you think about expansion?

Maybe you could just restate the question?

Okay. Would you ever consider outlicensing technology to large players that want their own plants?

We've not talked about that and I think with our relationship with ADM, we would have to all be aligned on that and that has not even come up.

Okay, great. Thanks so much.

Our next question comes from JinMing Liu from Ardour Capital.

Good afternoon, gentlemen.

Hi, JinMing.

Hi, JinMing.

Hi. Rick, could you give me some clarification on the plant expansion? My understanding is that the facility will come up with some capacity, not 100%. And you were talking about that you will leverage your next generation technology some time next year to bring up the full capacity. Should we expect that you will -- some part of the facility will be using your next generation technology next year?

No, I think that is a little premature. I think we said could be used. I mean, there are a couple things. One benefit of the modular approach of the Clinton facility is that as we bring up additional fermenters and capacity in advance of customer demand, we are going to learn things upon the initial startup and we could potentially apply those to the modules as we bring them on. There is the chance we could -- some of the things we're testing could be deployed in Clinton, but right now, we haven't got to the point with a detailed process design and so on for putting those in the plant. But it is possible, we are just not at the point to say that it could actually happen, but it is possible.

Is that a reasonable thought to expect that a -- 100% of main plate equipment will be there in Clinton next year, by the end of next year?

The facility is laid out and the major equipment is all there, but we're not saying that the plant would be -- when the plant would get to 100% of nameplate. That is going to depend on a number of things.

Okay. You were mentioning that the initial fermentation will start in mid-December. And I am just thinking, is that possible for you guys to make any commercial sales right after the first fermentation or will there not be any commercial sales made in 2009?

Yeah, we are not defining exactly -- we don't really know to be honest exactly when the on-spec recovered product will come out of the facility. But the hard-set date we have right now is, we have to make the fermentation broth first and that is going to happen in mid-December. We are trying to get across the point that this is an operating facility and for first-time processing, they are going to be working around the clock, they are going to make the right decisions and we will be producing product very soon.

Okay. But once the plant starts operation, then part of your cost -- some of your costs will be shipped over to the Telles, I mean, in December?

No, that is not true. What we have been saying is that there is a transition period from when the time when the plant starts producing, to the time that we ship product, to the time that we enter, according to the contract, the commercialization phase of the joint venture. So we are not exactly sure what that timing is. We will give some more indication later how it will be, but there will not be an expense shift in 2009. It will occur in 2010.

Okay, basically you have to meet essential milestones before the $5 million cost shifting happens?

There is some definition in the agreement as to exactly what point that shift over occurs.

Okay. Saw that. All right, thanks a lot.

Yeah, thanks, JinMing.

And we'll now take a question from Laurence Alexander from Jefferies and Company.

Hi, just wanted to follow up on a couple of technical questions. Ollie, do you have any feedback on the performance characteristics of PHA versus D-minus or PLA?

The performance characteristics of PHA versus the--

D-minus, because some of the producers of D-minus PLA are claiming that they've solved much of the instability issues that have characterized normal PLA?

When you say D-minus, do you mean -- there is two types of DLA, there is LPLTLLA and PDLA.

Exactly, the second one.

PDLA, sorry. And I suspect what you are talking about is the blend of the pure PLLA with the pure PDLA, I believe. Sounds like that's what it's about, anyway. I think that's what you'd be talking about.

Okay, yes.

Basically the idea is that there is continuous improvements going on in PLA by modifying PLA. We don't believe that is going to have much of an impact on the Mirel business.

Okay, so it is not really -- so it is not encroaching in your sort of areas of performance?

Yeah, you are going to see this continuous evolution of technologies, including Mirel, as we all seek to expand the performance windows and improve on the basic properties, just as we will -- expect to continue to expand the Mirel applications, certainly folks are going to continue to expand the PLA applications, whereas the LA or DLA are a blend of the two.

And from the market side, Laurence, I mean, Ollie is addressing technical side. From the market side, as we go through our indicative demand pipeline, I have not got any indication from our commercial team that that it's finding its way into any of the applications we're nurturing for Clinton startup.

Okay, perfect. And, Ollie, also as you look at the pathway to commercializing C4, are there any technical hurdles that you think your partners or your potential partners or your downstream customers would face that Metabolix cannot address directly?

Yes, so I think as regards that, I think we haven't really described the details of the C4 technology platform. It is a proprietary platform. I think what we have done is actually since we got most of our [Molson] back has gotten a very severe challenging of the [extensial] economics and we are now comfortable that we can deliver a technology that will be competitive, cost competitive. We don't see any major technical hurdles that would require a partner to solve, but the market is a market that really, there is a whole lot of internal selling and therefore, it is a fairly captured market, it is not a merchant market in a big sense for the end of the business we're looking at. So the real issue is, what is the right type of relationship to get into business.

Okay, perfect.

Yeah, not technical issues at this point.

Okay, good, and just one more philosophical question around the gross margin questions we have all been asking. The fermentation economics are probably fairly well known from your pilot facility and you probably have some sense of the scale-up economics. Is the reluctance to put out a gross margin number, say, give or take 1,000 basis points, an issue that has to do with as you run it through your models, the gross margins are more volatile and so you are not comfortable putting out a number until you actually see how the plant actually works, or is it a problem with sort of how you and your partner evaluate sort of path to market, or is there some other issue that is an underlying philosophical issue?

Right--

Yes, that is very--

So it is not an indication of a problem or an issue. It is really an indication of how we do manage is that running it in large scale, there certainly are models to it. But we certainly don't want to be giving any guidance or direction on something that we just don't really know about yet. Rick and I do not want to put out information that we are going to have to retract because we didn't have the right level of information when we put it out. So when we know what's going on and we have visibility, we absolutely will be giving that information, but we are very reluctant to give swags, because invariably people always have to change their swag and we don't want to have to change what we say. Other than that, there is no indication.

Perfect.

and that concludes today's conference call. I would like to turn the conference over to our presenters for any closing remarks.

Great, thank you. I would like to thank all of you for attending the call today. As you can tell, we are very pleased with the progress we have made over this last quarter and have a lot of enthusiasm for the long-term potential for each of our platforms. And we look forward to updating you on the progress across each of these during the next earnings call. Thanks for joining and thanks again for your interest in Metabolix. Have a good evening.

This concludes today's presentation. Thank you for your participation.