Yield10 Bioscience Inc (YTEN) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Metabolix First Quarter 2010 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for how you have to queue up for questions. I would now like to turn the conference over to Miss Laurie Chute. Please go ahead, ma'am.

Thank you, and good afternoon, everyone. Metabolix released first quarter 2010 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 section. 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'd like to turn the call over to Rick Eno, President and CEO of Metabolix. Rick?

Thank you, Laurie. I'd like to welcome all of you to the first quarter 2010 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 continue to make good progress on our commercialization and development activities and have maintained 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 C02 emissions relative to traditional materials, and address critical solid waste issues. We are founded on hard science, and have exceptional capabilities in plant science, in fermentation, microbial and polymer engineering, and in product and market development.

We currently have three business platforms. First, Mirel, a bio-based, 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, crop-based activities, which include our programs in switchgrass, oil seeds, and sugar cane.

I'd like to begin with the Telles business, our joint venture for commercializing Mirel. We have made steady progress since our last call. I'll provide an update on the Clinton Plant, the food contact notification process with the FDA, and a broad description of our expectations for the coming year.

The Clinton, Iowa Plant is the production source for Mirel, our first commercial product. As described in our previous call, the initial phase of the plant has been commissioned and is in operation. Initial product has been evaluated by the Telles Technical Team, deemed successful, and has been shipped to customers and prospects. Based on analytical testing, the product appears indistinguishable from that produced in our pilot facility. This is encouraging in that it illustrates to us continued success in the scale of other technology and bodes well for the implementation of next-generation technology.

Over the next year, the ADM Clinton Team with support from Metabolix will continue to improve and optimize the operational efficiencies at the facility. There are also several technology enhancements which are currently in late-stage development, including next-generation microbial strains and recovery technologies. We will now move to aggressively implement these enhancements at the Clinton Plant to reduce operating costs, improve capital efficiency, and extend the market potential for Mirel.

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, including a potential future expansion of the plant. Consistent with most process facilities of this type, we currently estimate that about two-thirds of the Clinton 1 capital investment will be in the actual processing equipment, in our case fermentation and recovery. And about one-third of the capital investment will be in supporting infrastructure and utilities, including electrical and cooling water services, control rooms, maintenance facilities, and basic site development.

As we have 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 the construction for the majority of the plant in 2007 and 2008, as well as the application of the next-generation technology that I mentioned to enhance capital efficiency.

I'd now like to provide an update on the FDA process for food contact. The FDA process for food contact requires the submittal of a dossier, known as a Food Contact Notification or 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. In addition, there are usually formal requests for additional or clarifying information. Once the clarifying information is submitted, the FDA has up to 120 days to reject the FCN, or it will become active.

Consistent with the timing described in our last call, we are planning to bring injection molding products to food contact markets in Q2. This will enable us to sell into applications such as cutlery and injection molded food storage containers. We expect to bring thermoforming and film products to food contact markets in the second half of this year. This will enable us to service applications such as coffee lids and yogurt cups and film for use in storage bags. We expect to submit additional notifications to the FDA as new Mirel grades are developed and the technology continues to advance.

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 on it, as we do not have control over many factors that impact the overall timing of the FDA process.

With regards to our market development activities, there have been no major changes since our last call. 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 particularly compelling and unique offering.

As a reminder, these segments are packaging, compostable bags, consumer products focused 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. We believe that these six segments represent over 2 billion pounds of initial addressable annual demand.

Now, with the Clinton Plant in production we will be able to move forward with the commercialization of our pipeline, focusing on the ramp-up of sales and driving towards a plant expansion. This will be the result of choosing the right customers and converting this demand into sales contracts and our ability to manage a development time for new applications, which is typically nine to 15 months. We will be gaining a few quarters of operating and market experience with Mirel at world scale, and then regularly provide guidance to you on the plant sales ramp-up and expansion prospects.

In terms of product pricing, we are maintaining our $2.25 to $2.75 per pound average selling price guidance. All of our major contracts fall within this range. Some specialty grades serving niche applications will sell at significantly higher prices. Fundamentally, Mirel's unique combination of biodegradability, bio-based sourcing, and performance properties allows 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, Mirel enables the creation of products and product lines that were not possible with legacy products. Mirel is a premium product.

Looking forward, you should think about 2010 as a transition year as the Telles business goes commercial, and 2011 as a year when a significant number of customer efforts will materialize as new contracts. Reviewing our objectives from our last call, over the course of 2010 we plan to do the following. Validate with ADM the Clinton manufacturing technology at scale and begin the process of continuous improvement.

This will take the form of improving day-to-day operating efficiencies and the implementation of new technology that will improve operating costs, capital efficiency, and extend the market application pattern for Mirel. Advance the developmental cycle for a large number of potential customers that we have maintained in our pipeline for the last three years, and start to satisfy the strong market demand for Mirel.

Continue to pursue the FDA food contact process with optimism that we will be selling into a range of food contact markets this year. And with our experiences in both technology assessment and the market, we will be developing with ADM a view on a Clinton expansion program, including the final build-out to the initial design capacity and on to the full site potential. It will be an exciting year for Telles and the Mirel brand. And we look forward to keeping you up to date on our progress.

Let me now move on to the other Metabolix platforms. These are our industrial chemicals and crop programs. These represent meaningful value creation opportunities for us beyond the Telles venture. In C4 chemicals and industrial chemicals, we continued our work on optimizing the fermentation process and have made significant strides in the development of a very efficient recovery process.

As outlined in earlier calls, our initial focus is on the C4 specialty market, including the pyrrolidones. And we continue exploratory partner discussions. We are currently broadening our developmental work outside of this initial opportunity as we flush out our industrial chemicals platform to include C3 and C5 alternatives to other chemical families.

Our third Metabolix platform is our crop-based activity, including our programs in oil seeds, switchgrass, and sugar cane. All in all, we are excited about the platform as we can see the pathways we are developing ultimately replacing the 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, plastics, and fuels in a very sustainable manner.

About a year and a half ago, we provided proof of concept by producing up to 3.7% PHA in the leaf tissue of switchgrass. We have now made further progress and have reached 6% PHA in switchgrass leaf tissue. We are excited about our deeper understanding of our targeted crops, as well as the continuous enhancement of PHA levels. We have also made gains in PHA production levels in sugar cane and oil seeds targets. In addition, we continue to identify and develop alternative recovery technologies to allow our crop-based technologies to address a range of both polymer and chemicals markets.

In terms of overall timing for commercialization of our crop programs, we are comfortable with our previous estimates of having commercially viable crops in field trials within two years. We are pleased with our technical progress on our crop programs. And we will communicate additional milestones to you when reached.

In summary, we continued to make excellent progress this quarter against our milestones. The start-up of the Clinton facility initiates the next phase of the Metabolix growth story. And we look forward to providing regular updates of our progress to you. The game-changing nature of our crop programs continue to make steady progress towards fruition. We are very enthused about the potential for the Company. I will now turn the call over to Joe for a review of our financial results for this quarter.

Thanks, Rick. And thank you all for joining us today. As Rick mentioned, we're very excited about the continued progress on our commercialization and development activities. We are particularly pleased to be in the position to announce today that we began making commercial shipments of Mirel produced in the Clinton manufacturing facility to customers this past quarter. This is obviously a significant initial milestone in the transition of our Company into a successful commercial business.

And while it is exciting to know that Mirel is moving forward, we are also pleased with the developmental progress of our crop and industrial chemical platforms this past quarter. Our successful efforts in both areas, we believe, will enable us to develop new businesses, attract additional partners, and to significantly diversify our customer and product mix. This diversification will be an important part of our long-term strategy to grow our business through the generation of substantial revenue and earnings from diverse technology platforms.

I will now focus on the financial results for our first fiscal quarter ended March 31, 2010. As always, we manage our finances with an emphasis on strict cash flow management. We continue to maintain this focus, and ended the first quarter with $82.8 million in cash.

For the first quarter, net cash used in operating activities was $9.4 million, which represents a planned increase in cash usage from $5.9 million used during the fourth quarter of 2009, and is an increase over the $8.6 million used during the comparable period of 2009.

While our cash operating expenses remained relatively flat quarter-over-quarter, the $3.5 million increase in net cash usage in the first quarter of 2010 compared to the fourth quarter of 2009 was mainly attributable to the timing of accrued annual performance bonus payments made to our executives and other employees, which is made during February of each year, and a decrease in cash receipts as a result of lower pre-commercial cost-sharing payments we receive from ADM.

The $800,000 increase in cash usage in the first quarter of 2010 from the first quarter of last year is mostly attributable to the increased operational needs of the business and a decrease in cash received from investment income driven by lower market yields.

I will now give some additional detail on the Company's financial results for the first quarter of 2010 ended March 31. Total revenue was $180,000 for these three months ended March 31, 2010 versus $261,000 for the three months ended March 31, 2009. Revenue in both quarterly periods resulted from revenue recognized from our delivery of Mirel sample product, license fees and royalties.

The decrease in quarterly revenue versus the prior year was primarily the result of a decrease in government grant revenue earned from our completed integrated bioengineered chemicals grant. As in previous quarters, the first quarter loss was greater than the cash used in operating activities as a result of non-cash expenses, including depreciation and stock-based compensation expense.

Operating expenses were relatively flat year-over-year. Total operating expenses in the first quarter of 2010 were $10 million, an increase of $300,000 or 3% from the comparable quarter in 2009. Research and development expenses were $6.2 million during the three months ended March 31, 2010 versus $6 million during the three months ended March 31, 2009. Selling, general, and administrative expenses were $3.9 million during the first quarter of 2010 versus $3.7 million versus the first quarter of last year.

Net loss for the first quarter of 2010 was $9.8 million or $0.37 per share as compared to a net loss of $9.1 million or $0.40 per share for the first quarter of 2009.

Now, on to the balance sheet. Our balance sheet remains strong. As of March 31, 2010, we had cash and short-term investments of $82.8 million. This compares to $92.2 million as of December 31, 2009. We continue to have no debt. And we believe that we have adequate capital to grow our business over the next two years, including expansion of our sales and marketing infrastructure and continued research and development in support of our various technology platforms.

We continue to work with a roster of successful companies that are partnering with us to create alternative solutions and change the way they bring their products to the marketplace. We are pleased with the progress we've made during the first quarter of 2010. And with that, we'll open the call to questions.

(Operator Instructions). We'll take our first question from Laurence Alexander with Jefferies.

Good afternoon.

Hello, Laurence.

Hi. I guess, first of all, I just wanted to ask about if you could give a little bit more of a view on what hurdles you feel you still need to hit for these C4 opportunities, and also moving into foam applications.

On C4, Laurence, I would think about it very much around the scale-up of fermentation-based processes, which would include improving and continuing to work out the yield levels, the efficiency of the fermentation process, as well as beginning to scale up recovery processes. So, technically, those are the major tasks in front of us. And they're ongoing, as we described in the call.

And then from a commercialization perspective of that technology, we're looking at both intermediate and long-term options for how the products get to market. And intermediate could be through the combination of toll operations and semi-works operations and longer-term commercial facilities. And we're looking at different partner types in terms of how we enable that, and looking to create the most value from that technology for Metabolix. So I look at it from a technical advancement, as well as a commercialization strategy perspective, as well.

And -- go ahead.

Okay. Continue.

No. Go ahead.

Well, I guess do you have any further questions in C4 since you asked about foam, also, right?

Yes. Exactly. Yes.

Okay. Foam is one of the other applications which we are developing as part of Telles and looking at extending Mirel into foam applications. And that currently is in the scale-up mode. And in product development in polymers, you increasingly go to larger and larger scale to prove out the polymer on equipment that more and more is like commercial scale equipment. And each step along the way there are usually some things one has to do to optimize. And that's the process we're in.

We're pleased with our progress. We haven't put a time frame on when we'll have foam in the market. But we continue to move that ahead, working with some very capable partners to help us identify the way we can most rapidly scale that up. And with the Clinton resin now available, I'm expecting that work will accelerate.

And then, I guess, a question for Ollie, as you think about the progress you've made with the switchgrass platform, is it getting easier to get the incremental yield enhancements? Or is it getting more difficult? I'm thinking, also, if you could compare working on the switchgrass platform to the difficulty of working on the seed platform. I mean the oil seed platform.

So, I would say initially a lot of the work in the switchgrass platform was really developing faster and better tools for doing the engineering work. So, I would say that at this point in time I think we're making a bit faster rate of progress than we did in the past. But that's because we invested the time to develop both the tools and also some additional modeling capabilities. So, we're pleased with that.

In terms of the difference between switchgrass and oil seeds, the real difference is the cycle time for doing the engineering work. And one is essentially about three to four months, and the other one is about a year. So, obviously one can do more experiments in a year in the oil seed than they can in switchgrass. But I would say what's very nice about the whole thing is the cross species learning that we're getting from both systems that is actually accelerating both.

And I'd add to that, Laurence, that we've been working in the same crop families for a couple of years now. And the team is getting very, very familiar with and deeply understand now the characteristics of those crops, which is helping to accelerate progress, as well.

Then I have a question on, I guess, IP protection or barriers to entry. There's a couple of Chinese companies claiming to be bringing on stream PHA production capacity over the next couple of years, even as large as 10,000 tons per year. Can you address at what point -- first of all, do you think they are using similar processes? Or are they going to be at a disadvantage on the cost curve? And, secondly, how you -- at what point we shift from it being about the IP to being process know-how that you've developed over the last few years?

So, we've actually been aware that eventually this goes forward to other folks who are going to try to get into this. I think we clearly have a technology advantage in the manufacturing side. And we continue to, as indicated by Rick, make good progress on continuous, if you like, generational improvements in our technology. But there's a big difference between making a PHA polymer and making a high-speed injection molding PHA resin.

And over the last three years, Metabolix, having learned from the example of the NatureWorks folks where once the plant went live there was essentially a huge upsurge in intellectual property filings. Over the last two or three years, Metabolix has been very aggressively optimizing formulations and patenting them globally with the intent to make it as challenging as possible for others to enter the market in any kind of competitive basis.

And then just two quick technical questions, the sales number, and I believe it's mostly sales of Mirel for customer experimental work, so can we read that as translating to roughly somewhere around the order of about 100,000 pounds being shipped this quarter?

We have not made any direct link as to how many pounds it is that we're shipping and what the price of that is. We just aren't disclosing quantities of product being shipped, whether it's to prospects or customers.

But in the past the average selling price, even on the pre-work samples, was going to be in line with the longer-term price. Is that still the case?

Yes. Yes.

Okay. And, secondly, do you have the ledger balance handy, by any chance?

Yes. The ledger balance is $372 million.

Okay. Thank you. Thanks.

Thanks, Laurence.

We'll take our next question from Alex Potter with Piper Jaffray.

Hi, guys. Pretty good. Just a follow-up here on that ledger balance. How long do you expect the ledger balance to continue, I guess, accruing?

So, if we look at what the components of the ledger balance is is that it's three things. It is the initial support payments that ADM had made through us that stopped in the middle of 2009, July 2009. It is the cost of the construction of the manufacturing facility. And then it will be any working capital needs that the Telles joint venture requires as it's getting up to full capacity.

So, Rick had mentioned that the initial phase of the construction is complete. There'll be some expansion of that. And then there'll be some working capital needs of the Telles joint venture. We have not at this point given an indication as to when we believe that that -- how much that funding will be or when it's going to flip over to profitability.

Okay. So, essentially it accrues based on the working capital that's needed up until the point when you're at full capacity.

No. It'll accrue up to the point where Telles is selling at a break-even volume.

Okay.

Which will be significantly less than the full capacity.

Okay. And just, I guess, on a related question, capacity-related question -- and I know that -- I can appreciate the fact that this might be somewhat difficult at this stage to give real clear guidance on. But when you say in the release that you're going to be running at relatively low capacity for the next several quarters, is it possible to get a little bit more granularity on what sort of capacity utilization and for how many quarters and how quickly you think it will ramp?

That's a good question. As we talked -- let me just start with the production capacity of the facility is being provided to match our market demand. And as Rick had talked about and as we've been saying for a number of quarters, that getting our customers through a sales cycle to selling a contract has been a factor of being able to get them enough test product.

And that typical sales cycle from the time a customer is coming to us with a concept to when they'll be able to test the product to be able to sign a contract is nine to 15 months. That's about the most guidance we've given as to how long it'll take in order for that to occur. We're really not giving any more guidance than that.

Okay. Fair enough. And I was wondering, also, if you could comment on the cash burn in the quarter. It looked a little bit higher than it had historically been.

Yes. So, in Q1 of every year, remember our bonuses. The significant piece of it is bonus payouts. The bonuses accrue throughout the year and get paid in the first quarter of the following year.

Okay. You would expect a downtick then?

Yes.

Okay. All right. And then, I guess, the last question relates to potentially expanding out capacity, as you mentioned. Obviously the Clinton facility was designed with eventual expansion in mind. I guess, if you could, just provide a little bit of clarity on what it would take for ADM and Metabolix to come to the conclusion that, "Yes. Now is the time to move forward with an expansion," and if you have any guidance on when that might occur.

Yes. I think that's the other good question is we've reviewed the objectives for Telles for this year. One of our objectives with ADM is to take a real good look at the technology and a real good look at the market now that we have commercial product in the market to examine what the potential for the product is. So, when you start thinking about an investment decision to expand the plant, the first element is really the market. And, as Joe described, we've got a nine to 15-month development cycle for most of our customers.

And our Commercial Team will be tracking customer development very, very carefully. And typically the way that works is you get a customer on board, and their initial volume is at one level. But they have a fairly good sense to predict out, "Okay. We're going to introduce a new product in the United States. We're going to move that to Europe. Then we're going to move that to South America." And that results in a multi-year customer-by-customer forecast which we can identify.

And the aggregation of that, when we put some form of discounting because things don't always work out according to plan against that, can start to give us a pretty good view of the longer-term demand for our chosen customer portfolio around what we think the potential will be at the selling prices we're at. So, that's the market side of the equation.

The other thing that we'll be looking at very closely, and it's already beginning, is to look carefully at how this technology performs at scale and try to understand and analyze what is the capital requirements of expanding the plant beyond the 110 million pound per year level? Our objective is to do that, and ADM's is, as well, I should say, at as minimal capital as possible. So, we're going to look for next-generation microbial strains. We're looking at alternative recovery technologies that we can get as much out of that plant as we can and hopefully much more than 110 million pounds a year.

Sure.

Those two factors together get run through your classic economic analysis to determine when -- the economics of an expansion and the duration of the laytime required gets us to the point of when we'd have to make that decision. But, in summary, our objective is to have a good run through all those factors this year in 2010 and continue to monitor it with ADM to ensure that we're making an investment decision at just the right times that we can make -- so we can meet our customer needs. But those are the components, and a lot of that work will occur in 2010. And we'll see where the analysis takes us.

Okay. I very much appreciate it. Thanks a lot.

Thank you.

Our next question comes from JinMing Liu with Ardour Capital.

(inaudible) questions.

Thank you, Ming.

One thing I have to clear out about ledger balance, you just mentioned that balance current at $372 million. Is that right?

Yes.

And I remember your last conference call you mentioned or in your [10-K] that number was more than $380 million. Am I right?

Yes. You're correct that what has been -- where the reduction of the ledger balance came from was that there previously at the end of the year was some internal interest charges that ADM had passed over in part of the ledger balance reporting. And we have eliminated any of the internal interest charges that were passed over. So, the comparable number if you're excluding any internal interest charges would have been $370 million for Q4 '09.

Okay. About that, those calculations somehow passed the auditor.

It's not -- this isn't a GAAP reported number. It's not part of our financial report, audited financial statements.

Okay. All right. This is about your Clinton facility. Rick, you mentioned before that facility is based on modular design, and you would open up module by module. So, can you disclose to us what percentage of (inaudible) so far you have tested in basic start-up and in production and whether you have the rest of the equipment installed or those equipment have to be installed in the future?

We can't, JinMing, give you a precise percentage. What we can say is that all the necessary processing equipment has been run and tested in order to produce product that meets specification and allow us to get the product into the market. And we've not disclosed -- and you're right to point out that what we're doing is making sure the capacity of the pliant stays well ahead of the market demand, which we're working regularly with ADM to do so. And the vast majority of all of the capital equipment is there because the implementation of any remaining equipment is relatively minor compared to what has gone on at the site over the last three years.

But we're not putting any specific percentages there. We're just ensuring that the capacity is there to meet up with the demand for the product. And because of the developmental cycle of a nine to 15-month period, we can get a pretty good line of sight on once we get some experience with the product in the market of when that incremental work will have to take place. But we're not putting any specific numbers on it.

Okay. Can you give me just a ballpark number, 10% or 20% capacity you have tested and in production? Or --

No. I think the point being that with, say, the technology has been scaled up successfully. We have product going out to meet customer requirements. And we're real pleased with how well it's performed.

Okay. How many employees do you have at the Clinton facility?

You'd have to ask ADM. That's their site.

Oh. So are they just padded? That's a joint venture. Do you have any idea of how many employees your joint venture hired so far?

Well, our joint venture is a marketing joint venture. ADM owns the plant. And the plant is supplying product to the joint venture.

Oh. I see. So, it is up to ADM to hire all -- whatever numbers of employees that want to have, right?

In the plant. In the plant. That's right. They're responsible for the manufacturing and operation of the site. And they hire the people as needed to run the site.

Do we know how many ADM hired, then?

I think you should ask ADM. It's their number.

Okay. Okay. About your other contracts you have with your customers, is there a covenant preventing them to use other people's PHA? Or do they have to use your PHA?

We don't think so. I mean, there's a wide range of different customers and contracts. But not to the best of our knowledge, JinMing.

Okay. So, say, Paper Mate, say they have their ball pen marketing so well they made a switch to suppliers --

We don't disclose the details by contract. But the majority of contracts we have, that's not generally an issue.

Okay. Okay. I have a few follow-up questions related to the Chinese company like Laurence just mentioned. We did some research. And we talked to people locally about that company. Can we compare notes on that?

What company?

The Chinese company that has 22 million pounds capacity and in commercial production right now. So, that 22 million pounds is the number you have, right?

I don't have a way to verify that. We've heard that number. But we don't have verification of it.

What's the capital cost, do you know, of that facility?

No. We don't know, JinMing.

I have that number for you. It's $13 million. So, based on that calculation that capital cost per units capacity is roughly a third of what you have been -- you and ADM have spent so far. And do you know what type of different (inaudible) resin they have developed?

I mean, we know there's PHA resins. We don't know specifically that and not completely in tune on exactly which market segments they're going after.

I think they developed resins for film sheets and foam.

Okay.

My point there is based on that cost structure of that facility -- and, by the way, they spent, I believe, 16 months to build that facility up. Based on that, why should any other investor not invest in that company but your Company for any potential expansion?

JinMing, I don't think we can really answer those questions fairly. We have not analyzed that. We've not tested the quality of the product, the repeatability of the product. Obviously, I mean, it's interesting competitive intelligence. But we really honestly have not done -- we cannot comment on competitors' cost structures. And we have not validated the numbers you've said.

(inaudible - multiple speakers) production cost structure, that type of cost, and the (inaudible), and what type of resin they have. Then last question related to that facility, do you know when they started commercial production?

Not precisely. We've seen indications of product in the market occasionally, but don't have the specific date of when they started production. We're pretty much focused on getting our plant running and up to full scale.

Well, you need to compare to out there. I believe they started a start-up process last November and entered commercial production late last year or January of this year.

Okay.

And -- so --

JinMing, what's the name of this company?

You don't know name?

I'm asking you. You seem to know everything. So, what's the name of the company?

It's called the (inaudible) run by (inaudible).

[Tianjin]?

Yes. We can take that question offline.

Sure. Okay.

Let's ask you another question related to the demand. What is the number you have (inaudible) market size last year?

We don't have that number handy.

Okay. I think that was past 500 million pounds.

Well, JinMing, I think there are a number of other people on the line. If this is helpful, I'll be happy to take the question. But if we want to compare notes on markets and competitors, it may be best done separately because we're more interested in providing people an update with how we're doing here at Metabolix.

And we'll now move on to our next question from Ian Horowitz with Rafferty Capital Markets.

Hi, guys.

Hi, Ian. How are you?

Good. I've been good. I have a couple of more direct questions. So, the grant revenue went down to zero this quarter. And I'm just trying to make sure that I have this right. This wasn't because of that you got an early payment, I think, in the last quarter, in the December quarter? Does that --

No. We haven't -- no. This just had to do more with the conclusion of grants. That didn't have to do -- we haven't received any accelerated grant revenue or early payments for grant revenue.

Okay. So, we should model going forward at this point zero in the grant revenue line? Is that correct?

I think for 2010, it may be. But I think if you're modeling going forward, you should assume some grant revenue.

No, no. Fair enough. I just -- yes. Going way out, going past -- I just meant for the remainder of the year so far in what you see, there's nothing on schedule right now.

What's left and what we disclosed is there's about $300,000 left for us to recognize as grant revenue.

Primarily the USDA blow molding grant.

And that will occur throughout the remaining three quarters?

Yes.

Yes.

Evenly-spaced? Okay.

Yes. That's safe enough. It's not -- $300,000, I don't think, is going to have much impact in your model.

No, no. I understand. I'm just, like I said, just trying to get through some mechanics. And then when -- I think we had in our models some royalty recognition from selling out of the Clinton facility, removing product out of the Clinton facility. And obviously we were wrong on that. When -- at what point do we move into that process where you guys will start to see that royalty payment coming through?

So, as we've discussed, that when we get to the commercialization phase of the agreement, which we have said will be sometime in the second half of this year, is when we start recognizing our $0.10 or so per pound royalty.

Okay. Okay. And then you talked about the timeline on the customer being nine to 15 months to get it to commercial. Can you just remind us what you think it would take in terms of the timeline between when you and ADM would make the decision to move into an expansion before we could actually see that up and running? I know the first train isn't really a very good proxy for new construction, but just an estimate, just an idea. Do they match up fairly closely?

Yes. I think, Ian, one of the variables there is determining the impact of the drop in technology we're working on. I mean, if we're able to with ADM get the next-generation strains and alternative recovery technology in place, the lead time is a bit less. If it requires a more substantial capital build-out, it's a bit longer. Typically, a couple of years once we make the decision to go should be about right. But it will vary depending on the precise configuration and what has to be done to increase the capacity of the plant.

Okay. So, it's not a direct [marry]? So, I mean, if the demand for a product really starts to ramp quickly, conceptually there's a point where you'll be short capacity. Is that correct?

You're right. It is possible in that if you assume a two-year construction time versus a nine to 15-month customer development time. In theory, yes, there could be a rapid ramp-up so that we may not be able with ADM to have capacity in place to meet that. But just rest assured, we're watching that very closely. And we're looking carefully at that to minimize the chance of that occurring.

Okay. Okay. Great. Thanks. I'll get back in queue.

Okay. Thank you.

And we have a question from Jeff Osborne with Thomas Weisel Partners.

(inaudible) I had a question on the commercialization in the second half. Joe, how much of the $10 million in OpEx would be shifted over to the JV from your books when that happens? I'm just trying to get a sense of what the exposure is there.

Right. So, what we've been saying and hasn't changed that there's about $5 million per quarter of sales and marketing and product development expense that Metabolix is bearing on [bertelis] today. So, that will shift over to the Telles joint venture and will no longer be a cash burn for Metabolix.

But, as we've also been saying it's probably not safe to reduce the operating expense from $10 million to $5 million because we will be investing some more in our other platforms, not as much as we're going to be reducing. So there will be a reduction, but it won't be as great as $5 million.

Got you. And then so I understand the commercialization (inaudible). How do we think about the first half of 2011 in terms of the ledger balance continuing to grow and what the drivers will be? I understand you gave the three drivers of what contributes to the ledger balance, but namely the working capital until full capacity you haven't really defined that. So, is there any way to put an upper bound on where that could go? Could it be $500 million?

We haven't put an upper bound on that. We've maintained our guidance that it's north of $300 million. And I think, as Rick was saying, we really want to get some operating experience under our belt, get the plant, get shipments to the customers. And then later this year we'll be giving some more metrics that will probably be easier for you to predict where that ledger balance is going.

There's a lot going on right now, Jeff, in parallel. We're starting to meet the pent-up demand for lots of customers that we have had in the queue for a while. We're working very hard with ADM to continue to optimize and move this technology rapidly down the learning curve. So all of that will really have a huge influence in the break-even time and the affect on the ledger balance. So, we're just asking for a few quarters to get that work done. And we're working hard to make that happen.

I understand. And just one last quick one, so from an investor standpoint it's a bit tough. You've got the nine to 15-month sales cycle time. But I think first and foremost I and probably many others want to get comfort that your cost of production is under control. So, how do you expect investors over the next six months while you're in this transition phase, as you called it, to get comfort that obviously there's demand for the product but also that you're having a reasonable ramp and yield and per cost? Is there any way to get more comfort with that without giving quantitative but more qualitative?

You know, it's a good question. We understand that this is not a new request. We do know that people, especially investors, are looking for visibility as to the operating efficiency of the facility. Now, we do remember the manufacturing facility is ADM's facility. There will be information we'll be giving once we have some better operational experience as to what's going on. But we're not giving any guidance at this point any different than we have before as to what the actual costs are being, what the actual production is, and what the cost of that is.

If you think from an investor perspective, we're thinking way beyond the next nine months. We're thinking that the value of Mirel and Metabolix is way beyond this Clinton 1 facility. So, if we're modeling something just at Clinton 1, it's not -- it's exciting but nowhere near as exciting as when you layer in expansion, and when you look at what the market potential is for this and what we can address, and expanding to 440 million pounds without additional operational efficiency. It's a very compelling story for investors.

So, I am sorry that we're not giving you the direct visibility now for understanding what the cost is short-term. But I think once we get some experience under our belt, we'll be able to give you some more visibility as to at least some of the operating metrics of Telles.

Thanks much.

Now we have a question from Pamela Bassett with Cantor Fitzgerald.

Hi, Pamela.

Hi. Thanks for taking my questions. Nice progress.

Thank you.

(inaudible) expansion -- can you hear me okay?

You're breaking up a little bit, but I think we get most of it. So, continue.

Is that better?

Yes.

Okay. When we think about Clinton expansion, there's been a real focus on the last 330 million pounds per year. But should we really think about that as one build-out, maybe a staged turning on of the facility, but maybe a much larger build-out plan beyond the 440 in the near term?

Let me make sure I understand -- Pamela, let me make sure I understand the question. Is the construction strategy to get to 440 or is it beyond 440, your question?

Yes, basically. I mean, if there's so much pent-up demand and you're seeding all these customers that could have development plans that expand into a number of markets over a fairly short period of time, maybe three to five years, would it be reasonable to expect that your staging of expansion is well beyond Clinton 1?

I think it may be a bit premature to think that far ahead. I think our objective this year is to put a good roadmap together to get Clinton towards its full capacity potential. And to be honest, we've not discussed with our partner ADM the strategy beyond that. Although, I think it's a shared view that given the economies of scale of having one of hopefully the largest PHA site in the world and the infrastructure and the rapid adoption of new technology, I think it's both the partners' views to get Clinton to full potential before we go outside of Clinton.

Now, once Clinton, we believe, is at its full economic potential then I think the question would then arise about what's the best next site that we should pursue? And, to be honest, that discussion really has not occurred yet. So, it would be a little bit premature for me to speculate on where that would be and what it would look like.

And what are the similarities -- are there similarities and differences between fermentation, as well as downstream separation for C4 versus PHA? How much is there in common between those?

There's quite a bit in common. There's a long track record the Company has of fermentation design, microbe optimization, and scale-up. And all of those skills are being brought to bear on our industrial chemicals platform. Recovery process is a little bit different for chemicals rather than PHA polymers. And, as I mentioned in Laurence's question, we're working to scale that up and to optimize that. But we -- our industrial chemicals program is underpinned, also, by our capabilities in PHA chemistry. And everything that the firm has learned over the last couple of decades is being brought to bear in industrial chemicals, as well.

So, there isn't really a chance here for some sort of a refinery model that's relevant to fermentation where it might be for plants, it's not true for fermentation? Is that how I should think about it?

When you talk about a refinery model, what do you mean by a refinery model?

Well, maybe where you might be able to switch a plant on and then direct the sugar stream in such a way so that maybe the fermentation is the same, but the separation is different or at a certain stage you might be able to switch from one product to another, depending on pricing or other kinds of market conditions or customer conditions.

Yes. Absolutely, Pamela. That is definitely feasible.

So it is feasible for the fermentation process with respect to both PHA and the C4 chemicals?

Yes.

Maybe I don't understand.

No, no. It's exactly what you're saying is you can -- you can have a common fermentation platform by which you can conceivably produce a range of industrial chemicals lined up to either identical or similar recovery technologies that would give you the flexibility to alter production based on market requirements for those specific industrial chemicals, very similar to the existing PHA polymer platform where we can alter production to make different grades depending on what the market requires.

Okay. But that -- so, there's still a separation between PHA and the chemicals? You could only do that on the -- those would be separate streams?

I mean, the fermentation -- the recovery processes would likely be very different. But the fermentation processes are rather similar.

Okay. So, they could be part of the same kind of fermentation --

Yes. That's right. That's right.

Build-out going forward at some point.

Exactly.

Okay.

That's right.

That's helpful. You mentioned field trials in two years. Is that for oil seeds, switchgrass, sugar cane, or all of the above?

We haven't disclosed which ones. We're working on all crop platforms simultaneously. But we have said that we are comfortable with getting commercially viable crops in regulatory field trials within two years. But we've not disclosed which one. We're working on all of them, and we're making good progress on each.

Okay, great. And the market potential for the C4 -- for the C3, 4, 5 chemicals is about what for Metabolix?

We've not -- we've talked about the market potential for C4 chemicals. We've not got to the level of definition and disclosure on the market potential for other exploratory areas we're looking at for C3 and C5 chemicals. So, we've pointed out about an $800 million addressable market for our specialty C4's. And that is the furthest ahead in our industrial chemicals portfolio. We've not had the same level of clarity in our disclosure on other chemicals we're working on.

Okay. Are you already starting to get traction in partner interest on your plant programs?

Yes.

So, it might be reasonable to think about partnering around one of those platforms, even in the next couple of years, even prior to field trials?

Yes. That's possible. And we're going to look at potential partners in terms of their ability to help us accelerate those crop programs and to basically create value from those as rapidly as possible. But we feel we're making good progress. And, yes, we are getting good traction in partner discussions.

Okay. Great. And, finally, any color around the disposable pen launch in Canada from Newell Rubbermaid?

Not that I've heard. I've heard good things about it. I've heard they're pleased with it. They had the pen advertised in the Olympics and were quite pleased with the response to that. We've had a lot of positive feedback on that. We're not privy to the actual units sold versus their plan. But qualitatively we've heard they are quite pleased with the launch.

Okay. Actually, I do have one more question. With respect to the C4 -- 3, 4, 5 chemicals, to what extent do you think potential customers would be using those in part rather than in whole in their products? So, for example, might they combine with petroleum-based products and just use a portion of the fermented product?

I think the chemicals --

And still benefit in the market?

I think, Pamela, the chemicals market is very diverse, very complex. And my expectation is that the high valued application of bio-based industrial chemicals would be less as a blend agent and more as a distinctive molecule, just like a pyrrolidone. Rather than blending a green pyrrolidone, which is a specialty C4 molecule, with petroleum-based, I think a consumer and a brand owner would see a lot more value in saying, "We've got a 100% bio-based solution," rather than a 37% bio-based solution because the molecular structure would be virtually identical to the petroleum-based, which would allow a complete drop-in.

So, my expectations are that the pure use of the bio-based route will create greater value than as a blend agent for a number of the specialty chemicals we're talking about.

Okay. So, there's no market perception or alteration of just being able to label your product as a green product because some percentage of the chemical is derived from a bio-based operation?

Well, quite often, another thing to add to it is if a product, say, a consumer product has got a label on it, and there are some programs, namely the USDA BioPreferred Program, which is (inaudible) --

Right. That's what I was thinking of, actually.

Yes. Exactly. That program will indicate some form of bio content. And if you think of, say, a hairspray or something that contains pyrrolidones the pyrrolidone molecule in that would just be a portion of other things within it. So, it's going to vary widely. But my expectation is that the blended chemical intermediates would make more sense sold as all -- rather, it would make more sense sold as an all bio-based product rather than blended. And then where the product goes downstream the brand owner would determine how to get the most value out of a bio-based branded product like they're trying to utilize in the BioPreferred Program.

Okay. That's great. Thanks very much.

Thank you.

We have a follow-up question from Laurence Alexander.

Hi there. Just three very quick ones. First, Ollie, I was going through my notes, and I realized I never asked -- I was always under the impression your fermentation process was a pure process. But is it a pure process? Or do you do a mixed cultural process?

It's a pure process.

Okay. Also, with respect to the Safe Chemicals Act that was proposed last week, is there -- have you had a chance to see whether there's any direct or indirect implications for demand for your products?

No. We've not. We have some folks looking at it, Laurence, but no conclusions yet.

And, finally, just if you can bear with us, a hypothetical. If down the road, once you had expanded the Clinton site, if you decided to go into a low-cost region, either cost advantage in terms of construction costs or cost advantage in terms of feed stock costs, and produce a lower quality PHA material, is it fair to say that your bugs, if I can put it that way, your fermentation process, should have a cost advantage against any other similar technologies that might be out there? Because I think that point was a bit lost earlier.

No. This technology was built to be deployable anywhere in the world. But a decision to deploy it in other geographies would depend on our ability to protect the intellectual property and not get robbed; for example, China or Brazil or somewhere else. So, basically, we built this technology so it will be advantaged anywhere in the world based on materials that would be useful as feedstocks anywhere in the world. So, this could be deployed in pretty much anywhere.

And I don't think that certainly for the Telles business we would look at producing a lower quality PHA to try to bring that into the same customer channels where we're defining a very high-quality premium product. I think it would dilute the value of the brand.

Right. But I guess I'm just thinking more -- just to help clarify the distinctions here, if you think about your traditional polymers, the (inaudible) within the polypropylene chain or other plastics, I think you declare it's a choice, not a limitation when you're not forced into the profit specs that you're producing.

Right. We have considerable choice about how we choose to market and the type of products and so on. But right now it's got a pretty good idea of what the market wants in terms of PHA products right now across a wide range of applications. And that's the marketing strategy we're pursuing right now.

Okay. Thank you.

Okay. Thanks, Laurence.

And we have a follow-up from Ian Horowitz.

Hi. Quick question, guys. You said that the injection molding, you expect approval in the second quarter. And I guess I'm just trying to figure out when should we start seeing stuff like the utensils out into the marketplace since we've got approval in the second quarter?

It's hard to predict on a customer-by-customer basis. But one of our objectives is to have resin going into those markets this year. So, we'd hoped to do it sooner. But we anticipate being able to sell into food contact markets this year. So, you should be able to hopefully see it this year.

What was your experience with Paper Mate or with Target or whomever in terms of when you were delivering resins until when the product was actually out on the shelves?

I think those were a little bit longer. But you've got to remember at the time the technology was very developmental, and it was early-stage. But we've come -- continued -- we've come a long way and continued to accelerate it. So, I would suggest you stick to the nine to 15-month duration for product development as a pretty good proxy. There'll be times it's shorter. And there'll be times that it's longer.

But that gives you a sense of when you could see some things in the market. And, granted, we are working. We have a number of prospects already in that pipeline. So, we're hoping to see product in food contact markets, hopefully injection molding, this year.

So, you are sending resin to injection molding opportunities before the approval? Obviously, they're not going to get out into the market. But, your customers are already getting comfortable with the product even though it hasn't been approved yet, correct?

Absolutely. And some different brand owners have different approaches to that. But in the scale-up process, we're working with potential food contact customers to run large-volume injection molding trials to ensure that the injection molding operations are highly efficient. And, as we mentioned in our last call, there are some customers we're doing some organoleptic testing with and tasting.

So, there's things going on. And our brand owners and customers we're working with recognize we're in the process. They've talked to us about that. And they're comfortable learning about the product and scaling it prior to that approval. But, obviously, it would not be found in the market until that occurs. And we don't have control over everything that the FDA does. So, we tend to try to be a little bit more conservative about that. But we are clearly working with customers on those applications.

Right. And one of your other customer wins recently was -- well, not recently anymore, I guess. It was Ball Horticulture. Can you give us an update on where that product is in terms of are we seeing that out in the market quite yet? Or will that be out for this season?

I know they have test marketed it. And speaking to our Commercial Team just very recently, they have very active ongoing discussions with Ball about taking advantage of the Clinton production and start-up to sharpen entry plans. So, active discussions ongoing, Ian. I know they have test marketed some of the products. And I don't have -- and I don't know if anyone in our organization has specific details around what they're planning for a strategic launch more broadly of the product. But I can assure you there are active discussions going on with Ball.

Okay. So, the current products that we can see from Mirel right now in the markets would be the Paper Mate pen in Canada, as well as the gift cards in Target. Am I missing anything?

Not Target gift cards. But the Paper Mate pen is going to be the one that clearly has the greatest recognition in the market. But all of our customers -- if you work in a laboratory, you may very well see the Labcon pipet trays. If you're in the world of composting, you're probably familiar with some of the products produced by Heritage. If you're in water treatment, you're probably aware of the Bioverse Sphere. But from the broad consumer basis, the pen is the most high-profile one out there, yes.

So, the gift cards are not being produced with Mirel anymore?

Not right now. We're talking with them based on the scale-up of the plant. The product launch was successful. And with our pilot facility of limited volume, we couldn't meet their needs. But that, again, is an active discussion.

Okay. Great. Thank you.

Thank you.

And at this time, we have no further questions. I would like to turn the call back over to Management for any closing or final comments.

Good. Thank you very much. And I'd like to thank all of you for attending the call today. As you can tell, we're very pleased with the progress. We continue to make very steady progress across all of our platforms, and have a lot of enthusiasm about the long-term potential for each. We anticipate much more progress over the coming quarters. And we look forward to keeping you informed of that progress. Thanks, again, for joining us, and looking forward to keeping you up-to-date. Goodbye.

Once again, that does conclude our conference call for today. We thank you for your participation.