12 March 2012 00:00 [Source: ICB]
Metabolix took its Mirel biopolymer to the next stage, but partner ADM lost patience
When US agriproducts giant ADM shut down bioplastics firm Telles on January 12, its partner in the joint venture, Metabolix, expressed complete surprise. So did investors, bidding the US-based industrial biotech company's share price down by 57% the next day.
© Rex Features
When Metabolix went public in 2006, it seemed to be on the verge of breaking out. A decade of research and development had given the firm a thick sheath of patents and a growing customer list, while a new partnership with ADM was to provide the resources necessary to begin production at commercial scale. Six years later, Metabolix is scrambling to salvage its position, reconfigure its strategy, and recover its momentum.
A spin-off from the Massachusetts Institute of Technology, Metabolix was founded in 1992 to commercialize technology related to polyhydroxyalkanoates (PHAs), a class of useful biopolymers. In its first 10 or so years, the company optimized organisms to produce PHAs by fermentation, perfected methods for purification, and developed applications that would benefit from their natural origin and biodegradability.
Major players began to notice. In 2003, Metabolix and German chemical major BASF entered a one-year research collaboration, and consulting firm Frost & Sullivan gave the company its Technical Insights Excellence in Biopolymers Research Award. In 2005, Metabolix began a two-year research and development collaboration with BP.
The most significant move came in November 2004, when Metabolix and ADM entered into a strategic alliance. ADM would build a 110m lb/year facility for the fermentative production of PHAs in Clinton, Iowa, US; Metabolix would supply the technology; and a 50:50 joint venture - Telles - would market the product - Mirel.
In November 2006, Metabolix made another momentous move - an initial public offering that brought the company $99m. One month later, construction of the new production facility began, with commercial production targeted for 2008. The stock was a hit, climbing to almost $27/share by July 2007.
What went wrong? ADM summarized its reasons in a press release. "We have analyzed our business portfolio, identifying areas that are not delivering sufficient results now or are not expected to deliver sufficient results within a reasonable timeframe," said Mark Bemis, president, corn, at ADM. "We have had a good working relationship with Metabolix, and the fermentation technology performed well at our facility," he continued. "Unfortunately, uncertainty around projected capital and production costs, combined with the rate of market adoption, led to projected financial returns for ADM that are too uncertain."
The greatest problem seems to have been the slow pace of market adoption.
During its third-quarter earnings call in November 2011, Metabolix president and CEO Richard Eno reported that the customer base for Mirel continued to grow, reaching 57, of which 26 had placed repeat orders.
However, volumes remained low. Telles had been expected to reach the milestone of 1m lb of Mirel sold by the end of the year, but only half that amount had shipped. Metabolix pushed the goal back to the first quarter of 2012 and minimized an earlier projection that the facility would be sold out in mid 2013.
The problem was magnified by the size of the Clinton facility. Capable of producing 110m lbs of Mirel each year and expandable to four times that, the plant, which went online a year late, had used only a small fraction of its total capacity - far too little to realize economies of scale, even assuming continued successful process optimization.
Meanwhile, ADM's potential losses were mounting. The company had spent more than $300m to build the facility, and it bore the cost of operations. The "ledger balance," which incorporated these sums, would need to be recovered before Telles became profitable, but it was growing. Pegged at $385m at the end of 2009, the ledger balance reached $403m by the end of 2010, and it grew to $425m over the next nine months. ADM has said that it will take a pre-tax charge of $300m-$360m in the second quarter, primarily for the impairment of the Clinton facility.
OVERLY AGGRESSIVE TARGETS
JinMing Liu, senior vice president of equity research at US-based investment bank Ardour Capital Investments, believes Telles set overly aggressive targets, resulting in two key errors. The more significant was to build a world-scale production facility before producing at demonstration scale. "If they had said, back in 2006, let's build 11m lbs instead of 110m, they would have shortened the construction period significantly," says Liu. "They would also have been able to push-market in 2008, as originally planned. Today they would have almost four years' of commercialization experience."
Liu also questions the pricing strategy. Telles, like other firms in the bioplastics space, priced Mirel at a considerable premium - $2.25-$2.75/lb, versus closer to $1/lb for the petrochemical products it aimed to displace. The analyst believes wider adoption and higher volumes would have been preferable to conservative pricing.
The temptation to aim high has been hard for green chemicals firms to resist. Biopolymer firm Natureworks, founded as a joint venture between US agribusiness Cargill and US-based Dow Chemical in 1997, also set overambitious production and pricing targets, says Liu, and Dow dropped out in 2005. "Customers are not willing to pay a premium for environmentally friendly polymers," Dow's president and CEO, Andrew Liveris, said at the time. Today, Natureworks prices its biopolymer at about $1.20/lb, compared with early pricing that was multiples higher.
"I still believe in PHA," says Liu. "I like the material, and it has a lot of potential, but Metabolix has to figure out a way to [realize] it."
Speaking with analysts the day of ADM's announcement, CEO Richard Eno offered his own take. "It is clear that developing a lower capital approach will be essential, and we have some options framed out that we will now evaluate," he said. "We have five years of learning, which we and a new partner can now benefit from, and that is very valuable knowledge. We will also be looking actively at non-food and next-generation cellulosic sugar capacities, which could offer feedstock cost advantages."
In New York last month, Eno said Metabolix had cut production plans for Mirel by a fifth to 10,000 tonnes/year. The company was considering its production options, he said, including acquisition, tolling, partnership, and a brown- or greenfield plant.
Despite the latest challenges, the outlook for Metabolix is good. The company remains well financed, with almost $80m in cash. Its promising C4 chemicals program, also based on PHAs, is independent of the Mirel effort, and a joint-development agreement with South Korea's CJ CheilJedang, signed last July, will allow development to progress unhindered.
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