Genomatica's $100M IPO: The 10-Minute Version

| August 25, 2011

Like to better understand the markets, margins and opportunities in renewable chemicals, and Genomatica’s IPO?

Find the prospect of wading through Genomatica’s 200-page filing, uh, unappealing? Try our 10-minute version.

In California, Genomatica announced that it has filed an S-1 SEC registration statement for a proposed $100 million initial public offering of shares of its common stock, and a proposed listing on NASDAQ under the symbol “GENO”. The number of shares to be offered and the price range for the offering have not yet been determined.

Here’s the S-1 registration, in a conveniently downsized 10-minute Digest version – with some commentary along the way as to what is driving value in the Genomatica model, why you might be sorely tempted to plunk down some benjamins on this stock, and why there are risks and what those are.

Genomatica: The 10-Minute version

No matter the arcane language, Genomatica’s value proposition to the chemicals industry is as bold as it is technologically advanced.

Focusing on a suite of intermediate and basic chemicals, the company proposes to produce “Exact Same” molecules for an “Exact Same” price, with a “Less Than” production cost that ferments chemicals from “Not Used Before” feedstocks.

For its customers, Genomatica promises to end price volatility, expand the supply of vital C3 and C4 molecules, while reducing carbon footprints and addressing sustainability issues.

It plans to address conversion of, at first, BDO and butadiene, and has developed a suite of 20 molecules that provide new markets for expansion.

Cost? The reductions come from the simplicity and yields of the direct-to-molecule processes it has established, the substitution of lower cost feedstocks and, in the long-run, the economies of scale from increased production scale.

Risk? Addressed through a series of marketing and production partnerships that establish JVs and produce chemicals at existing facilities around the globe in a bolt-on fashion.

The global chemical markets

From the S-1: “The global chemical market is a $3.0 trillion industry and enables the production of approximately 95% of all manufactured goods. Through chemical reactions, chemical manufacturing processes convert feedstocks into basic and intermediate chemicals which are further processed into higher-value products. Feedstocks are the most basic of starting materials for chemical production. Basic and intermediate chemicals, along with inorganic chemicals, fertilizers and other derivatives and basic industrials, account for up to 37% of total industry revenue, or $1.1 trillion, the largest segment of the industry.

The 1,4-Butanediol (BDO) and Butadiene Markets

From the S-1: “BDO is an intermediate chemical used in the production of everyday products such as athletic apparel (spandex), running shoes (urethane foams), and electronics and automotive applications (engineering thermoplastics). BDO is a colorless, non-corrosive, low-toxicity liquid with a high boiling point. According to the most recently available data from IHS, the global BDO demand in 2009 was 2.8 billion pounds, which equates to a market size of approximately $4 billion based on June 2011 prices.

“Butadiene is a precursor to certain intermediate chemicals, including BDO, however, its primary use is for direct incorporation into polymers, which are used in the production of a variety of products, such as tires, carpeting and latex products. Global butadiene demand in 2011 is forecasted to be over 20 billion pounds, which equates to a market size of approximately $40 billion based on June 2011 prices.

Challenges Facing the Chemical Industry: why renewables, why now?

From the S-1: “Because the production of approximately 95% of all manufactured goods is enabled by chemicals, the challenges facing the chemical industry directly affect consumers and the global economy. These challenges impact chemical manufacturers and companies dependent on chemicals to make downstream products and materials, and include:

• Dependence on Fossil-Fuel Feedstocks with Volatile Pricing.
• Increasing Scarcity and Rising Price of C3 and C4 Chemicals.
• Cyclicality From Supply-Demand Imbalances Due to Increasingly Larger-Scale Manufacturing.
• Consumer Demand for Greater Sustainability.”

Genomatica as it sees itself: 7 Competitive Strengths

The company cites 7 factors in its filing.

1. A differentiated platform at all from its fossil materials based competitors — but that it uses -industrial biotech to target “Exact Same” molecules.

2. Low cost. “Chemical production plants designed to use our production processes…will have better economics at smaller scales than similar-sized conventional production plants.  ”

3. Partnerships with Industry Leaders – so far, the company has partnered with Tate & Lyle, Novamont, Mitsubishi Chemical, Waste Management and Chemtex.

4. Capital Efficiency. We believe that the relatively lower cost of building plants…will allow us to accelerate commercialization…using substantially less of our capital than..a model to build, own and operate.”

5. Feedstock Flexibility. The company can potentially use: conventional sugars such as sucrose from sugarcane or sugar beets, and dextrose from corn or cassava; sugars from cellulosic biomass such as energy cane, switchgrass, miscanthus, corn stover, wheat straw and other plant matter; or syngas. Today, the company is focused on conventional sugars – the others are in development.

6. Intellectual Property. The company has 23 patents and 206 pending patent applications in the United States and in various foreign jurisdictions.

7. Management Team with Extensive Industry Experience.

Commercialization Partners

Tate & Lyle. In March 2011, Genomatica entered into a JDA with Tate & Lyle to jointly scale up the production of BDO from dextrose sugar feedstocks in North America. Under this agreement, Genomatica is jointly operating a plant at demonstration scale, with the potential for commercial-scale production in North America pursuant to a contemplated JV agreement. Tate & Lyle will supply dextrose sugar feedstock for the initial commercial-scale plant in North America.

Novamont. In June 2011, Genomatica signed a non-binding LOI with Novamont regarding a proposed JV for the commercial-scale production of BDO using our process technology at a Novamont industrial plant to be converted for such purpose. This LOI contemplates the first commercial-scale BDO plant in Italy with a capacity of approximately 40 million pounds per year to begin production by the end of 2012. According to the LOI, Novamont will provide all construction capital and consume all product off-take for captive use.

Mitsubishi Chemical. In April 2011, Genomatica entered into a non-binding MOU with Mitsubishi Chemical for a JV in Asia for the production of BDO using its process technology and a possible research and development collaboration for other target chemicals.

M&G / Chemtex. In February 2011, Genomatica entered into a non-binding MOU with M&G for the development and commercialization of certain target chemicals from sugars from cellulosic biomass using its process technology. In April 2011, Genomatica entered into a JDA with Chemtex, a wholly-owned subsidiary of M&G, to develop a process for producing BDO from sugars from cellulosic biomass feedstocks.

Waste Management. In December 2010, Genomatica entered into a JDA with Waste Management to develop a commercial-scale process to produce a particular intermediate chemical from syngas sourced primarily from municipal solid waste.

Financing along the way

Since its inception, Genomatica raised $84.2 million in gross proceeds through the issuance of convertible preferred stock. Highlight issues were:

Series B. In July 2007, Genomatica issued and sold 13,362,730 shares at $1.4967 per share, for $20M.

Series C. In January 2010, the company issued and sold 14,492,756 shares at $1.035 per share, for $15M.

Series C-1. The company issued and sold 24,453,864 shares at $1.8402 per share, for aggregate consideration of $45M.

Financial results along the way

Genomatica is another, essentially, pre-revenue company. As they put it, “To date, we have not generated any revenues associated with the sale of chemicals produced using our processes.”

As of June 30, 2011, their revenues were derived primarily from payments received under JDAs, government grants and licenses of  proprietary software to academic and research institutions.

The accumulated deficit as of June 30, 2011 was $43.5 million.

The net loss was $5.9 million, $9.0 million and $14.1 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $9.1 million for the six months ended June 30, 2011.

Valuations along the way

From the S-1:

March 1, 2010 Valuation. In January 2010, we completed our Series C convertible preferred stock financing at a price of $1.035 per preferred share. This financing involved significant participation by outside investors who purchased in an arm’s length transaction.

• February 22, 2011 Valuation. In December 2010, in conjunction with entering into a JDA with Waste Management for the production of a particular intermediate chemical from syngas, we completed the first closing of our Series C-1 convertible preferred stock financing at a price of $1.8402 per preferred share.

• July 22, 2011 Valuation. Our board of directors assessed the fair value of our common stock as of July 22, 2011 to be $1.80 per share, based in part on a valuation analysis as of the same date obtained from an independent third-party valuation specialist, as well as the other developments described above.

Milestones along the way

From the S-1:

“In 1998, we founded our company based on our proprietary technology platform for the predictive, computational modeling and simulation of metabolism in living organisms. We developed our software platform, called SimPheny, which is designed for modeling and simulating these complex biochemical pathways. From 1998 to 2006, we operated as a R&D organization advancing our technology platform and our expertise.

• In September 2007, we commenced our BDO production process research and development program.

• In February 2008, we achieved proof-of-concept and accomplished the first direct biological production of BDO from renewable feedstocks.

• In May 2009, we generated our first purified samples of BDO from our process at laboratory scale.

• In June 2010, we achieved our first pilot-scale production of BDO at 3,000 liters with a contract manufacturer and generated samples of BDO, which were subsequently externally validated to meet commercial specifications.

• In February 2011, we enabled the production of polybutylene terephthalate, or PBT, from renewable feedstocks using BDO produced from our process.

• In May 2011, our work on BDO was the focus of a peer-reviewed article on direct, single-step, biological production of a major chemical, in the journal Nature Chemical Biology.

• In June 2011, we and our partner, Tate & Lyle, successfully produced BDO at demonstration scale of 13,000 liters using our process at a plant located at an industrial site owned by Tate & Lyle. We were awarded the EPA Presidential Green Chemistry Challenge Award, considered by many to be the industry’s top award, and the U.S. Department of Energy selected us for an award with a potential value of up to $5.0 million to develop processes for the production of BDO from cellulosic biomass.

• In August 2011, we successfully produced pound quantities of butadiene from renewable feedstocks.”

The Risks, translated from SEC-speak

From the filing:

In S-1 speak: “We have not recognized revenue associated with the sale of chemicals produced using our processes, have incurred significant net losses since inception and may never become profitable.

In English: “We haven’t sold a pound of product yet.”

In S-1 speak: “Neither we nor our partners have ever commercialized chemicals produced using our processes and may fail to successfully do so.

In English: “No one has ever done this before, so if we give you a sense in our filing that this is like falling off a log, it might also be like walking to Neptune without supplementary oxygen.”

In S-1 speak: “Our failure to effectively scale up our technology and processes.”

In English: “It sure looks good on paper,” said Leonardo DaVinci, before commencing construction of the Tower of Pisa.”

In S-1 speak: “we rely heavily on industry partners and may not successfully enter into, maintain and manage these relationships.”

In English: “If we lose our partnerships and have to re-invent the wheel, forget everything we said about timelines and margins.”

In S-1 speak: “fluctuations in the prices and availability of feedstocks used to manufacture the chemicals produced using our processes as well as competitors’ chemicals, and fluctuations in the market prices of our target chemicals.

In English: “If oil goes back to $40, we are histoire.”

In S-1 speak: “Our failure to develop processes that allow for the utilization of lower cost feedstocks in producing chemicals with our industry partners.”

In English: “We actually haven’t figured out how to unlock all that low-cost cellulosic biomass yet.”

In S-1 speak: “Obtaining and maintaining our intellectual property protection and not infringing others’ intellectual property.”

In English: Our lawyers are going to get rich – their IPO you might want to look at, too.

The bottom line

Genomatica is either going to be one of the most over-valued companies in history (if they fail), or the most under-valued companies in history (if they succeed).

There’s little chance of a middle ground here while their patents live and their trade secrets hold up – if they can make product cheaper, on a continuing basis, they could be a real monster.

It’s been estimated that customers seek to move 15-20 percent of the chemical supply chain can move to renewables, and that’s $6.6-$8.8 billion, just based on the BDO and butadiene markets. It wouldn’t be unheard of at all for a company with superior economics and first-mover advantage to scoop up and sustain as much as 30 percent market share.

So there’s no reason – aside from abject failure in scale-up – to suspect that Genomatica is looking down the barrel at, say, $2-$3 billion in sales off its two core products, if it can scale to the 500,000-750,000 ton global capacity range.

That’s about the equivalent in tonnage – for those more used to visualizing in gallonage – to two or three 65 million gallon ethanol plants, by weight of product.



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