The rocky road to biofuels heaven: Codexis chief out, Ceres IPO delayed

| February 20, 2012

Ceres delays IPO (again); Codexis CEO and enzyme guru Alan Shaw resigns.

In California, visionary industry leader Alan Shaw resigned as CEO of Codexis and the Ceres IPO, scheduled for last Thursday, did not occur and has yet to be rescheduled as of press time. The Ceres IPO remains on the NASDAQ calendar.

At the same time, Ceres said that current shareholders had indicated that they would purchase up to 1 million shares in the company’s upcoming IPO, and the company warned that severe drought conditions in south-central Brazil will adversely affect sweet sorghum crop yields.

The changes at Codexis and delayed IPO at Ceres are indications that life in the public markets remains a rough one for early-stage industrial biotech companies. The changes at Codexis come after the company’s shares fell 65% off their initial IPO price of $13.00 in 2010, despite the company’s relatively steady performance in its fuels business and a fork into the renewable chemicals business, including a landmark deal with Chemtex.

At Ceres: confidence from insiders, drought in Brazil

The company reports: “We are receiving reports that while some of the 2011/2012 sweet sorghum crops being produced from our seeds are growing quite well, others are suffering from the adverse weather conditions. As a result, we expect that this drought will likely lead to overall reduced yields for the 2011/2012 sweet sorghum crops and may adversely affect the demand for our seeds for the 2012/13 growing season.

Ceres: still a good IPO deal?

IPO Candy writes in Seeking Alpha: “If Ceres succeed, the newly discounted share offering of $16 to $17 might be a bargain…The long-term financial model of the company aims at operating margins of 47% to 63%. To put these in context the gross margins at Monsanto are 51%. If one believes these margins to be achievable and applied to a $400M revenue level in 2016 the company supports a per-share intrinsic value of $65.”

Changing of the Guard at Codexis

Over at Codexis, the company reported that Peter Strumph, formerly Senior Vice President and Business Head of Pharmaceuticals, was appointed as the company’s interim Chief Executive Officer, after CEO Alan Shaw resigned “to pursue other interests”, though the company said that Shaw will continue to serve as a special advisor to the Board of Directors.

Shaw served as President of Codexis since its inception and Chief Executive Officer since 2002, and led the company development and 2010 IPO, which was the first in the current wave of industrial biotech initial public offerings.

As interim CEO, Peter Strumph brings more than twenty years experience in senior manufacturing and operations management in the biopharmaceutical industry, including executive leadership positions for ten years at CV Therapeutics where he managed their operational, development and commercial activities.  He joined the company in 2010 and oversaw a 49% annual increase in pharmaceutical product sales in 2011.

Rumors that the board of directors were getting antsy about the company’s dismal share performance began to circulate last fall, and the company set out to beef up its management team with, among other appointments, the tapping of longtime Coskata executive Wes Bolsen as the company’s CMO.

In recent weeks, CFO Bob Lawson announced that he would leave the company as soon as the annual report filing season was concluded, in order to join an earlier-stage Silicon Valley software firm. On Friday, the news broke that Shaw would leave the company.

The fatal blow?

Slow progress on cellulosic biofuels was usually cited as a problem with visibility on profits at Codexis. As Shaw mused late last year to the Digest, “We’re late to our own party.”

Investors and board directors may well have been ultimately dismayed not only by the lack of visibility with Shell, or progress in renewable chemicals, but by the collapse of the company’s efforts to develop an enzyme-based carbon capture business at coal-fired power plants.

After signing a 2010 collaboration agreement with Alstrom, and investing in CO2 Solution, Codexis announced quietly in its annual report that its carbon-capture ventures were being wound down.  The timing was a surprise. Alstrom initially signed a 16-month research deal with Codexis and CO2 Solution in December 2010, but would the venture down unexpectedly less than 12 months into the announced R&D effort. It was symptomatic of the company’s struggles to find near-term, lucrative markets for its transformational technologies.

Where will Codexis go?

The company’s prospects in the fursl area are limited to and by its relationship with Shell and Raizen, the Shell-Cosan JV in which Shell deposited its Codexis shares. Shell has not yet fully declared its long-term biofuels strategy, although it has focused its renewable strategy broadly around biofuels. Delays in its cellulosic biofuels deployment – operating a pilot plant through Iogen since the early 2000s but not yet committed to a commercial-scale deployment, have severely limited visibility on Codexis’ future.

In biofuels, the company expects to participate with its CodeXyme cellulase enzymes in a pilot scale cellulosic ethanol plant in 2013 at a Raizen plant in Brazil, with commercial-scale operations scheduled for no sooner than 2015. In renewable chemicals, the company has said that it expects to commence pilot scale production of its new line of CodeXol detergent alcohols this year, with demonstration scale production in 2013 and commercial-scale deployment in 2014. The timelines and upside, apparently, proved too slow for Codexis investors as they unneeded management at the firm.

The Bottom Line

Worth remembering that the road to biofuels heaven is paved with stones that impatient investors occasionally use to pelt industry CEOs into oblivion.

Woe betide the early-stage industrial biotech company that regards the public markets as a Get Out of Jail Free card, suitable for adding capitalization to companies, replenishing the  depleted funds of a company’s venture capital backers, and offering a risk-free exit for trapped insiders.

What is clear from the performance of industrial biotech company sin the IPO after market – where it is selling shares, or pricing its stock, not according to the deep understanding of early-stage investors or even the roadshow-level understanding achieved with institutional investors through the IPO. In the aftermarket, the companies have struggled to find investors among more retail-oriented value investors, who value visibility and cash flow above all other considerations, and sellers continue to be in decent supply even as buyers have proven elusive, driving down prices.

In the case of Ceres, the market hasn’t even waited for the IPO post-lockup period to show a certain level of uneasiness with the commercial timelines of industrial biotech. Based on the company dropping its expected IPO price from a midpoint of $22 to a midpoint of $16.50, and enduring two missed pricing dates, it would be fair to speculate that the company is having one heck of a time finding buyers for the 4 million shares that will be sold for around $66 million to new investors.

Only last year, Solazyme sold some 14 million shares into the same market at roughly the same price, more than tripling the haul that Ceres is looking at. Now, Solazyme has been the #1 ranked company in the 50 Hottest Companies in Bioenergy two of the past three years, but Ceres has been solidly among the top echelon of that poll for several years. and the company has largely delivered on the development timelines it has shared with the market.

Public markets supply capital, they do not supply patience, and the long-term commercialization timelines for companies such as Ceres and Codexis are proving to be deeply-discounted by retail investors for the market, policy and technology risk that long timelines impose on otherwise fine companies. In short, companies need to provide nearer-term cash flow stories in order to support the valuations they seek.



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