Friday, September 24, 2010

Changing Gears

This week following a presentation at the UBS Global Life Sciences Conference, we spent a few minutes with the management team from Verenium, Inc. (VRNM: Nasdaq). Yes, that is right Verenium was invited to a pharma/biotech conference. That is because Verenium has changed gears. No longer traveling down the road to produce biofuel, Verenium is now driving in the fast lane with its enzyme portfolio.

Management is positively giddy over its changing fortunes. After all, a look down the alternative fuel highway is anything but encouraging. First, it is a by-way with plenty of traffic from competing biofuel technologies. Signage on government policies is confusing and sometimes conflicting. Not only was Verenium having trouble figuring out the next turn, they were also struggling to haul along a trunk full of debt.

Relief has come from a deal struck with BP, Inc. (BP: NYSE) to buy Verenium’s biofuel production assets for a total of $98.3 million. Proceeds from the deal will be used to pay down debt. Verenium has already made an offer to retire $21 million of its outstanding notes.

Verenium retained its commercial enzyme business and plans to focus on enzymes for industrial processes. Novozymes (NZYM: DEN, NVZMY: PK ADR) and Genencor International (Division of Danisco, DCO: DEN, DNSCY: OTC/BB ADR) are significant players in the space.

Verenium still has its biofuels enzyme products and has the right to develop its own cellulosic enzyme program at some point in the future. Don’t count on Verenium to get back into the production of biofuels. The shift to a technology license business model is permanent. Management says they will wait for the biofuel market to develop before venturing into the sector again and then only as an enzyme resource. Profitability is within sight for Verenium and management is keener on achieving that goal that being a pioneer in biofuels.

The company has nine commercial enzyme products that put them among the top three major enzyme producers in the world. Over three hundred patent applications are pending on what appears to be a very green portfolio of enzymes. The company touts the way its enzymes help “harnesses the power of nature” helping its customers in the energy, food, agriculture and pharmaceutical maximize efficiency in production and quality and performance in their products.

While Verenium had been prominent among biofuel companies in our Beach Boys Index, we are moving them to our new Mothers of Invention Index that includes other innovators in efficiency and energy savings. We are not counting Verenium out in the alternative energy space. We believe they have a keen understanding of the biofuel space. When cellulosic ethanol gets of the bench and into production, we expect Verenium to be there with an effective enzyme to enhance production. BP is high on our list of likely customers.

We expect investors to take their time in revaluing Verenium post divesture. The Company’s balance sheet and P&L will change materially with the sale to BP. We believe the stock is still trading on the past, giving long-term investors the time to establish positions in the stock as compelling price points.

Cannot find our new alternative energy indices? Do not fret. We still compiling the names and finalizing a presentation format. Stay tuned!

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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