Friday, July 15, 2011

Myriant IPO: Fair Warning

It has only been six week since biotech Myriant Corporation filed a registration statement with the SEC.  Myriant wants to join a growing list of renewable fuels and chemicals companies accessing the public capital markets.  No one can accuse Myriant of being meek.  The company which has never turn so much as penny of profit is seeking $125 million from new investors.

Myriant’s technology platform combines proprietary microorganisms, or biocatalysts, and a fermentation process capable of using diverse industrial sugars to create various chemical intermediates.  Top on Myriant’s list of potential products is succinic acid.  Currently produced from petrochemicals, succinic acid is so deeply intermixed in industrial and householder products that it represents a $7.5 billion addressable market at current market prices.  According to Myriant’s SEC filing, fumaric acid is its second target market with a $1.7 billion value.  However, acrylic acid is the real sweet spot with the promised of a $14.5 billion in addressable market value.

I first wrote about Myriant and its renewable chemicals technology platform back when the company was called BioEnergy International.  The post “Biobonanza” published in January 2010, lampooned the company’s tardiness to the succinic acid market.  Myriant is not the first biochemicals producer to enter the market and is a distant competitor to far more experienced and better entrenched producers.  As I noted in over a year ago, Roquette Freres is already working with a partner to bring biosuccinic acid to the market.

Given that there is competition in the biochemical market, it may not be wise to price deals such as Myriant’s simply by large market size  -  a practice favored by investment bankers pitching large deals for small companies with no earnings.  In Myriant’s case the red ink is significant.  Net losses since inception to the end March 2011 topped $50 million.  Short of historic revenue and earnings as testimonials there has to be some evidence that management can hit the ball at least into the outfield if not out of the ballpark  -  so to speak.

The company has generated some revenue through the license of its technology. In January 2006, we granted Purac an exclusive, worldwide and royalty-bearing license to use their technology platform to produce, market and sell lactic acid.  Purac is the largest producer of lactic acid in the world and is fast converting to sustainable product processes and products.  The Purac relationship suggests there is some commercial viability in Myriant’s biocatalysts. 

Furthermore, Myriant has managed to find a potential commercial partner for its biosuccinic acid in Johnson Matthey PLC’s subsidiary Davy Process Technology Limited.  A deal is contingent upon further testing.  Myriant also has an exclusive alliance agreement with ThyssenKrupp’s subsidiary Uhde GmbH under which Uhde will integrate Myriant’s fermentation technology into Uhde’s plant designs.  Neither relationship provides for near-term revenue streams.  This opportunity is also contingent upon further performance by Myriant.

The uncertainty of future revenue has not stopped Myriant from building production facilties.  The company has already started a 30 million pound biosuccinic acid plant in Lake Providence, LA using funds from a $50 million cost-sharing grant from the Department of Energy.  That plant is expected to begin commercial operations during after the beginning of 2013.  Myriant has plans to build production facilities in Europe as well.

There has been little pricing talk for the Myriant deal so far.  While I applaud the advance of renewable chemicals, it is vital that investors do not get caught up in the large market euphoria that often accompanies initial public offerings of novel companies.  Succinic acid is after-all a commodity.  Once the newness wears off, Myriant shares could be priced like any other basic chemical company.

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.  Myriant is included in Crystal Equity Research's Beach Boys Index in the Alternative Chemicals Group.

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