Tuesday, February 21, 2012

Development Risk in Genomatica IPO

Practice makes perfect!  Renewable chemicals developer Genomatica, Inc. has filed with the SEC a series of amendments to its S-1 registration statement originally filed in August 2011.  The most recent update was on February 13, 2012.  The company needs capital to scale up production of two vital chemicals, butanediol (BDO) and butadiene.  Genomatica technology supports production of at least a dozen or so other specialty chemicals.

The amended registration filings help chronicle the Genomatic’s accumulating relationships aimed at bringing its BDO production to the market.  Early in 2011, Genomatic inked a non-binding memorandum of understanding with polyester king Gruppo Mossi and Ghisolfi.  The two expect to produce BDO from sugars extracted from cellulosic feedstocks using the proprietary PROESA process technology owned by Mossi and Ghisolfi’s Chemtex subsidiary.  The relationship seems to be building with a recent licensing of the PROESA technology by Genomatica.  There is also a joint development agreement with Tate and Lyle Ingredients Americas, Inc. to jointly scale up the production of BDO from dextrose sugar feedstocks in North America.  The most recent SEC filing describes a third joint venture and license agreement begun in December 2011 with Novamont Spa for commercial-scale production of BDO in Europe using Genomatica’s process technology.

Those three agreements cover the North America and Europe.  However, Genomatica expects to be worldwide in reach and has been in negotiations with Mitsubishi Chemical Corporation for a joint commercial operation in Asia for the production of BDO also using the Genomatica process technology.  The two are exclusive until June 2012.

What makes butanediol or BDO such a lucrative product is that it is a so-called “intermediate chemical” used in everyday products like athletic apparel, running shoes, electronics and automobiles.  Genomatica’s S-1 filing suggests the world market is valued at approximately $4.0 billion.  The market for butadiene appears to be an even more enticing.  The company suggests that market is approximately $40 billion in value.  The problem with these figures is that they are based on mid-2011 prices and 2009 demand levels.  Despite the appearance of shakey market demand measures, it appears the market is sufficiently large to support profitable production levels as long as Genomatica’s production is good quality.

Genomatica management thinks they are ready technologically to get a piece of this pie.  The company claims to have been producing BDO from dextrose sugar at demonstration scale since June 2011 at a plant located at a facility owned by its partner. The roadshow  -  if there ever is one  -  should give analysts and investors more insight into the economics underlying Genomatica’s business. 

The S-1 registration statement and its many amendments provide a clue as to the reliability of whatever math will be presented in the usual roadshow power point presentation.  Two of the most important sentences in Genomatica’s many filings:  “We have successfully produced BDO at pilot scale and are now producing BDO using our process at demonstration scale at a plant located at an industrial site owned by our partner, Tate and Lyle.  In order to produce commercial quantities of BDO using our processes, we will need to further refine our processes and maintain fermentation performance, such as rate, yield and titer, when producing BDO in those larger quantities.” 

These two sentences mean investors in Genomatica’s IPO will be assuming a considerable amount of development risk  -  more than most investors expect when calling their broker and asking to get in the next big deal.

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. Genomatica is included in Crystal Equity Research’s Beach Boys Index in the Alternative Chemicals Group.

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