Friday, August 15, 2014

Big Wide World of Renewable Chemicals

Last week privately-held Genomatica announced its intention to develop biochemicals for production of nylon.  The company wants to make three intermediate chemicals that are used in nylon production.  Of course, Genomatica will use its patented technologies to make those chemicals with biomass instead of petroleum feedstock. 

Genomatica already has two strong development programs under its belt.  The company has successfully produced butanediol (BDO) and has licensed that technology to BASF and Novamont.  BASF is the largest producer of BDO in the world and claims to have produced over millions of pounds of butanediol using Genomatica’s technology.  Not to be outdone, sometime before the end of 2014 Novamont is expected to finish a plant dedicated to BDO production in Europe.

If you own a car or use gloves to wash dishes you are in the market for butadiene, a key chemical used in the production of tires and latex among other common products.  This is an equally impressive market, with about $20 billion in annual sales.  Genomatica is trying to develop bio-based butadiene as well.

The butadiene market is very large, but the nylon intermediate chemical market is  no less impressive.  Genomatica claims that annual sales in the petroleum-based intermediate chemicals for nylon are valued at around $18 billion.

I would not be surprise to see Genomatica make another attempt at becoming a public company.  Two years ago the company had tried to raise about $100 million in an initial public offering.  It was forced to withdraw when it became apparent that the U.S. equity market had not recovered sufficiently to put that kind of money in an unproven biochemicals company. 

Instead the company did another private round of financing with a strategic investor, Italian chemical company Versalis.  That was probably an astute move on Genomatica’s part.  In the biochemical industry you just cannot have too many friends to help sell your products efficiently.  What is more management claims that Versalis offered a much higher valuation than had been discussed in the public offering.

Now that at least one of its development programs has been commercialized and a second is well on its way, Genomatica’s risk profile has changed dramatically.  It would be much easier to attempt an IPO under those conditions. 

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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