Myriant's $125M IPO: The Complete Digest analysis

Myriant becomes the 8th industrial biotech player to file an IPO in the 2010-11 greentech bull market.

Will it fly? Should it? The risks, the rewards, the rationale.

In Massachusetts, Myriant filed for a $125 million IPO, becoming the 8th company in industrial biotechnology to file in the past 18 months. The filing is the first since Solazyme raked in a record $227 million (assuming sale of its overallotments) in its IPO last week. Solazyme stock, meanwhile, has jumped 24 percent in the first few days of trading on NASDAQ.

UBS Securities LLC, J.P. Morgan Securities LLC, Citigroup Global Markets Inc. and Piper Jaffray & Co. will be acting as joint bookrunning managers, with Morgan Joseph TriArtisan LLC acting as co-manager, for the offering.

Myriant background

The company is the 8th elite integrated biorefining company to file for an IPO in the past 18 months – following Codexis, Amyris, Gevo, Solazyme, KiOR, and Ceres.

From the S-1: “We are an industrial biotechnology company focused on becoming a low-cost producer of high-value biochemicals that substitute for traditional petroleum-based industrial chemicals. We have developed a proprietary technology platform that we believe will enable us to manufacture a variety of “drop-in” chemicals and replacement chemicals for large and growing markets using a broad range of low-cost, renewable and readily available feedstocks. We believe that we can produce our target high-value chemical intermediates at an average of half the cost of traditional petrochemical intermediates at a wide range of oil and industrial sugar prices without relying on government subsidies.”

Breakout Markets in organic acids: Succinic, fumaric, acrylic, lactic acids at half price

From the S-1: “Our technology platform combines proprietary microorganisms, or biocatalysts, and a fermentation process capable of using diverse industrial sugars to create various chemical intermediates, such as succinic acid (a $7.5 billion addressable market at current market prices), fumaric acid (a $1.7 billion addressable market at current market prices), acrylic acid (a $14.5 billion addressable market at current market prices) and lactic acid (forecast to eventually become a multi-billion pound market).

Key initial market: Succinic acid as substitute for existing molecules

From the S-1: “We are currently focused on commercializing and producing biosuccinic acid.  There is currently a small existing merchant market for succinic acid for use in pigments, solvents, detergents, metal plating and PBS polymers. In addition to targeting the existing succinic acid market, we plan to sell our biosuccinic acid as a drop-in or replacement chemical in the following target markets:

“Butanediol, or BDO, is a high-value chemical intermediate with end markets in a wide variety of everyday products, including engineered plastics, biodegradable food packaging, adhesive tapes, foams, fibers such as elastane (better known as Spandex and Lycra) and coatings. Approximately 27% of global BDO production capacity utilizes a proprietary production process licensed by Davy…we are negotiating a joint development agreement…to replace their petroleum-derived MAN with our biosuccinic acid.

“Our biosuccinic acid can be used to substitute for adipic acid in these and other applications. Several prospective customers have already tested our biosuccinic acid as an adipic acid replacement, and one customer has signed a supply contract with us for that purpose.

“Phthalic anhydride is a major chemical intermediate used as a raw material to produce plasticizers, coatings and a wide variety of everyday plastics used in food wrap films, flexible PVC piping, flexible wire jackets and toys. Several prospective customers have already tested our biosuccinic acid as a phthalates replacement, and one customer has signed a supply contract with us for that purpose.

“Lactic acid can be converted, through a process called polymerization, into polylactic acid, or PLA. PLA is used in a range of everyday products, including packaging, apparel, bottles, durable goods, films, bedding, non-wovens and plastic dining utensils. The market for PLA is currently limited because conventional PLA cannot be used in applications requiring heat resistance. Our D(−) lactic acid can be used…to address the thermal stability problem…Market forecasts indicate that the addressable market for D(−) lactic acid will eventually exceed one billion pounds.”

Beyond the green premium, the green discount

Based on current commercial-scale cost metrics, we estimate that our production process for our initial product, biosuccinic acid, will be cost-competitive with petroleum-based processes down to $45 per barrel of oil.

The company’s financial progress.

The company recorded operating losses of $4.98M for the 3 months ending in March 2011, up from $3.241M in the corresponding period of 2010. The company is essentially, pre-revenue, recording $2,519 in sales over the past 3 months. Total assets are booked at $61M, with $50M in cash.

Customers and partners

Davy Process Technology,  using Myriants’s  succinic acid in their butanediol process in place of petroleum-derived maleic anhydride, without significant additional capital expenditures. Davy believes that its butanediol process ccounts for approximately 1.2 billion pounds or 27% of total global capacity, and 50% of plant capacity installed since 1992.

Uhde GmbH, to integrate Myriant fermentation technology with its separation technology in the plant design and, on a project-by-project basis provide process and performance guarantees for our future plants on mutually agreeable terms.

MOU with China National BlueStar (Group) Co. Ltd., to develop a proposal for a jointly-owned 220 million pound biosuccinic acid plant in Nanjing, China, and an agreement for the exclusive supply of biosuccinic acid to BlueStar.

Partnership with PTT Chemical International, to access PTTCH’s breadth of commercial and technical expertise and extensive knowledge and infrastructure in Asian markets.

Scale-up to date

From the S-1: “We are currently building a 30 million pound biosuccinic acid plant in Lake Providence, Louisiana, or the Louisiana Plant, which we expect will begin commercial operations during the first quarter of 2013. We intend to expand the annual production capacity of this plant to approximately 170 million pounds by the end of the first quarter of 2014.

“We have already scaled up our biosuccinic acid production 1,000 fold at the tolling plant owned by Fermic, in Mexico City, and have produced 24 metric tons of biosuccinic acid at this facility in support of internal testing and customer/vendor sampling and validation programs.”

“Our technology platform has been deployed on a commercial scale since June 2008 at Purac’s manufacturing facility in Barcelona, Spain, for the production of D(−) lactic acid.”

As Myriant sees itself

Competitive strengths: Validated proprietary technology  – Low-cost producer of sustainable biobased products – Feedstock flexible – Commercialized product – Strategic relationships – no subsidies or mandates required – Scale-up and signed customer contracts – Experienced team.

Strategy: developing drop-in and replacement products for large, existing addressable markets – leveraging and establishing partnerships – targeting drop-in applications to drive market penetration – securing customer contracts to support production capacity expansion – expanding internationally to markets with the greatest business opportunities – feedstock flexibility used to reduce costs.

The Risks

In IPOspeak: We are an early stage company with a history of losses. We expect to incur losses for at least the next several years, and we may never achieve profitability.

In English: In the year 2525, if man is still alive…we may be still losing money.

In IPOspeak: Our processes and resulting products are unproven at commercial scale.

In English: You load 24 tons, and what do you get? Another day older and deeper in debt.

In IPOspeak: We have never operated a commercial-scale plant or produced our lead product, biosuccinic acid, in commercial volumes, and as a result, we may encounter unforeseen difficulties in constructing and operating large-scale commercial facilities.

In English: We have only built leetle, leetle versions of the factories that could make money at this.

In IPOspeak: We will be dependent initially on three customers for sales of our lead product, biosuccinic acid. The product requirements of these customers may be less than the initial capacity of our Louisiana Plant.

In English: Thin pipeline.

In IPOspeak: We expect to face competition for our biochemical products, including biosuccinic acid, often from companies with greater resources and experience.

In English: Big Chem may let us make a market, then take it away.

In IPOspeak: A significant decline in the price of petroleum and petroleum-based products may reduce demand for our biosuccinic acid and our other biochemical intermediates.

In Franglish: “Apres oil at below $45 a barrel, le deluge.”

In IPOspeak: Some of our key operating strategies, including those involving Davy and PTTCH, depend upon negotiating and executing binding agreements.

In English: That traffic in our store hasn’t moved towards the cash register yet.

In IPOspeak: Our rights to key intellectual property are licensed to us. Termination of the underlying agreements would be highly detrimental to us.

In English: So whatever happened to the Dutch East India Company, anyway?

IPOspeak: We may not be able to enforce our intellectual property rights, including our trade secrets, especially in the international markets in which we expect to operate.

In English: Psst! Some countries steal technology.

Winner or loser? The Digest’s Take.

Winner, but think hard about oil prices. Myriant is the first renewable chemicals pure-play to file for an IPO in this cycle, but the others who have succeeded (Amyris, Codexis, Gevo and Solazyme) all have chems as the key part of their near-term mix. The trick here is that Myriant is not marketing a lower-cost “same as” molecule like Gevo’s isobutanol, but a substitute molecule. So it has more performance hoops to pass through.

Like any early-stage IPO in this crop cycle, there are scale-up concerns, but less in Myriant’s case, because chems scale-up involves smaller plants, and Myriant has marched further towards scale-up though partners like Purac.

Will organic acids really be adopted as substitutes for all those petroleum-based molecules? We think that the answer is yes, as long as the cost is equal or below the current market cost, and performance can be proven. A bet on this stock will include a calculation of the pace at which this conversion will occur. And a bet on the long-term price of oil. $120 near-term oil? Lookin’ sweet.