Carbios — H117 results and update

The first half of 2017 and the following couple of months have witnessed a number of important developments for Carbios. To some extent, they mark a step forward into a new stage of development in the company. The moves embrace a change in top management, the scheduled ending of the Thanaplast research and development programme out of which the company arose, the first significant revenues from the Carbiolice joint venture and two major financing moves. To a greater or lesser extent these have affected the accounts just published.

There has been no change in the company’s strategic scientific and commercial roadmap, which it is pursuing from a strengthened financial position.

Carbios came into being to execute the five-year Thanaplast programme partially funded by the French state via national investment bank BPI to develop enzymatic processes for the biodegradation and the biorecycling of plastic polymers. Thanaplast came to an end according to the original plan on 30 June 2017, having reached all the milestones set at its inception. This marks the end of Carbios’s original incarnation as the manager of a scientific research programme, which has anyway been declining in importance compared to its mission to scale up these technologies and license the processes developed under Thanaplast.

Grant income under Thanaplast was Carbios’s main source of revenue but this is now being replaced by other, more commercial sources. One more grant payment is due under Thanaplast for which all the relevant research has been completed, which we discuss under the financing heading.

Martin Stephan was promoted to the post of deputy chief executive officer, having joined the company in February. He will help lead Carbios into the next phase of its development as a technology supplier to major companies in the chemical and fast-moving consumer goods (FMCG) industries. Mr Stephan graduated from the prestigious HEC business school in Paris and has spent his entire career with industrial chemical companies: Elf/Total’s chemicals business and DuPont.

In another break with the company’s first, essentially scientific phase, Emmanuel Maille, who was a director since its inception, is stepping down from active involvement in the business, although he remains a consultant. A scientist by training, Mr Maille had been the company’s second-ranked executive.

Carbios’s dedicated full-time CFO has also left and is joining a privately held company. Her accounting and treasury functions are being assumed by a colleague on the administrative side. This seems appropriate given the relatively small size of Carbios, which has less than 20 employees, and the fact that external spending on R&D will dwindle post-Thanaplast.

Two other recent hires give a flavour of the direction the business is now taking. The arrival of an in-house lawyer reflects the shift towards commercial licensing agreements with major companies as a business vector. Carbios has also taken on a specialist in public-sector financing to handle more diversified streams of such revenue post-Thanaplast.

In June Carbios signed an agreement with TechnipFMC, a major global energy and chemical engineering company. Technip will develop methods of integrating modules using Carbios technology to produce precursors for PET manufacture. Through its Zimmer subsidiary in Germany, TechnipFMC has extensive experience in engineering conventional PET manufacturing facilities. Under the contract TechnipFMC will help scale up Carbios’s process and ensure that it is competitive.

This is a key step in developing systems to permit the commercial and industrial exploitation of Carbios’s IP. In June Carbios successfully demonstrated the synthesization of PET oligomers (the key precursors) at pre-pilot stage, and in October it succeeded in the first production of virgin PET from these oligomers. The next step is to develop a pilot stage production plant, which should soon be under way. The issues here are essentially engineering rather than scientific, and as they are addressed Carbios’s position in marketing its technology will be all the stronger.

Carbios has also joined Petcore, the trade association for PET-related businesses in Europe.

Carbios’s relationship with Carbiolice, in which it holds 61.3%, is starting to generate revenue. Under the contract signed in August last year and which came into effect in mid-February, Carbios is receiving payments for the research it conducts on Carbiolice’s behalf. These are treated as income because Carbiolice is only accounted for as an investment. The holding in Carbiolice does not fit into Carbios’s strategy as a developer and owner of IP, so it is more than possible that ownership will drop below the majority level.

Carbiolice has reinforced its commercial team and optimised the production rate, which is helping to stabilise its operating results. Its current revenue is being generated by products that pre-date Carbios’s investment, so do not generate product licence income for Carbios. Work continues successfully on developing the two types of precursor product that Carbiolice will market under licence from Carbios, in particular obtaining the necessary authorisations for their use in food-contact environments. Carbios will receive licence fees on revenue generated with these products, which is expected to begin in 2019.

There was a sharp fall in operating losses in the first half of 2017 driven by a number of factors. Total revenue actually rose because of the first time revenue for development work for Carbiolice even though this only came on stream partway through the period. This more than compensated for the sharp fall in grant income (which accounted for the bulk of revenue in the first half of 2016) as the Thanaplast programme came to an end. The end of Thanaplast was also reflected in the large drop in bought-in services, reflecting the termination of research commissioned from scientific institutes and independent scientists. This is in part counterbalanced by the sharp drop in the research tax credit (CIR) shown under the tax charge.

The surge in payroll costs is attributable to one-off severance costs in connection with the management changes discussed above. They are not representative of future levels.

In the course of the second quarter Carbios took advantage of the strong share price to issue new stock via the equity line financing arrangements with Kepler Cheuvreux worth a little less than €1m. Over the quarter the share price rose from around €6.5 to nearly €10. Together with smaller sums generated by the exercise of employee stock options, this brought in €1.12m in fresh equity funds.

More importantly, Carbios made an institutional share placement in July. This raised €3.6m in new equity at some €7.7 per share, which will largely be used to finance a pilot PET plant. Long-term shareholders also sold €0.6m worth of existing stock.

According to the management statement, Carbios is now funded through to the end of the first half of 2019. Net cash stood at €4.7m at end June 2017. We estimate that since then the proceeds of the capital increase, partly offset by current cash outflow, have taken net cash to a figure of €7.5m, which covers a current cash burn of approximately €0.25m per month together with the initial investments required by the PET pilot plant.

The recent announcement of a five-year partnership with L’Oréal marks a key milestone in the commercial exploitation of Carbios’s PET technology. While at a pre-pilot stage, it is very positive in our view that such a major global company is willing to use the technology. The deal will give L’Oréal priority access to initial production of biorecycled PET. Little has been disclosed about the terms of the agreement, but the partnership will be open to potential users from other industries. As such, we see the only risk to Carbios in the potentially slower adoption of the technology by L’Oréal’s competitors in beauty products. Probably more important for investors than the immediate financial effect is the boost to sentiment from validation of the commercial future of Carbios’s IP.

The next development will be further commercial agreements with major FMCG companies for the use of Carbios’s PET technology for their packaging. Our model factors in revenue of €0.3m from this source in the second half of 2017, but this is greatly subject to the timing of specific contracts. Perhaps more important for investors than the immediate financial effect will be the boost to sentiment from validation of the commercial future of Carbios’s IP.

The final subsidy tranche of €1m under the Thanaplast programme is due to be paid, as all the relevant milestones have been reached, and we have assumed that this will be in 2017, but it might slip into 2018. €0.47m will be an outright grant and the remaining €0.56m will be repayable as and when Carbios reaches the trigger revenue benchmark.

The timing of the completion of the pilot PET plant is currently uncertain; management guides to completion in early 2019. This will mark another important step in the move to full-scale, commercially viable technology.

The company’s profile has been further lifted by its recent selection as one of two short-listed finalists for EuropaBio’s award for the most innovative EU biotech SME of 2017. The winner will be chosen in late November.

We have reduced our 2018 revenue forecast to €1.5m on the basis of a more cautious view of the timing of PET contract wins. This is offset by lower costs post-Thanaplast and we are keeping our profit forecasts unchanged, although per share data now reflects the increase in the number of shares, which has been increased by 17% compared to the end 2016 level, chiefly by the new share issues discussed above. We have also adjusted our DCF value per share range to €20-32 from €23-37 to reflect the capital markets activity this year.