Our fifth Idea-to-Profit Summit will be held at Babson Executive Education on May 15^th and 16^th. The focus will be on measuring innovation performance. Here’s a link for more information: http://www3.babson.edu/Bee/research/ice/ideatoprofit.cfm

Metabolix and the Wave

March 26 2007

Metabolix stock looks like a hit. The Cambridge-based company produces “green plastics” from biomass – materials like wood or corn which can decompose over time. This contrasts with petroleum-based plastics, which do not biodegrade.

Since the company went public last October, its stock price has moved from about $15.50 to a high of over $20. It is currently trading at around $18. It has a production partnership with agribusiness giant ADM and a market cap of around $350 million.

Metabolix’ biodegradeable plastics

Carl Berke is the Associate Director of the Center for Innovative Ventures at Partners Healthcare. He has been following green plastics for over twenty years, both as a research scientist (he has his PhD in chemistry), a concerned citizen (he served on the town of Brookline’s Solid Waste Advisory Committee for 2 years), and an investor.

Berke passed on the opportunity to invest in Metabolix before it went public, when its capitalization was around $100 million, and (perhaps as a result) remains skeptical about the long-term prospects of the business.

He’s not alone in his skepticism. In December, 2005, I wrote about the dissolution of a Dow-Cargill joint venture to produce another type of environmentally friendly plastic. Dow had just given its share back to Cargill, taking an estimated loss of $750 million on the transaction.

The economic challenges faced by green plastics have stumped many companies. In the last twenty years, there have been at least two prior starters in the category: Monsanto, with a product called Biopol, and Warner-Lambert, with a product called Novon. Both of these companies bet and lost big on microbial produced plastics.

Dr Berke points out that green plastics predate the petroleum-based kind. Some of the earliest kinds of plastics, like celluloid and cellophane, for example, were derived from cotton and wood.

According to Berke, the problem with green plastics is less the technology itself and more the ways that plastic fits into existing systems of waste disposal.

He told me:

“Municipalities have a variety of options for processing their trash. Landfills are regulated by local, state and federal authorities to ensure that there can be no leakage from landfill contents that could potentially contaminate groundwater. That means that buried trash is effectively mummified due to the absence of water. This poses a major barrier for biodegradeable plastics, since they must have moisture to decompose. A century from now, those biodegradable plastics will not have degraded – they’ll be preserved in their existing form. So the technology can’t deliver its major benefits, due to the necessary requirements of our municipal waste disposal systems.

“Now consider the upstream effects – the energy-intensive systems required to grow, extract and process the microbial or plant materials into final product. Bioprocessing – converting organic material to plastic — is not cheap. Even farming, of course, consumes oil in its own right. It remains unclear that the net fossil fuel use from biodegradable plastics is lower than would be the case by converting the petroleum directly to plastic cups.

“Finally, the current solutions for plastic waste disposal are not so unsatisfactory as to demand a radical technology shift in raw materials. Currently, most cities mandate that haulers recycle collected plastic waste – plastics are separated from the waste stream and converted for reuse in new articles such as plastic lumber and fill fiber. What is not recycled is usually incinerated, frequently with co-generation to produce electricity. Think of the plastic as petroleum that was temporarily diverted into use as packaging on the way to being burned for electricity.”

As for Metabolix, he predicts that the stock price of the company will correlate with prices of oil futures, and that the IPO was timed with a peak. “Premium price without premium performance is a hard sell,” says Dr Berke.

Let me suggest a slightly different scenario, building on the increasing momentum of the sustainability trend. As I’ve talked to innovators and written about innovation trends, I’ve come to think of them like waves, and the companies, like Metabolix, like surfers. Many of the surfers, like Dow and Cargill, are too early – they wait for the wave, and after several years, they begin to believe that it may never come. Some of these companies decide to get out of the water – they write off their investments and move on.

A few companies are lucky enough (or patient enough) to be there when the wave finally does come. DuPont, for example, has been investing in a variety of sustainability initiatives for over a decade. Vik Prabhu, a business development manager from DuPont, was one of the DuPont executives who worked on a few of these projects. He noted:

“It was very tough. Because the market has been very slow to adopt green technology. And green alone, we found out the hard way, is not sufficient to sell a product.”

Vik Prabhu, New Business Development Manager, DuPont

After years of investing and waiting for the wave, DuPont is now emerging as one of the leaders in sustainability. In fact, the company recently said it expects to derive additional revenue of $6 billion by 2015 as a result of its sustainability efforts.

Perhaps Metabolix is positioned in the right place at the right time, with a technology that is getting ready to pay off after more than 20 years and hundreds of millions of dollars of investment. Dr Berke doesn’t think so. But, evidently, many other investors do.

More information:

1. Metabolix home page is here.

1. Carl Berke is available here.

1. My update on the Cargill/Dow joint venture is here.

1. DuPont’s press release on sustainability is here.

1. I wrote a piece on trends that will be forthcoming in the May 2007 issue of the journal Research Technology Management. When it’s published, it will be available here.