Carbios — Commercial revenues in 2020

Carbios develops processes for biodegradation, bio recycling and bio production of plastics, based on conversion of polymers into monomers and subsequent re-polymerisation. The processes used by Carbios are based on natural enzymes, which have been improved by enzymatic engineering to fully break down the polymers that make up plastic materials. The bioprocesses under development seek to create fully biodegradable plastics with a controlled lifespan (biodegradation), allow the recycling of plastic waste according to circular economy principles (bio recycling) and produce biopolymers (bio production). The company was founded in 2011 and floated on Euronext in December 2013.

In the absence of short-term multiples and metrics we use a DCF methodology to provide an indicative valuation for Carbios. Given the high degree of uncertainty surrounding our projections, a high degree of uncertainty also surrounds the valuation projections. Under our central case assumptions, we now obtain a valuation for Carbios of €13/share. However, the valuation remains sensitive to assumptions on discount rates, perpetuity growth rates and long-term margins.

Carbios describes itself as a green chemistry company with a focus on the discovery and development of enzymatic bioprocesses to reinvent the lifecycle of plastics. Carbios’s processes are based on the use of enzymes produced by natural micro-organisms, chosen for their ability to degrade the polymers. Carbios is focused, in particular, on two active bioprocesses:

Carbios’s business model is based on the licensing of its technology and bioprocesses to industrial customers, either directly or via joint ventures. The licences granted will generate revenue in the form of upfront payments, royalties and/or dividends. Carbios signed its first licensing agreement in 2016 with Carbiolice and retains a stake of 56% in the company.

Carbios is predominantly focused on the biodegradation and bio recycling of two polymers, PLA and PET, and has made significant advances towards the commercialisation of its technology in both areas. The advances in its PLA business (biodegradation) was confirmed in January of this year when Carbios announced that it had signed a multi-year agreement with Novozymes (a world-leading enzyme producer), under the terms of which Novozymes has committed to become a long-term exclusive supplier of Carbios’s proprietary PLA degrading enzymes. At the same time, Carbios confirmed that it expects to receive royalty payments from Carbiolice from 2020. The PET technology is be trialled in a demonstration plant (scheduled to be up and running in early 2021) and Carbios will aim for its first commercial PET plant in 2023. Carbios will aim to license one plant a year until 2026 and two plants a year in the period 2027–30. As well as receiving licensing fees, Carbios will generate profits from selling its catalyst to PET producers via a tolling arrangement with an enzyme producer.

According to figures used by Carbios derived from a range of sources, plastic production totalled 348m metric tons in 2017, with waste of 125m metric tons. European production has remained flat in recent years (at c 60m tonnes, global market share c 20%), although Europe remains the second largest producer of plastics in the world (China is the global leader with 26% of global plastic production in 2014). The largest proportion of plastics in Europe (39.5%) is used for packaging, with a further 20.1% used in the building and construction industry.

Today, the manufacturing of plastics requires fossil feedstocks, water and energy, with the production process contributing to greenhouse gas emissions. Hydrocarbons are heated to a high temperature, which breaks down hydrocarbon molecules into smaller molecules that are combined to make (in the case of plastic bottles) PET resin. The PET resin can then be melted and injected into moulds to make plastic bottles. Each 500ml plastic bottle has a carbon footprint of c 83g.

In addition to the negative environmental implications of the production process, the disposal of used plastic also raises environmental issues. Much of the plastic produced finds it way into the environment and it is currently estimated that almost 8m metric tons of plastic ends up in the world’s oceans annually.

On land it is believed that some plastic items can take 400 years to break down. While an increasing proportion of plastic waste is recycled and used for energy recovery, according to figures produced by Plastics Europe, less than a third of plastic waste in the EU is recycled. Plastic Europe estimates that 41.6% was used for Energy Recovery purposes, 27.3% was sent to landfill, while 31.1% was recycled. Of the recycled proportion 37% was recycled outside the EU. The picture in the US is even worse; according to the EPA, c 9.1% of plastic material generated in the US municipal solid waste (MSW) stream was recycled in 2015, with 15.5% combusted for energy. The overwhelming majority, 75.4%, was sent to landfills.

The thermomechanical processes currently employed in recycling also suffer from a disadvantage in that they can produce plastic material of diminished quality, which is susceptible to contamination. These processes allow for the re-use of recycled waste only in small proportions for its original purpose.

To tackle the problem of plastic waste, in 2014 the European Union set the aim of reducing plastic bag use by 80% by 2019. Such a target requires EU-wide action and a number of countries have already put in place measures to reduce plastic bag use. Denmark introduced a tax on plastic bags in 1994, while Ireland began charging customers in 2002. In 2015 France announced a total ban on plastic bags and in 2016 it followed this up with a ban on plastic cups, plates and cutlery, to be brought in from 2020. In January 2018 the UK government extended the 5p carrier bag charge to all retailers in England. Interestingly, China has had total bans on plastic bags since 1 June 2008.

The EU’s most up to date vision for reducing plastic waste was set out in its document ‘A European Strategy for Plastics in the circular Economy’ (May 2018). The vision aims for all plastic packaging to be reusable or capable of being recycled by 2030 with an overall aspiration that by 2030 more than 50% of plastic waste in Europe could be recycled.

In addition to the setting of targets for the recycling of plastics and a reduction in single use plastics, there has been a growth in bio plastics and biodegradable plastics to confront the problems associated with traditional plastics. A bio plastic is defined by its production process and is a plastic produced from renewable raw materials rather than from oil-based materials. Biodegradable plastic on the other hand is a plastic that undergoes biodegradation at the end of its useful life from the action of micro-organisms such as bacteria and fungi. Compostable plastic bags represent one such attempt to reduce the amount of plastic leakage into the environment.

The market for biodegradable plastics has been growing quickly in recent years, and is expected to continue to grow at more than 10% pa, but still only accounts for c 1% of the total market. It has been argued that growth rates have been held back by a number of issues, including weak mechanical properties, which prevent biodegradable plastic replacing all types of plastic, and a requirement for a specific set of circumstances (usually industrial compost at 50°C) to facilitate biodegradation.

As we highlighted in a previous report (Commercial revenues in 2020, April 2019), Carbios seeks to utilise enzymes produced by natural micro-organisms to degrade the polymers that make up plastic materials. Carbios is involved in the development of two processes: biodegradation and enzymatic recycling. These bioprocesses are targeted on two polymers: PLA and PET:

Ultimately Carbios aims to license its technology, either directly or via joint ventures, to other industrial companies. The form of licence revenue will depend upon the terms of the individual agreement, but could take the form of upfront payments, royalties and/or dividends. Carbios signed its first licensing agreement in 2016 with Carbiolice, in which it retains a 56% holding (see below). Carbios received an €8m upfront payment in 2016 and is expecting to receive turnover-related royalties from 2020.

At the time of its recent rights issue, Carbios published a table (which we reproduce below) summarising its major technological applications and their stage of development. As can be seen from the table, Carbios indicated that the estimated release dates of the PLA and PET to end-use customers are now 2020 and 2023, respectively. PLA client testing will start in H219 with a view to a commercial launch in 2020. The timing accords well with the French Green Growth Law, which requires single use plastics to be biodegradable and 50% biosourced by 2020. Revenues in advance of these end-customer revenues can be generated from industrial agreements such as that with Carbiolice.

PET is strong and naturally transparent and is one of the most commonly used polymers in the world. The global market for PET is worth c $100bn (c 70m tons) and according to figures used by Carbios the plastic (PET) bottle market (c 24m metric tons) is expected to grow at a rate of 3.4% pa. The larger PET fibres/textiles market (42m metric tons) is expected to grow at 6% pa. The PET market currently suffers from overcapacity with global production capacity of around 90m tonnes.

PET is produced by the polymerisation of ethylene glycol and terephthalic acid and is mainly used to make bottles and textile fibres. Although PET is not biodegradable, it is widely recycled (EU recycling rate 52% according to Euromonitor). With a Chinese ban on the importation of plastic waste, there will be increased pressure to deal with plastic waste locally and, given the problems associated with landfill and the incineration of PET (it is not energy efficient and can produce harmful dioxins), alternative approaches will be required.

Most techniques employed to breakdown and recycle PET rely on chemical processes, however the process developed by Carbios to break down PET is a biological one. Carbios’s enzymatic depolymerisation produces purified terephthalic acid (PTA) and monoethylene glycol (MEG) once the PET has been deconstructed. PTA and MEG are the building blocks used to manufacture polyester fibres and PET plastic products. Other chemical degradation techniques produce bishydroxyethyl terephthalate monomer (BHET) or dimethyl terephthalate (DMT). Carbios’s process can ultimately create recycled PET, equivalent to virgin PET, which can be used to produce bottles and other forms of plastic packaging. Carbios recently (February 2019) announced that it had used its enzymatic technology to create PET bottles from 100% recycled plastics.

According to Carbios its technology uses highly specific enzymes that can recycle a much broader range of PET plastics (clear, colored, opaque and multilayer) and polyester fibre feedstock than other recycling technologies. Carbios also claims that its patented technology offers the potential to recycle PET plastics repeatedly, enabling new products to be made of 100% recycled PET (as outlined above). Carbios’s solution is based upon a ‘plug-and-play’ unit, which can be attached to the front end of any operational PET production plant to break down plastic waste. As a result, Carbios claims that its technology and process offers advantages in terms of cost and ease of handling. The process (which has received the Solar Impulse Foundation ‘Efficient Solution’ label) requires limited heat and no pressure or solvents, which improves its environmental impact, and also provides a competitive solution to help increase global plastic recycling rates.

In November 2018 Carbios and KEM ONE signed a letter of intent for the lease and supply of services on KEM ONE’s site where Carbios will build its demonstration plant (with the engineering support of Technip) for the enzymatic recycling of PET. In January of this year Carbios and TWB obtained €7.5m in funding from ADEME (Carbios’s maximum share is €4.1m) to accelerate the industrialisation of the bio recycling of PET plastic and fibre waste. Approximately 75% of the proceeds of the recent rights issue (see below) will be used to help finance this demonstration plant, which is expected to be up and running in late 2020 or early 2021.

Carbios will aim for its first commercial PET plant in 2023 and will work on the basis of licensing its process at the rate of one plant a year until 2026. From 2027–30, Carbios will aim for two plants a year. The initial plants have a capacity of 100–200k tons pa but will gradually increase in scale to 400k tons pa. Carbios will sell its catalyst to PET producers operating its process through a tolling arrangement with an enzyme producer.

Many brand owners are coming under pressure to make their packaging more environmentally friendly and, as a result, have made significant commitments to either reduce the use of plastic, or recycle it. Evian, for example, has a stated ambition of using 100% recyclable plastic by 2025. Unilever has committed to ensure that all of its plastic will be recyclable, reusable or compostable by 2025. In light of this, Carbios signed a five-year deal with L’Oréal in October 2017 to bring its recycling technology to market on an industrial scale. Recently (April 2019) Carbios announced that Nestlé Waters, PepsiCo and Suntory Beverage & Food Europe are also to join the consortium with L’Oréal. Under the terms of the four-year agreement, the consortium partners’ ambition is to bring Carbios’s PET-enhanced recycling technology to the market and increase the availability of high-quality recycled plastics to fulfill their sustainability commitments. The collaboration includes technical milestones and support for the efficient supply of consumer-grade, 100% recycled PET plastics for global markets.

The market for the bio recycling of PET remains in its infancy with no dominant market player. Carbios’s competitors include Loop and J-Plan. Loop’s technology breaks down PET into intermediate organic compounds DMT and MEG, without heat or pressure.

On 24 June 2019 (after market close) Carbios announced the launch of an accelerated book building process with the aim of raising €13m to finance an industrial PET bio-recycling demonstration plant (75% of the total) and ongoing corporate expenses (25%). The book building closed on the following day (25 June 2019), with Carbios having raised €14.5m via the issue of 2.25m new shares at a price of €6.45/share. The dilution effect of the rights issue was 32.5%. Post the rights issue, Carbios’s total issued share capital rose to 6.9m. Carbios stated that it considers it has sufficient financial resources to meet its financial obligations over the next 12 months and has extended its cash horizon until Q422.

Polylactic acid (PLA) is a thermoplastic polymer produced from lactic acid (C3H6O3) or lactide monomers, derived primarily from renewable resources like corn starch or sugar cane. PLA is termed a bioplastic as a result of its biomass origins. Although PLA is a fully bio-sourced plastic, it is not biodegradable in normal conditions and requires industrial composting.

Common applications of PLA include plastic films, food packaging, 3D printers and biodegradable medical devices. Currently, bioplastics comprise only a small (but rapidly growing) proportion of all plastics produced on an annual basis and, according to figures produced by European Bioplastics and Nova Institute, total production capacity of bioplastic in 2017 was 2.1m metric tons, of which PLA has a market share of 10.3% of the raw material used for bioplastics production.

Carbios claims that by embedding its enzymes into the plastic material, the plastics can fully biodegrade over a controlled lifespan into base molecules without compromising the integrity and performance of the plastic. Carbios’s technology can be applied to a variety of plastic products, including bags, disposable tableware and food packaging.

Carbios first demonstrated its ability to depolymerise PLA in 2013 and has now refined the process. Carbios has developed a technology enabling PLA plastics to become 100% biodegradable and 100% compostable. The company has also developed the first biological process producing virgin PLA from lactic acid obtained from the bio recycling of the plastic (PLA).

Given the limited production of PLA (c 275,000 metric tons, the majority produced by Naturworks in the US), the recycling of PLA remains a relatively small but nevertheless emerging market with strong growth characteristics (15%+). Although work on PLA remains in the development stage, Carbios is discussing the potential licensing of its technology with industrialists.

Carbiolice was created in September 2016 and is an industrial and commercial joint venture with Bpifrance and Limagrain Céréales Ingrédients (a global seed producer). Carbiolice is in charge of the PLA biodegradation process developed by Carbios and its partners within THANAPLAST. Carbios currently holds 56% of Carbiolice but does not consolidate Carbiolice according to exemptions under the French Commercial Code. In the short term, Carbiolice generates some revenue from the production of corn-based compounds and biopolymers for plastic manufacturers involved in the production of bags/mulching films. In the longer term, Carbiolice will operate its patented enzymatic biodegradation technology (licensed from Carbios) to produce enzymated pellets (masterbatch). By embedding enzymes into the plastic material, the plastics can fully biodegrade themselves over a controlled life span, into base molecules. According to Carbios, the lactic acid can be assimilated by the micro-organisms in nature but crucially the incorporation of its pellets into the plastic material leaves the performance of the polymers undiminished and does not require any modification to the plastic production facilities.

The progress towards commercial operation was confirmed in January of this year when Carbios announced that it had signed a multi-year agreement with Novozymes, under the terms of which Novozymes has committed to become a long-term exclusive supplier of Carbios’s proprietary plastic degrading enzymes. At the same time, Carbios confirmed that it expects to receive royalty payments from Carbiolice from 2020. Carbiolice will operate one industrial plant capable of producing 4,000 metric tons per year (masterbatch) addressing a market size of 80,000 tons a year and will ultimately target a third of the market in the EU for soft biodegradable plastics.

Prior to the generation of commercial revenues, the Carbiolice project is funded by an €18m financing package, including €11m from Bpifrance. The €18m is scheduled to be released in four phases, over four years, on completion of technical and commercial objectives. The three partners of the project invested €4m in 2016 and in July 2018 a second round of financing of €3.35m (€1.1m Carbios) was put in place. It is worth pointing out that on the formation of Carbiolice, Carbios received an upfront payment of €8m, which was converted into shares in the joint venture. Carbios will also have received R&D collaboration revenues of c €2.5m over a four-year period, which will help support the industrial development of Carbiolice and serve as an additional source of income for Carbios.

However, in the longer term, Carbiolice will operate its patented enzymatic biodegradation technology (licensed from Carbios) to produce enzymated pellets (in master batch form).

The Carbios board of directors is comprised of eight members and there is also a scientific advisory board with four members. In December 2018 Carbios appointed Ian Hudson to succeed Jean Falgoux as chairman of Carbios’s board of directors, although Mr Falgoux will remain a director of the company. Ian Hudson started his career with ICI and joined du Pont de Nemours in 1998 holding a variety of roles in the company (including 10 years as President of Europe, Middle East & Africa) until he retired in 2016.

There has been no change in the management team (Executive Committee) during the last year. Jean-Claude Lumaret continues as CEO (appointed 2011), while Professor Alain Marty remains chief scientific officer (appointed 2015 following three years as a member of the company’s scientific committee and as a scientific consultant for the company). Deputy CEO Martin Stephan joined at the beginning of 2017. Mr Lumaret has a scientific background with a degree in chemical engineering and considerable experience of the starch industry. However, Mr Lumaret also possesses significant experience as a patent attorney, which will be an important asset for Carbios as it seeks to protect its technology. Professor Marty possesses a wide range of academic and scientific experience in biotechnology, enzymology and bioengineering.

The key risks facing Carbios are summarised below.

In the absence of short-term multiples and metrics to produce a meaningful valuation guide, we use a DCF methodology to provide an indicative valuation for Carbios. Given the high degree of uncertainty surrounding our projections, a high degree of uncertainty inevitably also surrounds the valuation projections.

Our DCF is based on cash flow projections for the two principal business segments: biodegradation (PET) and bio recycling (PLA). We project cash flows to 2030 and assume, following discussions with the company, a long-term EBIT margin of 40%. We continue to use a discount rate of 15% and perpetuity growth rate of 2%. We have updated our DCF to reflect the increase in the number of shares post the recent rights issue. We assume Carbios records its first operating profit in 2024.

PLA – For Carbiolice we assume the commercial revenues start in 2020, rising to a little over €5m by 2030, based on sales of 6,000 tonnes/year (utilisation rate of 75%) and a selling price of €16.5/kg (Carbios indicates that the current master batch price is c €15/kg) by 2030. We assume the initial installed capacity 4,000t/yr (one plant) will rise to 8,000t/yr (two plants) by 2030 in line with company projections. We also assume Carbiolice can generate c €2m of additional revenue for Carbios from the sale of sub licences by 2030.

PET – The projections for the PET business remain the most important component of our DCF forecasts. In line with the latest guidance, we assume commercial operations begin in 2023. We project that Carbios will generate c €10–12m of revenue from the upfront licensing of its technology by 2030. In total, we expect Carbios will sell 10 licences by 2030. However, this figure is substantially smaller than the revenue that we expect from the sale of enzymes. Carbios will purchase enzymes under an exclusive agreement from an enzyme producer and then sell on the enzymes to PET producers. We assume that the 10 licences we expect Carbios to have sold by 2030 (company guidance 12), will be equivalent to a total annual demand of c 1,650t/year of pure enzymes (ie a utilisation rate of c 90% given our projected total capacity of 1,850t/year). Based on a formulated enzyme price of €13/kg (slightly less than 10% of the PET price of €1,500/t), we expect 2030 revenue of c €225m.

Under our central case assumptions, we obtain a valuation for Carbios of €13/share. However, the valuation remains sensitive to assumptions on discount rates, perpetuity growth rates and long-term margins (See Exhibit 5).