Uncovered: Danimer Scientific (NYSE: DNMR)

Uncovered is our exploration of the companies that don’t receive as much media attention or analyst coverage. We believe every company has an interesting story and we want to hear them.

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The challenge with plastics

The past decade has seen people around the world acknowledge we need to think about the environmental impact of plastic. From how it is produced, a by-product of oil, to how it is disposed of, often in landfills and rarely recycled, the world has set out on a search for alternatives to plastic. In particular, single-use plastics.

A second issue with plastic was brought into focus with the recent train derailment in East Palestine, Ohio. 5 of the rail cars were carrying vinyl chloride, a gas used to produce PVC plastic. The gas is flammable and carcinogenic but remains an important input in the plastic production process.

Vinyl chloride isn’t just a problem when it spills into the environment:

The Centre for Environmental Health published a report on polyvinyl chloride (PVC), a type of plastic used in pipes, buildings, packaging film, flooring and more, in 2018, saying, “the bottom line is there is no way to safely manufacture, use, or dispose of PVC products.”
According to the EPA’s Toxics Release Inventory (TRI), which “tracks the management of certain toxic chemicals that may pose a threat to human health and the environment,” there are 38 TRI facilities in 15 states — mostly around the Gulf of Mexico and the eastern U.S. — that use vinyl chloride, emitting about half a million pounds of the substance every year. In 2021, there were 428,523 pounds of the substance released, according to the EPA.
On Jan. 2, the U.S. Department of Health and Human Services published a draft toxicological profile for the substance. In it, experts say that the volatile compound, “used almost exclusively by the plastics industry,” has “leached into groundwater from spills, landfills, and industrial sources,” and that people who live around plastic manufacturing facilities “may be exposed to vinyl chloride by inhalation of contaminated air.”
As of 2021, vinyl chloride ranks as one of the most released chemicals in the U.S. Out of 531 chemicals reported to the agency, the substance ranks 117th, with one being the highest releases.

The search for an alternative

The challenge with plastic is that it is such a valuable product. Lightweight, malleable, durable and cheap to produce. The fact it is everywhere is testament to how valuable it is. That makes finding a replacement difficult.

One area of research that has shown some promise over the past decade is bioplastics.

Bioplastics are made from animal and plant matter rather than oil and petrochemicals. Using renewable feedstock like vegetable fats and oils, corn starch and recycled food waste rather than non-renewable fossil fuels offers environmental and health benefits. If the technology can produce alternative-plastics cost-effectively at scale.

A number of companies are working on bioplastics. Many of the world’s largest chemical companies like Mitsubishi Chemical in Japan and BASF in Europe. Also in the race are oil companies like Chevron (NYSE: CVX) and agribusiness giant Bunge (NYSE: BG).

As well as these giant companies there are also pureplay bioplastics companies working on this technology listed on the share market. This includes Secos Group (ASX: SES) in Australia and Danimer Scientific (NYSE: DNMR) in the United States.

About Danimer Scientific

Danimer Scientific was founded in 2004 and in 2007 purchased Procter & Gamble’s intellectual property on PHA technology. PHAs or Polyhydroxyalkanoates (let’s just go with PHAs) are polyesters produced by microorganisms.

Danimer produces PHA by feeding vegetable oil into bioreactors where it is consumed by soil borne bacteria. This bacteria produces PHA through biosynthesis. Danimer then turn this PHA into a number of bioplastic products including barrier coating for paper and board products (think, the plastic coating that makes your coffee cup waterproof) and 100% biodegradable dental flossers.

A long history of partnerships

Danimer has partnered with some of the biggest fast-moving consumer goods companies in the world.

2007: Bought a lot of Procter & Gamble’s bioplastics IP
2016: R&D agreement with PepsiCo: snack food and packaging
2018: Received equity investment from PepsiCo
2018: R&D agreement with Nestle for water bottles, labels and bottle caps
2020: Partnership with Bacardi to produce a 100% biodegradable spirits bottle
2021: Partnership with Mars Wrigley to develop home compostable packaging

They are also partnering with some of the biggest retailers in the United States to experiment with replacing plastics with bioplastics. These retailers include:

Target (USA)
Walmart
CVS
Sam’s Club
Dunkin Donuts
Starbucks
Costco

A look at Danimer Scientific’s financials

Danimer has increased revenue meaningfully over the past couple of years. However, the company is not profitable. It lost $60 million in 2021.

Despite the growing revenue, Danimer’s share price has been smashed. The share price is down 42% in the past year and down 76% in the past 5 years.

Exciting technology doesn’t always make exciting investments

We can all be excited about the potential replacement of oil-based plastic with bioplastics. But that doesn’t mean we should invest in that trend. Danimer Scientific has been the subject of several short reports over the years, here’s just one example from 2022.

Notable Australian short-seller John Hempton has also disclosed that he is short the stock

Danimer is an order of magnitude better than $PCT, but I am short both, just at different size.
— John_Hempton (@John_Hempton) March 8, 2023

The numbers that matter

Bioplastics remain an unproven technology. Right now companies are working to improve the technology to find use cases where it can replace traditional plastics and then must find ways to produce these bioplastics at scale at a cost that makes it competitive with traditional plastic.

For investors that do not have technical expertise, it will likely fall outside their circle of competence. Trying to determine if BASF, Chevron, Danimer Scientific or any of the hundreds of other companies working on bioplastics have the solution that will be adopted by the market is near impossible.

However the opportunity is huge for whatever companies can bring commercial-scale products to market. In 2021, the global plastics market was valued at $593 billion US dollars. By 2030, it is projected to grow to $810 billion. And bioplastics have less than 1% market share at the moment.

For Danimer Scientific specifically, the question is whether they have enough money in the bank to continue investing in improving their technology and trying to onboard customers. In 2021, Danimer lost $60 million. Looking at its balance sheet, Danimer has $286 million in cash and another $25 million in receivables. This gives it five years run rate if it continues losing $60 million a year.