By Marlize van Romburgh Friday, June 3rd, 2011

Energy crop company Ceres has filed papers to raise up to $100 million in an initial public offering of its stock.

The Thousand Oaks-based seed maker has in recent years stepped away from food crops and into alternative fuel research. In a May 23 regulatory filing with the U.S. Securities and Exchange Commission, Ceres said it wants to develop genetically engineered crops that would be converted into ethanol and other biofuels.

Funds from the stock offering will be used for seed production and research, Ceres said in regulatory filings. It did not say when it expects its shares to start trading or at what price they will hit the market. A Ceres spokesman said SEC regulations prevent the firm from talking to the media while its IPO is pending.

Ceres, which has 88 full-time employees, has raised more than $100 million in private financing since it was founded in 1996, according to Business Times research.
But most of its products are still being developed. The firm has never posted an annual profit, and total revenue, much of it in the form of grants and collaborative research funds, was just $6.6 million in 2010. The company lost $22.6 million last year.

But while the risks are great, so are the potential rewards. In filings, Ceres said it sees its greatest market opportunity in the Brazilian ethanol market, where it recently began selling sweet sorghum seeds. Sugarcane is currently the predominant feedstock for ethanol produced in Brazil, Ceres said in regulatory filings, but the sugarcane growing season means Brazilian mill operators can only obtain usable sugarcane about 200 days per year.
Ceres thinks it can remedy that by producing sorghum as an alternative to sugarcane. Boa Vista/Nova Fronteira — a joint venture of Grupo São Martinho and Petrobras Biofuels — recently harvested and processed a commercial-scale planting of its sorghum products and successfully produced ethanol-generated power, Ceres said.

The success of that trial “will serve as the basis for expanded adoption of this product line as a feedstock for ethanol and power,” the company said in regulatory filings.
Jim Lane, the editor and publisher of Biofuels Digest, a trade publication, analyzed the Ceres IPO filings alongside those of several other biofuels firms vying to enter the public markets. He said Ceres’ focus on expanding the growing season in Brazil holds promise because of the widespread use of biofuels in that country.

“The drivers are very, very positive, particularly for Brazilian ethanol because it’s low cost and there’s a built-in market,” Lane said. “Ethanol is not a niche fuel in Brazil. There’s more ethanol sold than gasoline.”

Lane said the traits that Ceres is trying to develop — better tolerance to drought and salts, and better efficiency at using nutrients — are key to developing energy crops that won’t displace food crops. Displacement of food crops has been a key criticism of plants used for biofuel feedstock.

“These are exactly the right places to work in terms of making it possible to grow energy crops where crops don’t work for food,” Lane said.
Lane said that Ceres has also been smart to focus on non-commodity crops such as sorghum and switchgrasses, which big agribusinesses such as Monsanto, a part owner of Ceres, won’t devote resources to.

“To come forward with an emphasis on sweet sorghum is a very solid niche,” Lane said. “Sure, one of the big boys might come in later on — but maybe they come in via an acquisition.”

But the risks for Ceres are deep, as Lane points out. The firm is essentially pre-revenue and has little experience marketing products. It also faces the usual hazards of selling seeds, such as a dependency on good weather. “The trick for investors is to understand those risks and make sure they’re priced in and that you’re not overpaying for the stock,” Lane said.

Ceres has a product development agreement with agribusiness giant Monsanto, signed in 2002, that made Monsanto a 6.4 percent owner. Other major Ceres shareholders include Artal Luxembourg, which owns 18.1 percent; Warburg Pincus, with 15.6 percent; and Oxford Bioscience Partners, with 10.7 percent.

Until now, Ceres has relied heavily on government grants along with money from private investors to fund its research. The firm said in filings that federal funding is tapering off.
Tom Hopkins, an attorney in the Santa Barbara office of Sheppard Mullin Richter & Hampton who has worked on IPOs, said it’s “unusual but not unheard of” to see a biotech company tapping the markets for research funding.

He said there’s a lot of growth capital in the market seeking opportunities.

“They probably think they can do better in the public markets than trying to go back to the well with private equity or strategic investors,” Hopkins said.

Goldman Sachs and Barclays Capital are the underwriters for the offering. Hopkins said those names increase the likelihood of a deal going through.

“There are a lot of companies in the queue, and the fact that underwriters of that caliber are out there with this means there’s a pretty good shot it will get done and be a successful offering,” Hopkins said.