EcoloCap Solutions: A Green Business Model

EcoloCap Solutions (click on company name for my PDF profile) (OTCBB: ECOS) is focused on delivering shareholder value through a green business model that includes creating renewable energy sources and projects that offer high concentrations of CO₂ and methane (CH₄) gas (i.e. hydro-power, biomass alternative fuels, and methane gas capture from landfills) to reduce carbon emissions by replacing fossil fuels such as coal and natural gas in the production of electricity. An economic by-product of this business model is the creation of tradable carbon credits, which are termed Certified Emission Reductions (CERs). Over a decade ago, the Kyoto Protocol created free market incentives called carbon credits to reduce the worldwide emission of greenhouse gases. The CERs are issued from Kyoto’s Clean Development Mechanisms (CDM) projects which result in the reduction of harmful carbon emissions to reduce air pollution – in addition to economic benefits such as creating jobs and shareholder value. EcoloCap is initially focusing its efforts in Vietnam and China with plans to follow-up in the markets of Latin America and Africa, leveraging upon its technical expertise in clean energy projects and its extensive network of contacts in Eastern Asia which enjoys a very active CDM market.

In December 1997, the Kyoto Protocol was enacted to reduce the emission of greenhouse gases by 5.2% from 1990 levels during the period of 2008 – 2012, resulting in quotas that are imposed on the industrial carbon emissions of participating nations  Greenhouse gas emissions are quantified as an equivalent of tons of carbon dioxide (CO₂) released into the atmosphere. The CDM provides the opportunity for developed nations such as the United States (US) to purchase carbon credits or CERs (certified by the United Nations and equivalent to the reduction of one ton of CO₂ emissions) which are generated from renewable energy projects in participating countries such as Vietnam and China. The tremendous financial opportunity for companies such as EcoloCap lies in their ability to generate CERs in emerging and frontier markets at a below-market cost and then sell the carbon credits at current market prices in developed countries such as the US.

The head of environmental markets at Barclays Capital has predicted that carbon credits could become not just the world’s biggest commodity market; but the biggest market overall, with market experts predicting a staggering total of  $1 trillion possible within a decade. The European Union Emission Trading Scheme (EU ETS) is the largest market for the trading of emission allowances, spanning 28 countries throughout Europe; and other developed countries such as the US, Japan, and Australia are developing similar ETS markets. Carbon commodity trading is dominated by EU Allowances (EUAs) with a 78% share, followed by CERs which are created through CDM projects such as those described earlier.

As part of this bullish view on the future of carbon credit trading as a new commodity class, Barclays has recently launched an exchange-traded note (ETN) to track the global price of carbon. The iPath Global Carbon ETN (NYSE: GRN) trades throughout the day just like stock and is structured to track Barclay’s Global Carbon Index Total Return, with several similar products in registration for potential market launches to provide investors with simple, low-cost access to the market for carbon credits. These carbon credits are traded by companies who get tax breaks and other incentives for lowering pollutants into the air, as well as investors and speculators who want to participate in the global reduction of greenhouse gases.

● Equal Number of Projects in the Pipeline Expected to Close During 2H08

à $80 Million Potential Revenues by 2012 from Signed + Pipeline Projects

à $30 Million Potential Cumulative Cash Flow by 2012 Including Pipeline

à Seven Signed Projects Represent Estimated $39M in Revenues Through 2012

● A Carbon Credit Hedge Fund Business Model – Generated By Clean Energy Projects

à Lowest possible cost basis earned for carbon credits in emerging markets

à Credits are then sold in established markets for 40% – 70% profit margins

à Provides expertise in Kyoto certification, project management, and engineering

XiangTan Industrial Complex – China (4)

This site is an industrial waste-to-energy project at an iron/steel plant which will capture heat that is normally lost into the atmosphere and use it to power turbines producing 28 MW of electricity. Operations are expected to begin with the first CER delivery by October 2009, and the project has a 20 year life cycle. The project is expected to generate about 153,000 tons of CO2 per year as the result of reduced emissions by replacing fossil fuels with a renewable source of energy (i.e. the heat that is captured). Revenues of $1.05 million are expected from this project during each full year of operation from 2010 – 2012, resulting in cumulative cash flow of $1.2 million by the end of 2012. EcoloCap has the right to buy CERs for this project at $15.20 (USD), resulting in gross margins of 31% at a conservative selling price estimate of $22 less 3% brokerage fees.

This industrial complex project will also include top gas pressure recovery turbine (TRT) technology to generate electricity of 15 MW, resulting in about 59,000 tons of CO2 emissions saved annually. The estimated project lifecycle is 20 years, with the first CER delivery anticipated in September 2009. For each full year of operation during 2010 – 2012, revenues are expected to be $0.4 million and cumulative cash flow of $0.84 million by the end of 2012. Another TRT project at this industrial complex is also expected to begin delivery of CERs by September 2009 with a twenty year lifecycle and about 150,000 tons of CO2 emissions saved annually. Revenus are expected to to total $1 million each year for 2010 – 2012 with expected cumulative cash flow of $2.3 million at the end of 2012. The gross margins of 31% are expected to be the same as outlined above for heat capture.

The third waste recovery project at this industrial complex will include coke dry quenching techno logy that recovers spent heat to power turbines with the capacity to generate 25 MW of electricity. This project has a 20 year lifecycle with the first CER delivery estimated to occur in one year (July 2009). About 149,000 tons of CO2 emissions are expected to be saved each year with full-year revenues expected of $1 million for 2010 – 2012 and cumulative cash flow of $2.3 million at the end of the three year period.  The gross margins of 31% are expected to be the same as outlined above for heat capture.

Tien Rice Husk – Vietnam (1)

This site involves a biomass project in the Tien Giang Province of Vietnam which will utilize the normally discarded rice husks (outer shells) to replace fossil fuels for electricity generation. Located in the Mekong Delta, which is the world’s second largest exporter, this project will generate electricity at cogeneration plants which will be distributed into regional electric grids. The project is expected to be online by January 2010, with an estimated life cycle of 19 years and about 42,000 tons of CO2 per year for 2010 – 2012. The project is expected to average $0.47 million per year in revenues for the first three years, resulting in cumulative cash flow of $0.87 million at the end of 2012. EcoloCap has the right to buy CERs for this project at $12 (USD), resulting in gross margins of 45% at a conservative selling price estimate of $22 less 3% brokerage fees.

Vietnam Landfill Multiplex (1)

Gases released into the atmosphere which contributes to global warming from the degradation of organic waste will be collected in this project from a total of three landfills located at Hanoi, Haiphong/Thai Nguyen, and Danang/Hue. The first CERs are estimated for delivery in June 2009, with an estimated twenty year project lifecycle. An average of 570,000 tons of CO2 emissions are estimated to be saved from this project for 2010 – 2012, resulting in average revenues of $4.4 million during this three year period and cumulative cash flow of $3.2 million at the end of 2012. Reducing methane gas release from landfills offers a faster return on investment because reducing one unit of methane is equivalent to reducing 21 units of carbon dioxide, leveraging these types of clean energy projects into large numbers of tradable CERs.

Vietnam Hydro-Power Multiplex (1)

This project consists of five hydro-power reservoirs (Khe Bo – 30.9%, Khanh Khe – 12.4%, Dak Rong – 17.5%, Tram Tau – 24.7%, and Suoi Chim – 14.4%) to harness the energy of rivers in Vietnam to replace coal and other fossil fuels to generate 97 MW of electricity. The first CERs from this project are expected in October 2009, and the project has an expected lifecycle of 17 years. About 211,000 tons of CO2 emissions should be saved from this project, resulting in an average of $2.2 million in net revenues for 2010 – 2012 and cumulative cash flow of $4.4 million by the end of 2012.  An estimated 30,000 small-to-medium hydro-power projects are predicted for development over the next few decades in Asia, where EcoloCap has established its presence through both signed and pending deals.

ColoSure and Cost Reductions Are Key to the Future of EXACT Sciences

EXACT Sciences (click on company name for my PDF profile) (EXAS) recently announced plans to implement a cost reduction strategy, which includes suspending a clinical validation study of its V2 DNA-based colorectal cancer [CRC] screening technology, eliminating eight jobs, and renegotiating fixed commitments. The Company expects these initiatives will fund operations through at least 2Q09 based on current liquidity, without the need to raise capital at currently depressed market prices for the stock. EXACT’s partner LabCorp (LH) has recently launched a single-marker, lab-based fecal DNA test (based on the Vimentin gene which is a methylated DNA marker associated with CRC) with a sensitivity range of 72% – 77% and a specificity range of 83% – 94% in average risk individuals.

ColoSure replaces the 23-marker, stool-based DNA CRC screening test, PreGen-Plus, which was the subject of a FDA warning letter last October based on concerns over the Effipure component which is not part of the new single-marker test. ColoSure is included in the latest American Cancer Society [ACS] guidelines for CRC screening to detect the presence of any stage of CRC among asymptomatic, average-risk patients who are unwilling or unable to undergo a more invasive exam such as a colonoscopy. ColoSure retails for $220 with a reimburement price of $110 likely from insurance companies and other third-party payers.

ColoSure is poised to capture significant market share among the 8 million [M] tests per year from FOBT/FIT screening tests — which detect the presence of blood in the stool and require users to interact with the sample — because it is easier to use, only requires collection of a stool sample with no manipulation required by users, has the ability to detect CRC at a much earlier stage before bleeding occurs, and will be promoted by 1,000 LabCorp sales reps (each responsible for about 300 physicians over a one-year period). Current ACS guidelines recommend routine CRC screening beginning at age 50, which includes a growing population segment of about 87M people.

à cash burn rate for EXACT of $1.5M per quarter with cost reduction plan

àexpected annual run-rate of 1M ColoSure tests by mid-2009

à expected annual run-rate of 2M ColoSure tests by mid-2010

à $110 reimburesement * 1M annual run-rate * 15% royalty = $16.5M to EXACT

à $16.5M royalties less $6.5M annual expenses = $10M net income

à $10M net income with 27M shares outstanding = $0.37 EPS * 20 PE = $7.40/share

Short-term catalysts may include LabCorp deals with Fortune 500 companies, the Veteran’s Administration, and health plans (e.g. Kaiser, Cigna, Aetna) to promote ColoSure use for CRC prevention and include the test for insurance reimbursement. On a long-term horizon, EXACT will look to secure a licensing deal with a partner to fund a validation study for FDA approval, expand into other developed countries for stool DNA-based CRC screening, and develop V3 technology with a goal of detecting over 90% of pre-cancers.

As illustrated in the 5-year stock charts, companies such as Sequenom (SQNM) and Elan (ELN) have rebounded drastically from around the $1 per share level to trade above $20 per share in the span of several years. At current levels, EXACT Sciences offers investors an opportunity for simliar returns without the inherent risks and expenses of developing a new therapy. In addition, the former CEO of EXACT and current COO of LabCorp, Don Hardison, retains a significant financial interest in his former company.

In my previous post on EXACT from July 9, I outlined the reasons for selling out of my position around $1.45 per share as I felt the lack of results from the strategic review by Leerink Swan would cause selling by some major holder(s). Since this capitulation has occurred, the risk/reward is now favorable to buy EXACT below $1 per share, and I recommend accumulating shares of the Company in that range and will do so myself once freeing up some cash. EXACT Sciences has a portfolio of over 110 issued patents and over 60 pending patent applications worldwide, making the Company a royalty-collecting vehicle for investors that leverages LabCorp’s marketing muscle for sales of the homebrew test ColoSure while looking for a partner to fund validation studies for a FDA-approved, stool DNA-based CRC screening test.

Is Warburg Pincus Eyeing InSite Vision and Inspire Pharma?

Last year, private equity firm Warburg Pincus was active in eye care companies, buying Bausch & Lomb for $3.7 billion and acquiring a 25% stake in Inspire Pharma (ISPH) at $5.35 per share or $75 million ahead of its domestic sales launch of the antibiotic eye drop AzaSite last August. AzaSite is licensed from InSite Vision (ISV) and is based on the company’s DuraSite topical drug delivery technology, which greatly reduces the frequency and number of eye drops required to clear up infections compared to existing products in a $362 million single-entity ocular anti-infective US market. Since Warburg likes the commercial potential of AzaSite based on the Inspire investment, the next logical step would be to acquire the entire AzaSite franchise of products along with InSite’s proprietary DuraSite drug delivery platform at current low valuations before AzaSite sales begin to ramp-up and cause the value of both InSite and Inspire to increase from currently depressed levels.

Warburg should strongly consider taking all three of these eye care companies private, creating a vision care powerhouse that would provide a wide range of products and services, ranging from contact lenses to cataract surgery devices to OTC eye/ear drops to prescription eye/ear drops; while allowing Warburg to streamline operations and cut overhead costs and achieve global marketing reach via Bausch & Lomb. The AzaSite franchise of products at InSite Vision includes one approved product already on the market (AzaSite), as well as the following in development: AzaSite Xtra (higher concentration of azithromycin versus AzaSite), AzaSite Plus (antibiotic/steroid eye drop – to compete with Tobradex), and AzaSite Otic (antibiotic/steroid ear drop – to compete with Floxin Otic). This group of products could easily exceed worldwide sales of over $500 million based on competing products and the advantages in their formulation which increases patient compliance by decreasing the number of doses required to clear up infections, especially since many of their patients will be children with pink eye and ear infections, although there is a much wider potential market for these products beyond that demographic.

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