Amyris: The Owner's Manual

May 3, 2011 |

Your broker has told you about this high-flying “bio-something” stock, AMRS, that’s up 60 percent in the past six months.

What is Amyris, and what’s ahead? The Digest goes in-depth, and talks with CEO John Melo.

So, what exactly do you own when you buy into Amyris?

You now own a piece of a company that uses synthetic biology to produce a C15 hydrocarbon, farnesene, (at present from sugarcane syrup), which can be sold as-is or upgraded into a host of industrial chemicals used in fragrance, oils, lubricants, and even as a diesel or jet fuel.

Why is that important? It replaces building blocks or finished products made commercially today from fossil crude oil. It’s one of the first-movers in what US Energy Secretary Steve Chu described as “the glucose economy” that, in his view, will replace the oil economy.

Oh, the oil economy. That one. The $3 trillion traffic in crude oil that powers, well, just about everything.

“We’d like to create a biofene economy,” Amyris CEO John Melo told the Digest. “There, green is the value add, not an opportunity for a price premium.”

Let’s focus on that for a second. Aren’t all “green” products supposed to cost more, but in some way benefit the planet?

Wasn’t it a New England utility that recently signed a 20-year wind energy deal where it guaranteed three times the market rate per KWh, with a price escalation clause? (A deal which prompted Lignol CTO Colin South to drily observe to the Digest, “If I could get those terms, I’d be building capacity right now, instead of talking to you.”

Shouldn’t there be some huge feed-in tariff, or carbon tax, required to make Amyris rpoducts anywhere near comparable on price? Well, apparently, there are exceptions.

Here’s the claim from Amyris and its owners: it can make farnesene and the downstream products at a substantially lower cost than the comparable building blocks can be made from fossil crude oil. And its signing on partners at a dizzying pace, and starting commercial-scale production as you read.

Dang it, Adam Smith: you’re right again, markets function. Even green ones.

A biofene economy?

Why is a biofene economy significant for customers? From the broadest point of view: farnesene, made from a renewable resource, gives marketers of finished products — and their end-use customers, that is to say, thee and me — a break from the rollercoaster of oil prices.

Melo says, The alternative [crude oil-based product] has volatility in supply. A basis for our customer discussion is their exposure to crude. In our verticals, we hear from customers that they would like to move 10-20 percent of volume [to renewable-based suppliers], to get a better mix.”

Melo should know. A long time senior team veteran of BP and other majors, Melo has one of those historic years in 2010, leading Amyris through a celebrated IPO, instead of working through the huge transformation at BP that has taken place since last year’s oil spill.

Does he think about BP and the ‘year that might have been’, has he stayed on at the oil giant?

“Last year, I watched Tony Hayward on the TV and thought, it could have been any one of us. I feel blessed; BP was not exactly an exciting place to be, this past year. But I think about this too: BP, when I was there, created a case for me, for all of us, why it was good, and good business, to do the right thing. I’m thankful for that.”

Beyond premium, the green discount

Among the many things that BP is reputed to stand for – beyond petroleum, bad planning, big polluter – one of the acronym de-codes ought to be “beyond [the green] premium”.

For some time, BP Biofuels chief Phil New has called on the renewables industry to get beyond terms like “advanced biofuels,” which are distinctions based in process, and think about “advantaged biofuels,” or distinctions based in cost.

His point: there is no green premium – the broad customer market, at the end of the day, is unwilling to pay a consistently higher rate for products made from renewable resources. At best, it’s a tie-breaker – products made from renewables, made at the same cost and displaying the same performance, will win orders from industry over traditionally made products.

Melo agrees, emphatically. “For our customer – the price discussion is simple. We cannot be more expensive, the quality has to as good or better, and there has to be reliability.”

But there’s a more important territory that is being explored, and one in which Amyris is one of a handful of companies securing first-mover advantage: beyond the green premium, there lies the green discount, which is to say products made from renewables with sustainable cost advantages over its crude oil-based competition.

In these huge commodity markets green discounts do not provide lower prices to the consumer, but higher margins to the companies supplying their first trickle of product into the commodity streams.

“Take flavors and fragrances,” says Melo, where we have numerous different products, and in all of them the market price is different levels. We set our price based on the market price, but we have a significant cost benefit in every case.”

Later on, if and as production volumes grow, we may well see these “advantaged” products (as opposed to “advanced” or “green” products) produced in sufficient volumes that they will begin to downshift consumer prices, and squeeze the margins of traditional suppliers. Perhaps they will snuff some of those traditional suppliers entirely out of their traditional markets, or all of them.

Pickin’ mighty molecules

There are tens of thousands of molecules out there that have some industrial application, and margin and opportunity is how Amyris structures its approach. Melo comments, “We focus on an application that has the greatest margin, where we are structurally cost advantaged. We target the #1 or #2 company, and bring to them a strong value proposition based on cost, reliability and quality.”

Shell Oil recently forecast that 30 percent of the fuels markets will be replaced by biofuels, by 2050. The International Energy Agency forecast a 27% market share for biofuels by 2050. That represents, in the fuels markets alone, a shift of 225 billion gallons – 351 billion gallons, taken against the entire spectrum of uses for the barrel of oil.

But that’s a long ways away, generations of innovation from now. For now, we remain focused not on who and how traditional suppliers will exit the market, but how renewables companies, using synthetic biology, will enter the market.

The Brazilian gambit

To date, we have known more about where, as opposed to when, and how. 2010-11 was the winter of Brazil. But Amyris has been down there for some time; they were the pioneer in the market, in so many ways. The Portugal-born Melo has a caution for others who go down expecting a gold-rush mentality, some kind of switched-on, deal-a-minute expectation borne of watching the flurry of MOUs , partnerships and offtake agreements that have been pouring out of the Amyris offices of late. It takes time, Melo cautions.

“Be patient. Be local. Sector is very tight. Family business, or family in control. Takes a long time, you have to deliver a lot, there are high expectations. First meeting, you think, the people are wonderful, we’ll be in business in six months. Then, you have 20 more meetings. It takes tremendous patience to build the case.”

But Amyris has been reaping the rewards of first-mover advantage, and that’s been a major factor in its celebrated stock rise, now trading at a 65 percent premium to its IPO opening price last September.  Along with Gevo and Codexis, they’ve opened the IPO window again for industrial biotech. Sometimes, that has resulted in a confusion over the distinctions between the three.

Gemyris, Codexvo…er, who exactly are these companies again, and why are they distinct?

As we wrote in “Gevo: The Owners Manual”: “Gevo and Amyris have been run together by public investors lately, into a sort of Gemyris, companies powered by magic bugs that ferment ordinary crop-based sugars into suites of exotic fuels and chemicals that will slowly take over the world.

“There are common elements, for sure. Both companies have their strong roots in synthetic biology, and both feature exotic magic bugs engineered from yeast. Both had investment roots in Silicon Valley, with Khosla Ventures in their pedigrees. Both have been rocketing up the 50 Hottest Companies in Bioenergy, with Amyris landing #1 this year and Gevo #5.  Both had celebrated IPOs this past year, and have been performing strongly in the aftermarket, with both up more than 60 percent over their debuts.
About there, the Gevo-Amyris similarities fade.

So let’s turn to Amyris, its biofene market and its applications

Amyris’s business model is in producing high-value products through low-cost fermentation. From fermentation of sugar cane syrup via bolted-on units at existing sugar and ethanol mills, Amyris produces a C15 molecule, farnesene, that can be finished, or used as a building block, for products in six verticals: cosmetics; flavors & fragrances, polymers & plastic additives; lubricants; consumer products; and fuels.

It’s expected product stream is closely tied to a series of production, marketing and offtake partnmerships. Here are a few of the major ones scheduled to commence delivery between 2011 through 2013:

Squalane, for Soliance
Amyris lubricants, for US Venture
Niche diesel, for BPTrans
Base oils, for the Cosan JV
Biofene, to Gruppo M&G
Supply to Firmenisch
Supply to Givaudan
Biofene, to Proctor & Gamble
Lubricants, to Total

The Amyris Ring of Partnerships

Amyris is best understood as a web of partnerships, which form the core strategic element in its capital-light, distributed path to market.

They have partnership models to build value across the supply chain. They exist in four types.

1. Production partnerships, such as with Sao Martinho, in that case in the form of a JV that brings production capacity.

2. Development and supply agreement partnerships, such as with Firmenich, that provide  offtake markets and also provide a partner-managed marketing and distribution function.

3. Marketing and distribution partnerships, such as with Soliance, that include an offtake agreement and cooperation on marketing and distribution activities.

4. Integrated partnerships, such as with Cosan, that provide feedstock, manufacturing capacity, a cooperative marketing and distribution effort, and a fuel customer.

Capital: a staged business model to accelerate the volume ramp

The capital strategy evolves as the products and partnerships move forward. The nearer-term products utilize Amyris capital and contract manufacturing – but by mid-decade, Amysis will have moved through cost-sharing partnerships to partnerships where the partners absorb the capital cost of bringing products to market.

Phase 1, in 2011, represents contracted manufacturing using Amyris capital, in partnership with Tate & Lyle, Antibioticos and Biomin.

In 2012-13, the company moves to joint ventures, in which capital outlay is shared, primarily with Sao Martinho and Paraiso Bioenergia.

In 2013-14, the company moves to 3rd party mills for production, using partner’s capital – based on partnmerships with Total, Cosan, Sao Martinho, Bunge and Guarani.

The Fuel Story

So, where in all this is the biofuel story. Amyris will be participating in three distinct fuels markets in the early to mid 2010s: diesel additives, diesel and jet fuel.

2011-12, look for the launch of niche diesel additives and blends with BR and Mercedes Benz.

In 2012-2015, expect an entry into Brazilian diesel and European diesel markets with Shell and Total.

In the 2014-2020 period, look for entry into commercial jet fuel market with General Electric, Embraer, and Total among the partners. Efforts will begin with development and testing in 2011-12, and moving to demonstration scale by 2013-15.

The Chemicals story

There are a lot of molecules out there. To make the story easier to follow, we have prepared a chart, by vertical sector, product, partner, year of market entry, the price per kilo of the target product, and the market size.

The bottom line: inflection points

It’s a sophisticated web of partnership, as we have noted. Use this owners guide to measure progress – analysts are using it too, to project value and set target prices. Watch the flow of announcements – is Amyris hitting its targets in terms of market entries, and timelines.

With every “hit,” start adding to the target price, because some level of risk is assigned into each one. With every “miss”, knock down the value according to the market size of the product. Look for new verticals that open up, or new partnerships that address value.

The overall opportunity: staggering, by any measure. In the chemicals market alone, Amyris’ product pipeline through 2015 has it entering $66 billion of markets, with customers talking in terms of moving 10-20 percent of contracts to renewables companies. That’s $6.6-$13.2 billion in potential orders, and expect product margins of as much as 30-40 percent, or $2-$5.2 billion for the total opportunity for the sector. (Note, we said “opportunity,” not projected sales.)

That’s leaving aside the fuel markets. And shows how much discount (for risk, time and competition) is built into Amyris’ current market cap of $1.16 billion, given that a public company should easily support that market cap on as little as $47 million in net earnings.

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