Markets and Molecules: Amyris in 2013 and beyond

August 12, 2013 |

AmyrisRecord renewable products sales, but slow ramp up, for farnesene: how does the future shape up for Amyris?

In California, Amyris last week announced $10.8M in Q2 2013 revenue, compared to $19.3M in Q2 2012 (before the company transitioned out of the ethanol business). $4.2M was related to renewable product sales and $6.7M in collaboration and grant revenue, compared to $2.3M and $3.7M for Q2 2012.

“During the second quarter, we continued to ramp up our farnesene production volume at our production facility in Brotas, Brazil. We achieved record renewable product sales during the quarter and continued to execute on our collaboration strategy with our partners, all the while maintaining lower operating expenses,” said John Melo, Amyris President & CEO.

“We have also secured an agreement with our two leading shareholders  for $60 million in funding, which will provide us with the necessary resources and financial flexibility to achieve Amyris’s business objectives,” Melo added.

Analyst Reaction

Mike Ritzenthaler, Piper Jaffray

We maintain our Neutral rating and $3 target on shares of AMRS following their 2Q print with GAAP EPS of ($0.51), a few pennies below our estimate of ($0.48). The $4.2 million in product sales were 39% of total 2Q revenues, and up 40% sequentially. Management’s focus continues to be on reducing costs as volumes ramp, but with ~$20 million of burn in 2Q (cash from ops + capex), cash availability remains a central tenet of the Amyris story. Partnership activity is on pace to achieve the expectation of $60-70 million in collaboration funding, making the net burn for FY13 in the ~$25 million range.

Rob Stone and James Medvedeff, Cowen & Company

The Q2 loss was 5% wider than St. on 5% lower revenue, lower GM, and higher expenses (primarily ramp issues). Operations are improving, but we trimmed our H2E production and sales. A planned financing awaits shareholder approval in September. We see a range-bound stock, pending proof of execution.

Pavel Molchanov, Raymond James

Since disclosing scale-up delays and withdrawing guidance in February 2012, Amyris has been in the penalty box. However, the reasonably detailed product sales guidance provided with the 1Q13 results, despite yesterday’s haircut, indicates that visibility is finally re-emerging. Alongside the production ramp-up, continued efforts in cost reduction and securing additional financing are other positives. While Amyris is making progress along its commercialization roadmap, cash burn remains high, and we do not view the valuation as particularly attractive. We maintain our Market Perform rating.

The Issues

amyris-technology-2

Financing – enough now raised to take the company to breakeven?

As Rob Stone and James Medvedeff observed, “A $42.7MM convertible placement with Temasek (an existing investor) and Total should net $35MM (Total is swapping other debt). Shareholder approval is required; a special meeting is scheduled for September.” Mike Ritzenthaler adds “The funding gap was filled (as telegraphed in 1Q) by an existing investor through a mixed-structure offering, and management stated on the call that this funding plus visible funded R&D can get the company to cash breakeven.”

Production volumes

Molchanov writes: “The 50 million liter Paraíso plant in Brazil made its first farnesene shipment in 1Q13 and is running with no major mishaps, though production ramp-up has been slower than expected – hardly a surprise in the world of industrial biotech.” Stone and Medvedeff added, “The contamination issue may be resolved; all six fermenters are now running, albeit in early-ramp mode. However, strong execution is needed to meet H2 revenue and cost targets on the product side,” but “fermenter contamination restrained the pace of the ramp at Brotas, and cost of product sales was $8.9MM.”

Ritzenthaler warned “a substantial product ramp in FY14 with healthy gross margins is still needed to hit the cash flow milestone.”

Production expenses

Ritzenthaler noted, “On the call, management highlighted a 30% y/y reduction in operating expenses, which is a more normalized level. Management highlighted lighter capex, lower production costs (from cheaper feedstocks), and a growing revenue pipeline as key factors in achieving cash flow break even in 2014. As for the timing, we continue to expect that many of the positive indicators for achieving cash-flow breakeven in 2014 (such as Novvi volumes, sustained and stable production from Paraiso) will occur in the back half of 2013.

Sales

Stone and Medvedeff opined that “we model $13MM of product sales and positive product GM in Q4,” while Molchanov wrote, “In a display of confidence, in May management provided product sales guidance of $30-40 million for 2013 – the first such guidance since early 2012. That guidance was reduced yesterday to $25-30 million, implying around 75% of full-year sales coming in the second half.”

Ritzenthaler added, “While a healthy collaboration pipeline and ramping volumes in lubricants may present a catalyst-rich environment for shares of AMRS as 2013 unfolds, sentiment on the sector remains heavy. Investors will most likely wait for better visibility into how the catalysts unfold, so we have elected to remain on the sidelines at this point.”

Breakeven Point

Molchanov: We continue to project gross margin turning positive in early 2014.
Ritzenthaler: “Cash flow breakeven milestone in FY14 is unchanged.

Markets and molecules

Of all the discussions around the Q2 earnings, nothing intrigued us more than the target that AMRS has set for cash production costs of “sub-$4 per liter” for farnesene. The $4 point represents around $15 per gallon, for those who do the math that way, and indicates the amount of mileage that Amyris has left before it accesses the gigantic fuel markets.

Now, we have written in the past that no company prices products coming out of the barrel of oil on a uniform basis. There are fuels that sell for $3 or less per gallon, there are chemicals which sell for $5 or more per gallon — and there are plenty of higher average selling prices available, for selected molecules, that exceed $5 per gallon.

All of which means that you don’t have to have a sub-4 per gallon price to access the fuel markets, as long as you have markets available that provide higher margins elsewhere (but are volume-constrained either by market size of the offtake deals a given company has developed).

It is the same in the traditional corn ethanol markets. Corn oil prices are generally far higher than ethanol, while distiller’s grains prices are much lower. As the South Dakota University Extension researchers reported in May, “In the last two months, dried distillers grains plus solubles prices…average about $210/ton late last week. Modified distillers grains plus solubles and wet distillers grains plus solubles prices…are about $122/ton and $81/ton.

So, the amount that a company like Amyris can tap the fuel markets relates back not only to its production price and volumes, but the available demand and pricing for other markets for farnesene — including fragrances, flavorings, lubricants and more.

A blended sales scenario

The chart below gives an example of how high value, low ASP fuels and lower volume, high ASP chemicals can work together — to make production costs work that seem unreasonably high if one is looking solely at the fuel markets.

Amyris-chart-081313

In this scenario, we have taken the production costs at Amyris and applied a low production volume — but clearly, Amyris appears to be finding a market for farnesene, albeit in limited volumes, at somewhere in the vicinity of $4 per liter. SO we’ve made that the starting point for our illustration, with Scenario 1 and 2.

In that scenario, it’s clear to see that sales have to be focused on chemicals — moving into the fuel markets, with their lower ASPs, simply makes the required chemicals prices too high to find markets and still cover production costs.

But, at larger volumes and reduced production costs (and these are not based on Amyris, but simply offered as illustration) — we can begin to see how availability of the fuel markets can assist biobased companies to reach larger volumes and economies of scale, even if chemicals markets that can support higher ASPs are constrained.

Clearly, a company that can sell unlimited quantities of $15 per gallon chemicals into a given market will do so — but a company like Amyris that, for example, could not find enough customers for $15 per gallon chems in the short term, might well be able to use the fuel markets to supply volume. In our scenarios 3 throgh 7, we explore some of the ramifications (again, using illustrative numbers, rather than guidance from Amyris or others).

The principle that is being illustrated — blended markets and variable prices — is well understood in the traditional ethanol business where multiple products have long been available. It is well understood in the entertainment market, as well, where high-priced theatrical, DVD and pay-per-view prices support larger volumes and lower prices in later “windows” such as pay cable, basic cable, and free-to-air network screenings.

But we continue to see feedback from readers — who occasionally wonder why a publication named Biofuels Digest covers the world of non-fuel biobased deal flow so closely. We see the emergence of multiple robust markets for biobased molecules as inherently linked to the fuels narrative — as a near-term path to profitability, and a longer-term sales channel that can address commodity price instability and offer paths to high volume production and economies of scale.

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