Amyris: Biofuels Digest’s 2014 5-Minute Gude

February 18, 2014 |

Company description:

Amyris is an integrated renewable chemicals and fuels company founded in 2003 and based in Emeryville, CA, with additional operations in Chicago, IL and Campinas, Brazil. Amyris has over 400 employees, with three-quarters of its employees located in the United States. Amyris subsidiaries include Amyris Brasil Ltda., a wholly-owned Brazilian company through which Amyris conducts its Brazilian operations for the manufacture and trade of products; and Amyris Fuels, LLC, a wholly-owned subsidiary through which Amyris is building its U.S. fuels distribution capabilities.

Rankings

50 Hottest Companies in Bioenergy: #14, 2013-14

30 Hottest Companies in Renewable Chemicals: #6, 2013-14

Awards

Won Biofuels Digest’s 2012 Special Editor’s Award: Amyris, comeback of the year

Profiles

Featured in: Amyris hits the comeback trail

Featured in: Amyris narrows loss; captive company for Total, asks analyst?

Profiles

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-2-300x168.png

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-081313-300x284.png

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.

Major Investors: Amyris’s stock is traded publicly on the NASDAQ stock exchange under the symbol AMRS.

Type of Technology(ies): Amyris has developed genetic engineering technologies that enable modification of the way microbes process (i.e., metabolize) sugar. By controlling these metabolic pathways, Amyris is able to design microbes, primarily yeast, to be tiny living factories that convert plant-sourced sugars from crops such as sugarcane or sweet sorghum into target molecules. Using its industrial synthetic biology platform, Amyris develops yeast strains designed to produce a broad range of molecules. The first molecule that Amyris is focusing on is Biofene™, Amyris-brand farnesene, a hydrocarbon building block that can replace petrochemicals in a wide variety of products in the cosmetics, flavors and fragrances, consumer product, polymers, lubricants and fuel markets.

Feedstocks: Amyris can use a broad range of plant sugars to produce its products. Amyris expects to scale production initially using Brazilian sugarcane as a feedstock.

Products: Renewable fuels, lubricants, polymers and plastic additives, consumer products, flavors & fragrances and cosmetics.

Product Cost: Please see quarterly earnings statement

Offtake partners: As part of its go-to-market strategy capitalizing on the flexibility of its proprietary molecule, Amyris has entered a number of off-take and co-development agreements with partners in specific, high-value vertical markets such as cosmetics, consumer products, flavors and fragrances and lubricants. Amyris has an offtake agreement with Shell for the supply of Amyris No Compromise® diesel, with M&G Finanziaria S.R.L. to incorporate Biofene® as an ingredient into M&G PET processing and with The Procter & Gamble Company for use of Biofene in certain specialty chemical applications within P&G’s products. Amyris also has co-development agreements with companies in a variety of markets, including with Total to develop renewable jet fuel and with Kuraray to develop polymers to replace petroleum-derived feedstock such as butadiene and isoprene, allowing Amyris to target high-value markets while ramping up production of renewable diesel.

Past Milestones:

1. Completion of initial public offering.

2. First purchase order for Amyris’s first commercial product, renewable squalane, followed by sales of Amyris renewable diesel and lubricants.

3. Initial commercial production facilities in Brazil, Spain and U.S.

In December 2013,, Amyris and Total announced the formation of Total Amyris BioSolutions B.V., a 50-50 joint venture that now holds exclusive rights and a license under Amyris’s intellectual property to produce and market renewable diesel and jet fuel from Amyris’s renewable farnesene. Amyris also plans to initiate sales of renewable jet fuel in Brazil once it achieves ASTM validation.

“The joint-venture Total Amyris Biosolutions is a first step towards the commercialization of our renewable diesel and jet fuels. We are in the phase of scaling-up the industrial process and we expect to start commercialization within the next few years, once our joint research and development goals are met,” said Philippe Boisseau, President, Marketing & Services and New Energies, and a member of TOTAL’s Executive Committee. “As far as commercialization is concerned, the new joint-venture will benefit from the know-how and customer access of TOTAL, which operates in more than 130 countries and is aiming to become a key supplier in renewable fuels,” Boisseau added.

“The formation of this joint venture, anticipated by our streamlined collaboration agreement signed last year, paves the way for us to initiate our fuels commercialization efforts globally, building on Amyris experience with renewable diesel in Brazil and the growing demand for lower-emission jet fuels worldwide,” said John Melo, President & CEO of Amyris, Inc. “TOTAL has been a strategic partner for Amyris for the last three years and a model of how global companies can leverage our inspired science to deliver sustainable solutions for a growing world,” Melo added.

In November 2013, analysts Rob Stone and James Medvedeff of Cowen & Company wrote of Amyris’ Q3 results:

“Q3:13 26¢ cash loss was narrower than St. (30¢) on other income, but revenue was 48% light, GM negative, and Q4 product sales trimmed. Partner funding adds cash in Q4, but only half of 2014 is contracted….Cost of product sales was 2x revenue…In addition to squalane, niche diesel, and farnesene for base oils, shipments may commence for other categories such as flavor and fragrance, and polymers and plastics. However, Brotas is likely to take 2-3 years to fully ramp to 40MM liter annual capacity. AMRS targets $4.00 per liter cash cost by year-end, about breakeven on the lowest ASP products in the portfolio.”

In October 2013, Amyris secured a $35 million bridge loan at 5.5% interest from current investor Maxwell (Mauritius) Pte. The promissory note matures on February 2. The annual percentage rate is equivalent to 16.5% but should the company default on the note, the interest rate goes to 2% per month or 24% per year.

In August 2013, Amyris announced it entered into agreement for the sale of convertible notes in a private placement for up to $60 million in cash proceeds. Under the terms of the agreement, one of Amyris’s largest stockholders, Temasek, agreed to purchase $35 million of the notes in an initial tranche and, at Amyris’s election, up to $25 million in a second tranche. Both tranches are subject to Amyris’s satisfaction of closing conditions, including stockholder approval of the transaction at an upcoming special meeting of stockholders.

The purchase agreement for the offering contemplates the sale of senior convertible promissory notes in two tranches—one of $35 million in initial principal amount and one of $25 million in initial principal amount.

Future Milestones:

1. Build and operate two additional productions sites in Brazil (SMA and Paraiso).

2. Remain on track for target production costs while meeting increasing customer demand.

3. Add C5 and C10 molecules along with new products and customer agreements.

Business Model

Amyris partners with biofuel producers to build new, “bolt-on” facilities adjacent to existing mills, instead of building new “greenfield” facilities, thereby reducing the capital required to establish and scale production, while simultaneously offering partners the opportunity to diversify and grow their product lines. Each of these steps in the production process – from the feedstock, through fermentation, to recovery and finishing – use processes that are already used by other industries today, enabling cost-effective scaling of production. Amyris’s streamlined production process employs an innovative take on established infrastructure and allows for lower start-up and capital costs and more efficient processes. In addition, Amyris’s partnership model incorporates cultivating long-term relationships with customers and co-developing ingredients with them to meet specific product development goals.

Competitive Edge(s): Biofene provides a number of compelling advantages when compared to other renewable chemical and fuel alternatives, most notably that it is an oil. It can therefore be a drop-in replacement for many petroleum products, and it fits into the existing petroleum transport and distribution infrastructure. It is also an extremely flexible molecule that, with a few simple finishing steps, can replace petroleum derived chemicals in a number of markets, including ingredients in cosmetics, polymers, lubricants and consumer products, and renewable diesel and jet fuel. Amyris’s technology has been designed to be feedstock-agnostic and its platform is extremely flexible; Biofene is just one of thousands of molecules that Amyris can produce.

Research, or Manufacturing Partnerships or Alliances: Amyris is a member of the National Advanced Biofuel Consortium under the Department of Energy (DOE) and NREL as well as a recipient of an Integrated Biorefinery (IBR) grant from the DOE. Amyris has ongoing research collaborations in Australia, Brazil and the U.S., and is a founding member of the Advanced Biofuel Association (ABFA), Biotechnology Industry Organization (BIO) and Diesel Technology Forum (DTF), among others. Amyris has manufacturing partnerships with Glycotech, Biomin, Sao Martinho, Tate & Lyle and Antibioticos.

Stage: Commercial

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Category: 5-Minute Guide

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