Amyris and the Great Rate Debate

The full-year and Q4 2016 results are in for Amyris, and there’s reason for the Hot 50 selectors, who lifted Amyris to #2 in the world this year, to cheer loudly. Revenues doubled during 2016. The production cost plunged to as low as $1.75 per liter for farnesene. There are 14 major collaborations underway which generated $20M in revenue in Q4 for the company. And, the Brotas plant’s farnesene-producing capacity is sold out through 2020.

These are, each of them, scenarios that most can only dream about. So that’s the good news.

The Lift in Revenues

The news that leaves most people scratching their heads is found in the very same numbers. How can a plant with a nameplate capacity of 40 million liters be sold out on a revenue of $77M, especially when that revenue consists mostly of “collaboration payments” that usually extend beyond product production to include product development costs. And especially especially when the company exited the low-value commodity arena to focus on higher-value specialty ingredients?

We’re left to guess, because we never get a read from this generation of synbio companies on liters produced, or the sale price. Or the percentage of collaboration revenue that includes making a product.

But let’s start with a $2.50 per liter farnesene price, and let’s simply focus in on reported production revenue, which reached $15M in  Q4. That translates to 6 million liters of production and a 60% plant utilization. If the actual farnesene price is higher, the utilization rate could be lower.

The perplexing capacity constraint

Which suggests two things, Either there’s a tremendous amount of down-time at the plant. Or, the plant is struggling with rate.

We highlighted production rate in this article on hard times and bright prospects at POET-DSM, and we’ll highlight it here as well. Since we don’t have complete transparency on the business — we have to make substantial room for the possibility that there is simply so much switching time between campaigns that the problem is one that can be solved by building more specialized capacity.

Which is Amyris’ current plan, as a matter of fact. The company has broken ground on Brotas 2, which will focus in on flavors & fragrances, while the current plant focuses in on

But as Affirmed once said to Alydar, I think after he beat him in the Belmont Stakes to win the Triple Crown:

“Bro, it’s not about the odds, the price you command, or the low cost to feed you, it’s about how fast you get around the track.”

Well, something like that.

Why is rate so important? Surely if you can produce a $5 product for $1 in sugar and associated labor and maintenance, you’re on to a good thing, and possibly a great thing.

Well, you are. But in the end there’s capex. It’s kind of like the student loan of the Advanced Bioeconomy. Doesn’t really matter how much you earn coming out of school, if you had to borrow a million bucks from loan sharks to get your degree — your kneecaps are toast when you inevitably default and the Lenny the Shark finds you.

For companies like Amyris, a plant that was built for 40 million liters but is sold out at two-thirds of that — well, you’ve just brought up the capex per liter by 50%, and that’s a problem, because in the business of building out the bioeconomy, all the money comes in the end from equity and debt sources who would like to see returns in the mid-teens or higher. Not the 4% rate that we see in the home mortgage market or the 1% returns offered by the US government for its 10-year Treasuries.

Mitigating Factors

There are some mitigating factors here to consider. First, when Amyris says Brotas is “sold out”, the orders could be well-north of the volumes produced in Q4 2017. For any of three reasons.

a. The plant is sold out for 2017, but wasn’t for Q4.

b. The rate of production is expanding because the team is getting better at whipping a modified yeast around the old Brotas racing track.

c. The campaigns of the future will involve less of the on/off plug-and-play — the old Switcheroo between this production molecule and that production molecule.

For any or all of those reasons, there are two cheers. The company would have had three cheers it it has reached that $90-$105 million in revenue it had targeted for 2016. The actual figure came in at around $77 million, with $32M in Q4, suggesting that the company’s ramp-up is coming late. Suggesting that revenues were getting pushed out to future quarters. Which suggests that the rate of production is not what it was expected to be.

We’ll make one more observation regarding production rate and this is to go a little broader than Amyris. There’s a plug-and-play idea going around Silicon Valley and elsewhere, that in the future there will be shared production refineries serving multiple smaller companies that go to market without having to build production capacity — saving gobs of time, money and aggravation in the process.

It’s not exactly the tolling model — it’s more collaborative, and based in services and not just time-sharing the shiny fermenters. The idea is that specialized scale-up teams, shared between many organism development companies, will be the most efficient path to market.

The observation we’ll make is that the gap we see here in capacity utilization with Brotas — which possibly stems back to switching back-and-forth between production organisms — could spell T-R-O-U-B-L-E for the plug-and-play idea. It may well be that we’ll see a more sophisticated model emerging — shared resource for pilot through to the first commercial runs — then the construction of dedicated capacity by licensees who want the increase the margins. That’s essentially been the Genomatica approach and it could well be the winner.

Over to the bright side

On a run-rate basis, let’s note that Amyris’ annualized 12-month forward revenues have crossed the $100 million threshold. And, the company is seeing more than $50M in product revenue in 2017. Further, we’ve seen that Amyris has been largely, via its collaboration-based business model, to avoid the annual Massacre of the Shareholders through dilutive capital raising exercises. It hasn’t been any shareholder picnic building this company, and the $0.53 per share price is a Red Flag of Shame hanging over the company and will hang there for some time to come — but building an industrial company that generates $100M in revenue isn’t for the faint of heart, and we’ve seen investments in the $10B+ range in the oil & gas business that always run the forward risk that prices will collapse, or supply will flood the market.

Seen through that lens, Amyris’s future has a lot less volatility than crude, and given the option of building a world-scale ethylene cracker and praying that natgas prices stay low enough to beat the pants off naphtha while not dropping so low that the market beats the pants off of the whole project — well, you put Amyris into that context and you begin to see the point of it all.

Amyris is beginning to look like a market entry, and if sugar really gets into the game, it’ll be the single biggest bit of news in speciality chemicals since the entry of petroleum around the time of the Second World War.

It’s been shouted that “sugar is the new crude” so many times (generally by the people selling “the glucose economy”) that it feels pointless to call “BS” on that, though we’ll call it once more. But we do see that sugar could become a new swing producer, and in its own way that’s more interesting.