BioAmber and the Charm of Making

If you remember the 1981 film Excalibur, there were numerous uses of what was described as the Charm of Making:

Anál nathrach, orth’ bháis’s bethad, do chél dénmha

Which roughly translates into Modern Bioeconomyese as, “O Lord, give me the power to make lots of succinic acid.”

If you’re not chasing biosuccinic or at least salivating over it, check your pulse. DSM, PTT, Mitsui, Roquette, Corbion, Vinmar and BASF are just a few of the major players around the world chasing it.

In part, that’s because there’s a market for succinic and a sustainable option is a tasty one, as you can see, for so many. But there’s this idea floating around that one of these days succinic is going to become a gateway, platform molecule, that there are going to be more uses for biosuccinic acid than a set of Ginsu knives.

The story was about technology development for the longest time, and then the Building of the First Commercial, over which investors chanted more pagan incantations than a Viking funeral.. Now, several small commercial plants have been built — Myriant completed one in Louisiana that is as wrapped in mystery nowadays as the quest for the Grail. Succinity is in the mix – a JV of Corbion and BASF, and Reverdia is there, a JV of Roquette and DSM. And there is BioAmber, which has been racking up partners and customers with the ease of Tiger Woods rattling off birdies in the 1997 Masters. But then, a sudden management change, and a delay from PTT in building their own plant which required the succinic offtake.

The Fortunatelys and Unfortunatelys

All of which leads us to the occasion of BioAmber reporting its Q1 result — given the PTT situation, an unsurprisingly lackluster sales figure and a Q1 loss of $10.5M compared to a loss of $8.1M for Q1 2016, and inside of that expanded loss are a host of storylines about this fascinating biosuccinic producer, of the fortunately and unfortunately type.

Fortunately, sales of bio-succinic acid were $2.1 million, a 46% increase over the same period last year.

Unfortunately, as Cowen & Co’ Jeffrey Osborne noted, revenue fell “below our and the Street’s low estimates.”

Fortunately, “Key partner PTTMCC has once again began taking delivery of bio-succinic, which was an obstacle for the company in 4Q16 and 1Q17,” adds Osborne.

Unfortunately, G&S ballooned from $2.6M to $4.9M, driven by one-time severance costs in connection with the departure of the CEO and CFO for a total of approximately $1.2 million, and additional non-cash stock-based compensation expense of $1.2 million resulting from accelerated vesting of stock-options associated with the departures.” Yikes, that’s a big payout for the dearly departed.

Fortunately, “there were 7 new clients that began buying bio-succinic acid in the quarter, and the plant attained a new throughput record, briefly surpassing 70% and saw a further reduction in variable costs relative to the previous quarter.”

The rise of Mitsui

Which brings us to the most unusual aspect of BioAmber’s results this quarter, which was that sales expense plunged — despite rising sales — to $642K from $1.2M because of the “expanded commercial role that Mitsui has assumed, particularly in Asia, which allowed the Company to reduce the size of its global commercial team.”

A sales expense of something like $200K per month sounds more like a satellite operation of Mitsui — a production plant that Mitsui doesn’t happen to fully own — than a freestanding company. The good news is that BioAmber’s future is tied to a motivated powerhouse in Mitsui. The bad news is that BioAmber’s future is tied to a motivated powerhouse in Mitsui – whither goes thou, so shall I, as the saying goes.

The Mitsui relationship is going to be under incredible scrutiny because, in so many ways, the future of the company as a financial entity – with an expected EBITDA of $45.6M in 2020 according to Cowen & Co’s estimates goes back to “more news flow in 3Q17 on CJ’s joint venture and Plant 2 funding/location”

The 2 Deliverables

To deliver on the potential that BioAmber’s technology and team have established, the company has to execute two major steps:

1. Ramp of Sarnia production – something like $15M per quarter is the target here, and we see the problems of depending on major partners when, for example, “PTT’s delays in ramping their new facility” cause sales to hit $2.6M for Q1.

2. Bring in a new CFO and CEO, pronto. It’s very hard to see the company drifting along without translating the CJ joint venture into a plant, or striking the financing and offtake agreements for its proposed 200,000 MT Plant 2 facility in the U.S. or Canada, or striking some additional deals of the CJ type. The company’s speed in settling the top management will be key.

In his note to investors, Osborne noted that it was a “tough 1Q17 result” but described the outlook for the remainder of the year as “more upbeat”. The next 90 days will be crucial as the company lands a new CEO capable of diving in fast to achieve all those milestones now on the table — while retaining the confidence of Mitsui and turning more than 200 prospects who have taken product samples into the solid, global customer base that a biosuccinic technology of this power and promise merits and that the investors will require.

It may well be that Mitsui nominates its own candidate — someone who already has that experience to ensure that Mitsui’s global marketing assets are as fully utilized as possible — while ensuring that Mitsui’s investment expectations also are realized.

The next 180 Big Days

We’ll be looking east, then, over the next 180 days — for more clarity on the management team and the status of the China JV with CJ and on how much further Mitsui might expand its role in order to cash in on the promise Mitsui has always seen in the technology and the BioAmber team.

The stock has taken a lusty beating in the past 90 days — at $5.92 in late January, it has fallen to $2.34 as the company suffered through the shock management changes and the delays from customers that limited shipments. Cowen sees limited upside for now, with a price target of $2.50.

Biosuccinic is at a tipping point, and 2017 appears to be the year we discover if the clear customer interest and the success in bringing the technology to scale can be translated into a clear win for investors.