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>>> Amyris - A Juggernaut In The Making

Aug 16, 2016




http://seekingalpha.com/article/3999958-amyris-juggernaut-making




Summary


•Amyris is the leader in biomanufacturing.

•Biomanufacturing has enormous potential.

•Recent developments eliminate the need for dilution.



Amyris - The Long Term View

Amyris Inc. (NASDAQ:AMRS) has had a long and tumultuous history. The company's first project was to engineer microbes to produce artemisinin, a cure for malaria. It then ventured on to produce fuels the same way, which made sense with 2007 oil prices, but does not make commercial sense today.

Along the way, it learned a lot about how to both create yeast strains that produce a variety of chemicals, and how to make biofactories (pictured below) so that large amounts of these chemicals can be produced. While some companies have dabbled in the former discipline, none but Amyris have mastered the latter.

Having largely divested its fuels business, the company now focuses on higher margin products. It produces molecules for fragrances and cosmetics, nutraceuticals, drugs, tire rubber and more. Their current gross margin is over 58% (source). Moreover, they are experiencing huge product sales growth. In the past two quarters, Amyris achieved product sales growth of over 45%, after having double-digit growth rates for the prior three quarters. In Q2 2016, product sales reached $4.9M, while total revenue was at $9.6M (source).

Amyris is still making large capital investments, which sales revenue alone cannot cover. To that end, it does collaborative research projects where large corporate partners give Amyris cash to do research work to figure out the feasibility of producing certain molecules. If the studies succeed, Amyris also gets to produce those molecules and earn more money that way. Recent collaborations include those with Biogen (NASDAQ:BIIB), Johnson & Johnson (NYSE:JNJ) and Cathay Pacific (owned by Swire (HKG:0019)) (source). In effect, Amyris's customers are sponsoring R&D work for the company.

Finally, Amyris gets grants from the US Government for research purposes. Recently, the Department of Energy gave Amyris a multimillion-dollar grant for research into biofuels (source). More importantly, DARPA, the Pentagon's research arm, gave Amyris a $34 million grant to create technologies to develop new molecules and bring them to market faster (source). Under the terms of the agreement, Amyris gets to keep the IP for all new molecules developed in this program.

The long-term potential of the company is enormous. The competitive advantage of the company can roughly be divided into two parts.

The first one is producing new, unique molecules that humanity hitherto has had no access to. Farnesene is the first example of what's to come in this department - it's a hydrocarbon building block that Amyris has developed. It has already found uses in fuels, oils and lubricants, tires, adhesives, fragrances and solvents (source). The tire market alone is worth billions to Amyris as Liquid Farnesene Rubber tires increases fuel efficiency and reduces stopping distance.

Amyris's production of farnesene at the current plant has already been sold out through 2020 (source). It is building a new plant (sponsored by its customers) to expand production. There will be more new molecules like farnesene for Amyris. The best part is that it won't even require R&D spending - DARPA is sponsoring the discovery of new molecules worth hundreds of millions of dollars to Amyris!

Amyris is targeting development of 400 new molecules over the next three years under this program. The first molecules have already been developed and customers are interested in commercializing them. If just one of the molecules has the same commercial potential as farnesene, this program should add tens of millions of dollars of revenue per year starting in late 2017-early 2018. It is likely that more than one out of these 400 molecules will find substantial commercial use.

The second part of Amyris's competitive advantage is its ability to produce molecules that humans have already found uses for, but do so in a cheap, reliable and sustainable fashion. Three examples of this are squalane, artemisinin and isoprene. Squalane is a skin moisturizer that is normally derived from sharks. It is hard and expensive to obtain in the outside world, while Amyris can program yeast to grow produce it in a vat. It is both cheaper and quicker than catching sharks.

Artemisinin is a cure for malaria. The global production of it has been fluctuating due to seasonal and agricultural factors. To ensure the availability of the drug year-round at an affordable price, Bill and Melinda Gates Foundation has recently invested $5M in Amyris to produce artemisinin in factories (source).

Isoprene is used to produce synthetic rubber. Its production emits a lot of CO2 and requires cutting down trees. To avoid both, Michelin has partnered with Amyris to use its genetically engineered yeast to produce isoprene in a renewable and sustainable fashion (source).

Fuels also fall into this category. However, the drop in oil price from 2007 made Amyris uncompetitive on price in this market for the time being. If production costs continue declining for Amyris as they have been, it should become competitive in fuels within a decade, but the company was wise to divest from this project in the short run.

These are but a taste of what's to come. When humanity started extracting oil, it got access to ~200 chemicals that fuelled the plastics revolution of the 20th century. Living organisms have pathways to produce ~200,000 different chemicals (source) and Amyris is the world's leader at programming microbes to produce a specific one.

Recent Problems

Despite that, Amyris is currently trading at a market cap of around $90M. The company expects to make $90-100M in revenues this year, which brings the P/S ratio under 1. That is ridiculously low for a company with 47% sales growth, 58% margins and potential for substantial upside.

The reason for such a low stock price is debt. The company has $181M in debt, $80M of which is current (source). The company's revenues cannot cover it, and almost all of their debt is convertible (source). That means that existing shareholders have been expecting significant dilution, which has depressed the stock price recently all the way to $0.4 per share, down from the 52-week high of $2.57.

Note that there is no risk of Amyris going under - most of its debt is in the form of convertible debt held by its large shareholders, notably Total (NYSE:TOT) and Temasek (combined they own over 60% of Amyris shares). These companies are committed to Amyris's long-term success and are willing to provide capital to the company. The only risk related to Amyris's debt is dilution due its conversion.

The recent barrage of news (all mentioned on the last quarterly call), however, shows that the dilution fears might be unwarranted. Amyris recently received $15 million from Ginkgo Bioworks. They are cutting costs. They are becoming so important to their customers, that the customers are willing to provide $70-100M in non-dilutive funding. They are also selling $40-60M worth of assets. That should easily cover the current portion of the debt ($80M), and the company expects to be cash flow positive in 2017. So it is unlikely that the company will experience any major dilution soon.

The majority of Amyris's long-term debt is due in 2019. It is hard to predict at this point how the company will handle it by that point, given the number of projects that are going on concurrently. Dilution at that point remains a medium-term risk for the shareholders. As for the long-term risks, there is always competition in Silicon Valley. Zymergen is a startup founded in part by ex-Amyris employees that intends to compete in the same market.

Given the number of molecules living organisms can produce, however (200,000), it is unlikely that these companies will choose to compete directly in the markets for the same molecules. More likely, they will try to make production of new molecules faster than their competitor. As it stands today, Zymergen likely has similar discovery capabilities as Amyris, but no production experience whatsoever, which puts them at least a couple of years behind.

Additionally, Amyris's stock has dropped so low over the past few years that it is now within the domain of penny stock traders. As such, it has been subject to promotional activity within the past two years. That fact can be alarming for a stock, but it has no bearings on the fundamentals of the company. The only reason why investors have to be wary of this fact is that Amyris's free float is relatively small due to a number of very large shareholders, and as such, the stock price can be affected by relatively small investors. Right now, however, whatever has been happening in the market, Amyris looks far from overpriced.

Smart Money

I will leave you with this - John Doerr is widely regarded as one of the most successful venture capitalists ever. He was one of the first investors in both(!) Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN). He serves as a board member for both Google and Amyris.

John Doerr recently bought $25 million worth of Amyris stock for himself at a price of over $1.5 per share (source). Today, you can get a share for $0.4. Surely, it might be worth to take a look at Amyris.

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