Friday, June 24, 2011

Living Factories Burn Cash

There is no shortage of ambition at Amyris, Inc. (AMRS:  Nasdaq).  When the company staged its initial public offering of common stock in October 2010, its four founders told investors of their intentions to build a “farnesene” world with its synthetic biology platform.  Few attending at Amyris road shows had heard of farnesene until the team explained genetic modification of microorganisms. 

By controlling metabolic pathways, Amyris scientists are able to design microbes, usually yeast, and use them as living factories in established fermentation processes.   Such microbes can be used to convert plant-sourced sugars such as those from sugarcane or sweet sorghum into target molecules like farnesene, which Amyris has branded Biofene. 

The company is commercializing its technology through partnerships in renewable fuels such as ethanol and renewable chemicals such as surfactants and lubricants.  Amyris recorded $103.8 million in revenue in the most recently reported twelve months, mostly from the sale of ethanol and reformulated ethanol-blended gasoline produced using its Biofene molecules. 

Investors in the IPO may not have understood even the most basic chemistry, but the promise of high profit margins and ample cash flow had investors listening.  So far though, the living factories have been burning more cash than they have been generating. 

The net loss in the most recently reported twelve months ending March 2011 was $104.9 million or $5.74 per share.  Amyris operations required $70 million in cash during the same period, requiring the company to dip into cash from its common stock offering last year.  Cash and marketable securities totaled $227 million at the end of March 2011, suggesting the company has breathing room for another three years or so.  Then, without significant improvement in profitability, the microbes will be pan handling on Wall Street.

Given its business model, relationships are everything for Amyris. The company has agreed to supply Biofene to M and G Finanziaria for use in M and G’s resins that end up in food containers.  The company has a marketing and distribution partnerships with Soliance, a provider of renewable ingredients to the cosmetics industry, and with Cosan, a Brazilian lubricants producer.  Amyris is also developing lubricants and jet fuel with Total, S.A. Fragrances and flavors are the focus of a development with Firmenich and Givaudan.  The most recent tie up is with Wilmar International, a producer of surfactants for used in a wide range of personal care products and industrial processes.

The list of partners has apparently impressed the analysts publishing estimates on Amyris.  The consensus estimates posted by Thomson-Reuters shows increasing sales and a narrowing net loss.  Alas, the year 2012 still ends in the red, suggesting something material needs to occur in 2013 in order for Amyris to keep paying the microbes’ bills.

Uncertainty over those promised profits, may be one reason Amyris shares have backed off a 52-week high in the mid-30s.  Nonetheless, by any measure the stock looks overbought.  That has not been lost on bears, who has sold short over 6% of the float.  Options might be a way to play Amyris on the cheap, given the divergence of opinion on the company’s future.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  AMRS is included in Crystal Equity Research’s Beach Boys Index in the Alternative Chemicals Group.

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