Amyris Stock – Producing Ingredients Using Synbio
Fake it until you make it applies to the startup world as well. Oftentimes, a company will set out doing “business plan A” and end up finalizing on “business plan E.” That’s fine when you’re growing a new business, but not so good when you’re a publicly traded stock (cough, Organovo, cough). Sometimes you’ll have an entire class of stocks fail at the same time, something we noted in our 2017 piece on WTF Happened to Synthetic Biology Stocks? One of those stocks is a company called Amyris (AMRS).
A quick look at the Amyris investor deck shows that this stock has undergone a serious transformation. In the past year, shares of this $4.8 billion company have soared +309% compared to a Nasdaq return of +45% over the same time frame. Now that the company seems to have found their way, we want to take another look at what they’ve been up to.
The Potential of Synthetic Biology
Before we get into the details, it’s important to rehash the value proposition for synthetic biology (synbio) in the context of companies like Zymergen, Ginkgo Bioworks, and Amyris. These firms have all built platforms that allow companies to produce “high-performance alternatives to petroleum, plant and animal-based products” using the power of machine learning to scan through millions of genetic alterations to land on something superior. For example, there are many use cases around industrial fermentation. Modifying an enzyme so that it performs at a higher levels can save millions of dollars.
An obvious requirement should be that these platforms work. We were amazed to see Zymergen hasn’t gotten to that point yet. Their first product was launched “with a non-fermentation produced biomolecule sourced from a third party,” and they’re currently working on converting the process to a fermentation-produced molecule which is expected to be complete next year. In other words, they haven’t even demonstrated their platform is economically viable.
Another thing to consider is whether manufacturing is being performed in house. If it is, that’s a lot of added risk and required capital, which happens to be the case with Amyris.
About Amyris Stock
Broadly speaking, Amyris has a functioning platform that designs, engineers, and manufactures molecules for health and beauty products using a variety of technologies such as machine learning. The company produces their own products and also works with other companies to produce products which generate royalties.
They’re also doing manufacturing in house with construction of a large-scale specialty ingredients facility in Brazil expected to be completed by the end of this year. Their process has improved tremendously over the years, with time to market for molecules decreasing from seven years to less than a year for their most recent molecule. Going forward, they expect to release two to three new molecules per year. The latest investor deck looks quite promising, that is until we dove into the latest Amyris 10-K.
Under the hood is a complicated business that’s evolved from low margin commodity markets to higher margin specialty ingredients markets. The company’s wholly-owned consumer brands include:
- Biossance – a clean beauty skincare brand
- Pipette – a baby and mother care brand
- Purecane – an alternative sweetener brand.
Selling fast moving consumer goods products is no easy task. That should be left to the Proctor & Gambles of the world while Amyris should be focused on developing ingredients that other firms utilize and capturing royalties. We see the same “build it and they will come” approach Zymergen is taking, and we don’t like it. That said, it all comes down to revenues, which are coming in sporadically.
In Q1-2021, Amyris brought in more revenues than they did throughout all of 2020. Around 83% of last quarter’s revenues came from a single customer, DSM, which also happens to be an investor in Amyris. We would generally frown upon any single customer accounting for more than 10% of revenues. When a single customer can make or break your company, that’s not a good position to be in.
To Buy or Not to Buy
Our preferred synbio platform would be one that captures recurring revenues along with royalties. We frown upon volatility in revenue streams because that increases stock price volatility which increases risk. Our simple valuation ratio is optimally tuned for companies with consistently growing revenue streams and that’s what we plan to stick to. Amyris presently has customer concentration risk which is also a concern. Then there’s this tidbit from the 10-K:
Throughout the first half of 2020, the Company failed to meet certain covenants under several credit arrangements, including those associated with cross-default provisions, minimum liquidity and minimum asset coverage requirements and certain scheduled payments. Most of these lenders provided waivers to the Company for breaches of all past covenant violations and cross-default payment failures, under the respective credit agreements or extended payment deadlines through May 31, 2020.Amyris 10-K
That’s a big red flag. If there’s an economic downturn, lenders might not be so lenient with those waivers. In looking at the Amyris latest quarterly filing, there appears to be special arrangements made to extinguish debt including the issue of shares and warrants which dilutes current shareholders.
We always focus on revenue growth above all else, but it’s hard to ignore just how much cash Amyris is burning through – $290 million in last quarter alone. Regardless of how big the potential rewards might be, there’s just too much risk here for our tastes.
Amyris hopes to “enable the ESG agenda of industry leaders,” which means that investors can do good while doing good. The “third industrial revolution” is finally upon us, and after spending several billion dollars, Amyris hopes to capitalize on the opportunity. While we applaud the vision of synthetic biology leading to a greener future, there are too many moving parts to keep track of in the Amyris business model, and enough red flags for us to avoid the stock going forward.
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