Amyris Stock: Putting Lipstick on a Pig

Synthetic biology is probably the single most exciting technology theme we cover. Nature is the most powerful technology known to man, and we’re not only on the cusp of harnessing it but making it better by using technologies like gene editing. But for investors, synbio has been anything but exciting. Over four years ago, we asked WTF Happened to Synthetic Biology Stocks?, and we find ourselves asking the same question today.

One company discussed in that article was Amyris (AMRS), a firm we looked at later on in a piece titled Amyris Stock – Producing Ingredients Using Synbio. Here’s what we concluded:

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.

Nanalyze, June 2021

Over the nine months following our piece, shares of Amyris plummeted from $16.50 a share to $4.71 a share, a loss of 71% compared to a Nasdaq loss of 0.58% over the same time frame. Figuring out why volatile tech stocks plummet isn’t easy, but figuring out whether a company is worth owning at any price is certainly feasible.

A common venial sin synthetic biology companies commit is trying to develop, produce, and market their own products to end consumers. It becomes a mortal sin when they do the same with beauty products.

Selling Beauty Products

Some technology applications don’t add value to society because they create more problems than they solve, social media being one of them. Applying a powerful technology to a weak domain isn’t appealing. When a synthetic biology platform starts selling beauty products, it’s an immediate turnoff. Does anyone think that the consumers who spend $500 billion a year buying products that only half the world’s population appreciates will be sold on the synthetic biology value proposition? People who buy beauty products do so because some celebrity was wearing them on television, not because the production platform unlocked the powers of nature. Transforming the beauty industry is not the problem we want the world’s greatest technology to be solving right now.

Amyris began 2021 with three products – Biossance (clean beauty skincare), Pipette (clean baby skincare), and Purecane (zero-calorie sweetener). Then during the second half of 2021, they launched five consumer brands in the Clean Beauty & Personal Care end market:

• Terasana® clean skincare
• Costa Brazil® luxury skincare
• OLIKATM clean wellness
• Rose Inc.TM clean color cosmetics
• JVNTM clean haircare

Says the 10-K, “in 2021 and 2022 we entered into certain leases in New York, Miami, and London that will be used as office and retail space for our consumer business.” Opening retail locations in some of the world’s most expensive property markets to peddle products in the viciously competitive beauty industry is not what Amyris should be focused on. It’s like when Intrexon decided that selling packaged apple slices was the way forward. After burning through $2.4 billion worth of capital over nearly two decades, is selling better beauty products really the grand vision Amyris investors had hoped for?

With $700 million of debt due in 2026, Amyris should probably be trying to rein in costs and get spending under control. The reverse is happening:

Sales, general and administrative expenses (SG&A) increased by 88% to $257.8 million in 2021, due to a $68.0 million increase in sales and marketing expense related to our consumer brands and a $21.8 million increase in employee compensation related to an additional 295 employees, mostly within our sales and marketing consumer brand teams.

Amyris 10-K

Nearly half their operating costs are attributed to SG&A, an overhead expenditure that’s skyrocketing because they’re hiring a bunch of muppets to sell makeup. Why not let the experts do that? The relationship Amyris has with Sephora has been growing strong over the past three years as seen below (revenue in USD millions):

• 2019: $8.7
• 2020: $13.8
• 2021: $27.6

Amyris should let beauty companies do what they do best and focus on reducing their costs and applying the power of their technology platform to domains that add value to society. Instead, they’ve decided to try and compete in an extremely fickle and competitive industry. During 2021, Amyris completed four acquisitions aggregating approximately $167.7 million which involved – wait for it – companies working in the beauty industry.

• COSTA BRAZIL – A sustainable like of overpriced beauty products created by some posh-looking Brazilian guy
• MG Empower – A digital marketing agency in London provides influencer marketing and digital innovation services.
• Olika – Clean wellness, combining safe and effective ingredients and nature-inspired design packages.
• Beauty Labs – one of the leading consumer applications for “try before you buy” color cosmetics.

At this point in time, many investors will be turned off, but some of you will be guzzling the bull thesis Kool-Aid like a freshman necks a bottle of Boone’s Farm. Yes, we know, John Doerr is a controlling shareholder, so maybe you can ask him what he thinks about related party revenues and shareholder dilution.

Related Parties and Shareholder Dilution

Harking back to our piece on Ginkgo Bioworks, related-party revenues are a big red flag. In the case of Ginkgo, they were creating startups, funding them, then the startups were using that money to pay Ginkgo for their platform. For that reason, we proposed that investors should not consider related revenues when valuing companies. For Amyris, their related-party revenues constituted over half their 2021 revenues and originated from a single customer which also creates customer concentration risk:

For a company that’s burned through $2.4 billion so far, we’re not surprised to see that the number of shares outstanding is increasing over time. This often goes undetected by retail investors who only pay attention to one component of the market capitalization formula – price. Here’s how Amyris’ outstanding shares have increased over the past five years.

Every time the company issues shares, they dilute shareholders like Mr. Doerr. For someone with a net worth of $12.7 billion, that might be small potatoes. Mr. Doerr also understands that the ultimate goal of every business is to survive. If Amyris can’t survive, their shares become worthless. But we’re not looking for companies that are merely trying to survive, we’re looking for those that are thriving.

If for some reason you find this synbio cum beauty product conglomeration to be appealing, then you’re on your own. Amyris may very well be on their way to becoming the next L’Oréal (they probably aren’t), but that’s not what we’re looking for right now. Our mandate is to research companies focused on building synthetic biology platforms, not beauty product empires.

The Best Synthetic Biology Stock

The synbio thesis has always been simple to understand. Companies with powerful synthetic biology platforms harness nature and disrupt multiple industries concurrently resulting in ginormous high-margin royalty streams down the road. We’ve seen this same story told many times with some variation around business models, and we believe that vertical integration is too capital intensive. Companies that want to invent, manufacture, and sell their own products are biting off more than they can chew. An Intel-inside model where innovations are quickly spun out to industry leaders in exchange for royalties down the road is our preferred business model. Based on that belief, Ginkgo Bioworks is the most viable option at the moment. In our last piece on Ginkgo Bioworks, we proposed a price of $2.69 a share might make the company worth another look. We’re not far from that price now as shares have fallen 75% since our article to around $3.05 per share. Here’s what the company said in an 8-K which announced preliminary 2021 results:

Ginkgo expects to report audited fourth quarter and full year 2021 financial results in March 2022, at which time it intends to provide its outlook for full year 2022.

Once that happens, we’ll get to work dissecting the Ginkgo Bioworks 10-K to see what insights we can uncover. As for Amyris, it’s not a company we would want to own at any price.

Conclusion

Beware of those companies that start with an industry-agnostic production platform and eventually pivot into some product niche that’s not overly compelling. For Intrexon, that was apple slices, and for Amyris, it’s beauty products. Putting aside their related party revenues, heavy debt load, customer concentration risk, and excessive spending, this isn’t a company we think any risk-averse investor should consider owning. Synthetic biology stocks have done nothing but punish investors so far, and approaching the space with an abundance of caution seems merited.

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