Suing This Synthetic Biology Pioneer Is Silly

Shares of synthetic biology pioneer Amyris (NASDAQ: AMRS  ) closed Tuesday down 5% and opened today down as much as 8% on news that an investor was bringing a lawsuit against the company with Milberg LLP. Cue the parade of law firms initiating their own class action lawsuits for their piece of the pie. While I do think Amyris management got a little ahead of itself in early projections, I also think this lawsuit is baseless.

The accusations
The lawsuit claims that Amyris and management violated the Securities and Exchange Act of 1934 between April 29, 2011 and Feb. 8, 2012. The company is accused of "making false and misleading statements regarding its ability to sustain commercial production of Biofene." Biofene is the company's renewable form of farnesene, a building-block molecule that can be refined into thousands of value-added chemicals including high-value squalane for cosmetics. And, of course, the share price dropped considerably (otherwise, there would be no lawsuit).

Commercial reailty
On May 5, 2011, the company released its production timeline, which turned out to be the biggest mistake it ever made. Management claimed that it would produce 6-9 million liters of Biofene in 2011 and 40-50 million liters in 2012. After running into contamination, scalability, and separation issues, actual production volumes totaled much less than that.

The company's first commercial scale biorefinery in Brotas, Brazil. Source: Amyris.

Those projections sure look laughable now, but at the time Amyris had a healthy stable of production facilities online or under construction. Third-party manufacturers were producing Biofene in North Carolina, Spain, Brazil, and elsewhere. The company was also building its own commercial-scale facilities in Sao Paulo, Brazil: one in Brotas (currently operating) and one with Usina Sao Martinho (construction on hold).

Couple the challenge of scaling an industrial biotech platform -- remember, this industry is walking into the unknown -- with less than efficient financial operations and you get the current state of affairs. Contract manufacturers were axed to save money and the facility at Brotas seems to have been scaled down from its ambitious targets. The biorefinery employs six 200,000 liter bioreactors -- fewer than the 240,000 liter tanks operated at some contract sites. My crude calculations show this facility will likely produce just 15 million liters of nameplate capacity each year.

Lesson learned
The financial situation at Amyris is less than enviable. Whereas fellow industrial biotech company Solazyme has hit every major milestone and had no problem raising funds, Amyris has had to take the more dilutive route for shareholders. Still, large commercial partners Total (NYSE: TOT  ) and Cosan (NYSE: CZZ  ) haven't backed down in their support of the company. Total upped its investment in Amyris during several rough patches in the past year after incurring significant paper losses on the roughly 20% stake in the company. Total even has its own webpage for the partnership, which speaks to its long-term vision for Amyris' platform, especially in renewable diesel.

Cosan has expanded its joint venture Novvi as recently as March. Many industrial biotech companies have chased cheap feedstock sources for initial operations, which makes Brazil's sugarcane an easy target. Similarly, sugar producers can diversify their businesses by investing in industrial biotech. Cosan is looking to steer production away from sugar (commodity) and ethanol and into higher-value lubricants and base chemicals with Amyris' platform.

In recent months, Amyris has also courted Firmenich, Givaudan, and International Flavors and Fragrances for (ahem) flavors and fragrances and expanded product development with Kuraray for polymers and plastics. To say that international manufacturing companies are excited about the company's products is an understatement. It will take time for the company to get on sturdy financial footing, but I'm cautiously optimistic Amyris has a bright future ahead of it.

Foolish bottom line
It doesn't look like management intentionally misled investors. Instead, the group likely underestimated the challenge of growing its yeast at commercial scale. It also doesn't look very good for the investor to bring the lawsuit almost 16 months after the period that caused him or her so much financial pain. This is just a reminder of what can happen when you invest in a developmental-stage company in a nascent industry. My advice: Take a long-term approach, don't lose sleep over pops and drops, and don't bring about lawsuits over movements in share price that occur during a 10-month period.

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