Is BioAmber a Good Long-Term Investment?

Sustainable chemicals company BioAmber (NYSE: BIOA  ) had a relatively quiet IPO in May. That could be attributed to the lack of enthusiasm surrounding industrial biotech companies in the last year, all of which have fallen dramatically from their overhyped IPO prices or the fact that the company is (gasp) not targeting biofuels in any way (that is actually a positive, but it comes with less fanfare). Whatever the reason, several investors I have spoken to who are interested in the industry had no idea that BioAmber even existed. Ouch. So let's walk through a crash course on the company and see if it represents a good long-term investment.

What does BioAmber do?
BioAmber has licensed an initial yeast strain from Cargrill, a genetic pathway from Celexion, and process technologies from Du Pont. Throw it all together and you get some scary potential. The company is focused on developing efficient microbial pathways for C6 building block molecules, or molecules that contain six carbon atoms. The company's first target is bio-succinic acid, which represents a $10 billion market for polyesters, plastics, and spandex.

Source: BioAmber S1 filing.

After accounting for additional precursor molecules in development such as adipic acid, caprolactam, and HMDA (all important for nylon fibers), the company's total market opportunity rises to more than $30 billion. That may not seem like a grand total, but companies are intrigued by the its carbon-neutral process for producing these dirty chemicals. One day, the carpet in your house may be produced by chemicals supplied by corn-fed microbes at BioAmber. Crazy, huh?

What are the opportunities?
Aside from the $30 billion market opportunity noted above, BioAmber offers investors a streamlined play in industrial biotech. The company is building its first commercial-scale facility for bio-succinic acid production in Canada with partner Mitsui. The facility will have a nameplate capacity of 30,000 metric tons -- with an option to upgrade to 50,000 metric tons -- and is on schedule for commissioning and start-up in 2014. The two partners are planning two additional commercial-scale facilities in the next three to four years.

BioAmber has more than 19 customers lined up to buy commercial quantities of bio-succinic acid, including global giants such as Mitsubishi Chemical, LANXESS, Faurecia, and NatureWorks. Some are locked in to buy 75%-100% of their succinic acid needs from the company. Cha-ching!

That is an amazing feat for any developmental stage company, but it pales in comparison to another accomplishment. BioAmber has operated in 350,000 liter bioreactors -- the largest in the industry -- at its demonstration-scale facility in France since January 2010. To put that in perspective, take a look at how it stacks up to peers:  

Company

Largest Bioreactors Continuously
Operated to Date

BioAmber

350,000 liters

Solazyme (NASDAQ: SZYM  )

128,000 liters

Amyris (NASDAQ: AMRS  )

250,000 liters

LS9

135,000 liters

Genomatica

240,000 liters

Source: Company news releases.

Additionally, BioAmber offers investors a huge opportunity by taking the road less traveled. By not targeting molecules with fuel applications, the company won't be immersed in the controversy surrounding biofuels. That is a smart move for a lot of reasons. The low margins and high volumes required to become a force in the fuel industry make it a nearly impossible target for developmental-stage industrial biotech companies -- as Amyris found out before correcting course last year.

And, of course, there is sustainability. Recent life cycle analyses show that just 0.04 kg of carbon dioxide is emitted per kilogram of bio-succinic acid produced. That compares quite favorably to the 7.1 kg of carbon dioxide per kilogram of succinic acid produced from petrochemical processes. The company is also less dependent on sugar costs because 25% of the carbon that ends up in its bio-succinic acid is derived from carbon dioxide supplied during fermentation. Now it's easy to see why 19 customers are waiting for shipments.

What are the risks?  
The company has produced only 1.25 million pounds (568 metric tons) of product to date, but that is mostly attributable to a lack of capacity rather than a lack of competency. That may worry some investors, though. Its biggest competitor, Genomatica, produced 5 million pounds of butanediol -- a major derivative of succinic acid -- over a five-week period in late 2012 and is quickly turning heads throughout the industry as it races to full commercial scale. That is a pretty big deal. The butanediol market represents a $4.3 billion opportunity, or roughly 22% of the company's total bio-succinic opportunity.

Foolish bottom line
I believe that there is a lot of value in the industrial biotech industry right now for long-term, buy-and-hold investors. BioAmber has dropped since its debut, but if snagged at the right price, I believe it could be a solid long-term investment. It is closer to commercial scale than other industrial biotech peers. Just be sure to keep an eye on Genomatica, which will soon be operating in 600,000 liter bioreactors in a 100 million-pound-per-year facility.

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