Is Amyris on the Path to Profits?

Synthetic-biology pioneer and renewable-hydrocarbon company Amyris (NASDAQ: AMRS  ) has had a tough public life thus far. After a successful IPO, the expectations were high, but production snags and less-than-perfect capital decisions led to a downward spiral for investors. Management continues to make some tough decisions and is working toward reducing costs on its way to achieving positive cash flow in 2014 and a profitable business in 2015. What can investors learn about the future from the first two quarters of 2013? The recent earnings release is a good place to begin.

Production updates at Brotas
The company made progress at its first commercial scale facility in Brotas, Brazil, which is now running all six bioreactors. That doesn't mean the biorefinery is operating at full nameplate capacity -- nearly 50 million liters -- just yet, however. That process (ramp up) will take about three years to complete. Nonetheless, management believes the company is on track to produce its flagship molecule, farnesene, at roughly $4 per liter by the end of 2013. Average selling prices for the quarter were $8.38 per liter, although that will trek downward as lower margin products increase their share of the product mix.

The company's first biorefinery in Brotas. Source: Amyris.

Progress in production at Brotas allowed the company to terminate its final contract manufacturing agreement with Tate & Lyle. Amyris incurred a short-term cost in the process but should reduce financial obligations in the long term -- all part of the plan to become cash-flow-positive next year.

Most of the company's revenue still comes from collaborations, but it did generate a record $4.2 million in renewable product sales. Nearly one-third of that came from renewable diesel sales. In fact, Amyris' diesel has been used for more than 15 million miles in Sao Paulo and Rio alone. The ability to disrupt conventional diesel and jet fuel supply is exactly why Total (NYSE: TOT  ) remains the largest backer of the company's synthetic biology platform. Total even boasts about its investment on its website.

So much for Shark Week
Fuels are a big part of the company's plans, but they are far from the only products being produced or conjured up. Sales of NEOSSANCE Squalane, a high-value emollient for cosmetics, increased by 65% over the first quarter of the year. The market is turning to Amyris for a predictable and steady supply of the chemical, which is traditionally derived from shark and olive oil. An olive shortage (how horrible!) and international regulations on shark-derived products are driving the transition, which will soon result in Amyris controlling the global supply of squalane.

The company supplies SEPPIC for a majority of its needs, as well as Laserson in Europe, CenterChem in the United States, and Nikko in Japan and Asia -- all among the top names using the chemical. You can already find the company's squalane in hair and beauty products at Sephora and on QVC. It still doesn't have the revenue power of Solazyme's Algenist product line, but it has started commercial life with a bang. I expect the global squalane market to expand once Amyris reaches full production capacity at Brotas and adds more capacity elsewhere.

Base oils, flavors, and tires
Scientists are working on producing more molecules with the novel platform and even hinted that the company is developing single strains that can produce multiple molecules. I'm confident that day will surely come, but it is still some time away. Besides, there is no shortage of applications for farnesene.

A look at the company's product portfolio focus and potential. Source: Amyris.

Amyris sold farnesene to its lubricants and base oils joint-venture with feedstock supplier Cosan (NYSE: CZZ  ) called Novvi, which began producing large amounts of base oils for customer testing. The pair expect to increase the sales volume of farnesene to the JV in the coming quarters, which will push down the average selling price for Amyris. Cosan is one of a handful of the world's largest feedstock suppliers, including Bunge and Archer Daniels Midland, trying to increase margins with the nascent industrial biotechnology industry. Hopes remain very high. 

Farnesene was also sold to Japanese specialty chemicals giant Kuraray, which is developing synthetic rubber from the molecule. It is now being field-tested with three major tire manufacturers.

Additionally, Firmenich, International Flavors and Fragrances (NYSE: IFF  ) , and Givaudan are developing oils and other ingredients from farnesene for the flavors and fragrance industry. Much like the global squalane market, Amyris can provide stability and quality improvements to the flavors and fragrance industry without sacrificing sustainability. As with other companies, Amyris and IFF will produce novel ingredients for consumer products and share in sales from commercialized products. Firmenich will be the first to commercialize a product, though. The pair will begin producing a novel fragrance oil molecule at a specialty contract manufacturing site later this year.

Foolish bottom line
Progress is certainly being made, but there is a long way to go on the road to profits. More than $60 million in annual revenue -- and 80% of 2013 operating expenses -- comes from collaborations. It's good to see so many partners interested in synthetic biology, but investors will have to be patient for product sales to pick up. That could take some time, since the ramp-up at Brotas will occur over a three-year period. Expect to see steady progress continue at Amyris with further product and partner announcements -- and, unfortunately, more debt offerings -- in the coming quarters. I'm not sure it belongs in my portfolio just yet. 

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