3 Takeaways From Amyris' Production Update

Investors have traveled a long and arduous road with synthetic biology pioneer Amyris (NASDAQ: AMRS  ) in the last several years. Once valued at more than $30 per share and sporting a market cap in excess of $1 billion, the company now trades at less than $200 million. Production gaffes exposed an inefficient corporate cost structure, which led to numerous rounds of dilutive debt offerings gobbled up by partners, such as Total (NYSE: TOT  ) , and dealt a massive blow to investor morale. Amyris has dug a mighty big hole that is stuffed full of red flags, but there is a tremendous amount of potential that is difficult to ignore.

In a recent sign of progress the company announced that it had achieved a production run rate of 1 million liters of the renewable hydrocarbon farnesene, its first commercial building-block chemical, over a 45-day period. It's a major production milestone for the company's first commercial scale biorefinery in Brotas, Brazil, although many obstacles remain. Here are three things investors can takeaway from the announcement.

Ramp-up progress
Brotas began operations in December 2012, achieved steady-state production in all six 200,000 liter fermenters in July, and is expected to sport a nameplate capacity of 50 million liters after a three-year ramp-up period. Hitting the recent production milestone will allow Amyris to raise money at less dilutive prices (see below), but there's a ton of work to do. Consider that the facility would need to produce roughly 6.5 million liters over a 45-day period to reach nameplate capacity.

Fermenters tower over holding tanks at Brotas. Image source: Amyris

Nonetheless, continuing to successfully ramp production places the company's longer term goals of achieving cash flow positive operations in 2014 and profitable operations in 2015 within reach. Ramp-up progress will allow Amyris to achieve its production cost target of $4 per liter of farnesene by year's end and boost product revenue in each month and quarter. How can we gauge this progress? Well, the company notched record product sales of $4.2 million in the second quarter, which would amount to about $17 million per year. Annualizing the current production rate at Brotas and assuming an average selling price of $5 per liter would put product sales at about $40 million per year -- a number that becomes considerably rosier when you throw in continually improving production between now and the end of next year.

More production also means more products will be available for collaborations, which will foster happy relationships with patient partners. Amyris and sugarcane behemoth Cosan (NYSE: CZZ  ) formed Novvi to develop sustainably sourced base oils and lubricants. The joint venture began producing large amounts of products for customer testing in the second quarter, so expect the amount of capacity dedicated to the partnership to increase in the next few months.  

A look at the products and partners patiently waiting for farnesene production to ramp-up. Image source: Amyris

Total also has a lot at stake in Amyris' progress. Aside from its continual financial support (it owns more than 20% of the industrial biotech firm); the global energy giant is banking on farnesene's ability to make major contributions to its goals of (1) greatly increasing its worldwide diesel and jet fuel production in the next decade and (2) minimizing its environmental footprint. Total has invested in a wide range of renewable technology platforms, both bio- and thermocatalytic, that could one day compete for funding. So it is imperative that Amyris make as much progress as soon as possible.  

Inching closer to second production facility
The market factored in a lot of potential when handing Amyris a valuation of over $1 billion a few years ago, but it was backed up by hard plans. The company had originally planned to build a second commercial scale facility in a joint venture with sugarcane producer Usina Sao Martinho called SMA Industria Quimica, or SMA. Construction was ultimately halted to focus on implementing its technology platform at Brotas and is not expected to restart until favorable economic conditions and production characteristics permit such an investment. 

Under terms of the original joint venture agreement Usina has the right to exit SMA and force Amyris to buy out its 50% stake if operations don't commence by the end of 2013 -- clearly not feasible. That would trigger a payment of tens of millions of dollars and be detrimental to Amyris and its shareholders. Luckily, the two have agreed in principle to amend the agreement and push back the date of commencement to 2016. Successfully ramping production at Brotas should encourage Usina to remain committed to Amyris' platform, although it doesn't guarantee it.

And of course, having a second, larger facility would be a major boost to the company's revenue potential and long-term growth prospects.

Improved financing terms
Lastly, hitting a production run rate of 1 million liters over a 45-day period allows Amyris to borrow money at more favorable financing terms. In fact, it was "one of the two conditions required to avoid a reduction in the conversion price" of the first payment of a $60 million offering of senior convertible promissory notes. The payment will help fund operations and pay back a $35 million bridge loan (yikes!) acquired earlier this month. There's nothing fantastic about the company's financial position, which remains the largest red flag for investors. Hopefully we're close to seeing the last debt offering. By the end of next year Brotas should be producing around 3 million liters of farnesene over a 45-day period, or annualized product revenue of about $120 million at an average selling price of $5 per liter. That could actually make cash flow positive a reality when combined with collaboration revenue. 

Foolish bottom line
In case you haven't caught on by now, the best way for Amyris to increase its financial and operational independence and regain power at the bargaining table is to continue to make progress with production at Brotas. I'm keeping a watchful eye on developments, but I'm not holding my breath. Even in a best case scenario it will take years for Amyris to regain its footing and rebuild investor morale, but the process has to begin somewhere. The recent announcement was a big first step.

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