Can Amyris Inc. Save Deep-Sea Sharks and Expand This Market by 230%?

Blue sharks have been identified as the culprits of 13 attacks on humans in the last 430 years, according to the International Shark Attack File. There are likely more attacks that have not been reported or successfully identified, but don't worry -- humans have returned the favor by killing up to 20 million blue sharks each year. Legal or illegal, the motivation is simple: Shark products represent a big economic opportunity. The shark's skin can be used for leather, its fins can be prepared in soups, and the remaining meat can be processed into fish meal. And if you get two or three shark livers you can make about 1 liter of the high-value emollient squalane, which sells for $30 per liter, or $114 per gallon.  

Can engineered yeast save deep-sea sharks? Source: Wikimedia Commons.

Good news for deep-sea sharks: Synthetic biology pioneer Amyris (NASDAQ: AMRS  ) has engineered yeast to create the hydrocarbon farnesene, which can then be processed into large amounts of high-quality squalane. The emollient is naturally produced by your skin to prevent moisture loss; thus, it's an important ingredient for numerous global cosmetic brands offering skincare lotions, hair care creams, hand washes, lipsticks, and various other personal-care products. In fact, you may have used a product containing squalane today. Several Avon (NYSE: AVP  ) products, the St. Ives brand from Unilever (NYSE: UN  ) , the Cover Girl and Olay brands from Procter & Gamble (NYSE: PG  ) , the Nivea brand from Beiersdorf, the Dial brand from Henkel, the Aveeno and Johnsons brands from Johnson & Johnson, and many others list squalane as an ingredient.  

Despite its perceived prevalence, manufacturers have largely abandoned the emollient because of sourcing concerns (shark liver and ultra-refined olive oil) that have led to volatile supply and pricing. The squalane market has shrunk to just one-third of its size by volume in the last decade as a result. However, manufacturers and suppliers are rushing to Amyris' novel synthetic biology platform in hopes of returning the squalane market to its previous glory. Amyris has grander plans.

The case of the missing squalane
The squalane market has shriveled from 7,500 metric tons annually 10 years ago to just 2,500 MT today. Simply put, shark livers (irregular and perhaps illegal supply) and olive oil (crops decimated by drought in recent years) cannot serve as stable annual sources of the emollient. Who knew! Of course, given the lack of alternatives, the market is still dominated by shark- and olive-derived squalane. That's about to change.

Amyris ran into problems as it began to ramp production at its first commercial scale facility in Brotas, Brazil in 2012, but still exited the year supplying 10% of the global squalane market. The company continued to march to higher production volumes in 2013 and managed to end the year with an 18% hold on the market while supplying squalane to over 300 unique brands.

*Numbers are approximate. Sources: Amyris presentation, author calculations.

It's important to note that Amyris supplies squalane to distributors around the globe, which then sell the emollient to personal-care product owners such as Avon, Unilever, and Procter & Gamble. Such a model is more capital friendly and allows Amyris to leverage the existing infrastructure within the industry while focusing on producing its molecules as cheaply as possible. Two molecules of farnesene, the company's versatile building block molecule, are required to make one molecule of squalane. It appears to be close to a 1-to-1 ratio on a volumetric basis as well, so it likely costs Amyris about $7-$8 plus additional minimal processing costs to produce 1 liter of squalane. Not bad considering the current market price of $30 per liter, but expect production costs to fall even further in the future.

While the company will continue to replace rare traditional sources of squalane, CEO John Melo doesn't want to just capture market share. He wants to create it. The global annual squalane market stands at roughly 2,500 MT, or 3.1 million liters, today. Given current prices the market represents a $93 million opportunity today. That's a far-cry from the market's historical peak value of $180 million. It's even more distant from the $300 million market Melo envisions his company's platform enabling. Can Amyris really capture and create market share?

Get ready for a squalane renaissance
You can laugh at the fact that Amyris' 18% market share represented just 450 MT of squalane exiting 2013, but that volume will fetch $13 million-$15 million in revenue in 2014 -- nearly equivalent to total renewable product sales realized last year. What high-value specialty chemicals lack in volume they make up for in selling prices. Besides, the potential future value of Amyris' squalane supply is anything but laughable.

Using current market prices, a $300 million market would be supported by roughly 8,100 MT, or 10 million liters, of the emollient. If the company can successfully expand the squalane market and account for the bulk of the added volume (where the heck else would it come from?) then sales of squalane could represent a megaopportunity for Amyris without taking up much production capacity. Here are a few step-wise scenarios to consider on the way to building a $300 million squalane market.

Amyris Squalane Volume (MT)

Amyris Squalane Volume (L)

Market Value ($USD)

% Brotas Capacity*

Deep-sea Sharks Saved

1,000

1.2 million

$37 million

4.9%

3 million

2,000

2.5 million

$74 million

9.9%

6 million

3,000

3.7 million

$111 million

14.8%

9 million

4,000

4.9 million

$148 million

19.8%

12 million

5,000

6.2 million

$185 million

24.7%

15 million

6,000

7.4 million

$222 million

29.6%

18 million

7,000

8.6 million

$259 million

34.6%

21 million

*Expressed on a farnesene basis, although other molecules are produced. Source: Amyris for approximate market price, Author calculations.

Although deep-sea shark liver and ultra-refined olive oil currently represent approximately 2,050 MT of the annual global supply of squalane, they're quickly being replaced by Amyris. It's difficult to say if they will be completely squeezed out of the market, or if other sources of farnesene will arrive to take small minority stakes in the market, but the company remains in a unique position. Consider that producing 5,600 MT of squalane each year, or the entire expanded volume of the market, would give Amyris a 69% market share. Wouldn't an expansion of the market result in lower average selling prices? Perhaps, but if Amyris can grab a stranglehold on the market and provide a consistent, sustainable supply of squalane it would have a pretty big role in determining the market price. I don't think Avon, Unilever, or Procter & Gamble would mind, either.

Foolish bottom line
The ability to engineer yeast to create a global supply of a constrained, highly coveted molecule at significantly reduced costs compared to traditional sources highlights a small sliver of the awesome potential of synthetic biology. Amyris could accomplish amazing things, while returning out-sized gains to investors, with more than just the squalane, however. The company plans to launch its second flavor and fragrance molecule in the next year or so and capture 40% of the market within the second year of production. It will represent a smaller volume than even the squalane market, but will sell for much higher prices to make up for it.

Now, Amyris isn't a perfect short-term investment. Some analysts and industry watchers weren't thrilled with the planned slow pace of ramp-up at Brotas in 2014, and the conversion of debt issued from past mistakes will result in share dilution in the future. However, I see an amazing long term opportunity, especially at a lowly current market cap of roughly $320 million. That seems like a steal for a company that will be able to produce over $1 billion in annual revenue at 60%-70% margin, expand production capacity by at least 400%, keep your skin moisturized better than lower-quality emollients currently used in personal care products, and save millions of sharks by the end of the decade. Sounds pretty Foolish to me.

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