Patchouli is fun to say and more fun to spray. While Urban Dictionary associates the fragrance oil extracted from the leaves of the exotic scented plant with hippie perfume used to mask the scent of the unbathed (among other things), patchouli oil has far more industrial importance in personal-care markets than the humorous definition would lead you to believe. You may find its scent throughout your home in laundry detergents, air fresheners, baby wipes, and more. The oil was even incorporated into a Masters of the Universe action figure sold by Mattel in 1985.
Despite its industrial potential, patchouli oil -- and the broader flavors and fragrances industry -- faces the same problems that plague the market for squalane, a high-value emollient used throughout the cosmetic industry. Current agricultural methods used to produce the molecule result in unreliable, unsustainable, and inconsistent quality of its supply. That's why synthetic biology pioneer Amyris (NASDAQ: AMRS ) and Firmenich, the largest flavor and fragrance company, have developed a novel bioprocess for producing large, quality volumes of patchouli oil from yeast.
Ripe for disruption
Patchouli is natively grown by farmers in the tropical regions of Asia, but it was introduced to Europe through trade conducted on the Silk Road. Cultivation methods haven't changed much over the centuries and still follow the same general path to monetization: Farmers grow the crop, harvest the leaves, dry them, and extract patchouli oil at an approximately 3.5% yield. The leaves can be sold before or after being dried, but the selling price captured deteriorates for each additional processing step. For instance, long-term contracts for dried leaves can fetch about $300-$350 per metric ton, but purified patchouli oil can fetch $50 per kilogram.
In other words, it pays to be as close to the end of cultivation process -- extraction -- as possible. The agricultural approach takes six months from planting to the first harvest of leaves, not including drying and extraction. Good news: Amyris has replaced the lengthy cultivation and extraction process with a single manufacturing process that produces pure, high-quality patchouli oil in about two weeks.
The future of flavors and fragrances
Amyris has set some pretty ambitious goals within the flavors and fragrances industry. In all, the company has 22 molecules under contract with the world's leading companies, which could generate roughly $1 billion in revenue by 2020. The opportunity (selling price and volume) varies for each molecule, but the aggregate potential is huge. Take a look at the opportunity presented by six of the 22 molecules currently under contract and their expected market introduction date:
How does product development work? Firmenich paid Amyris to engineer an organism to produce economical volumes of patchouli oil and scale production at its facility in Brotas, Brazil. Once produced in bulk later this year, Firmenich will pay Amyris for production costs plus a predetermined premium, and both will share in the differential from the market price. The contract structure works because the synthetic biology platform has enabled the lowest production costs for patchouli oil in the world. However, Amyris is incentivized to optimize production metrics to increase its profits from the contract -- as well as future contracts -- which could generate 60%-70% gross margins, according to CEO John Melo.
Foolish bottom line
Amyris' platform (based on the isoprenoid metabolic pathway) can target about $1 billion of the $6 billion annual market for flavors and fragrances, which is growing at a CAGR of 5% annually. Despite partnerships and development agreements with the world's leading flavor and fragrance companies, it's important to keep your expectations in check. There are several synthetic biology start-ups and organism companies targeting flavor and fragrance molecules that lie outside of Amyris' platform. A few synthetic chemical producers are beginning to develop processes for creating the high-value molecules, too. There is bound to be overlap (and thus competition for Amyris), but then again, novel production systems that offer reliable supply should lead to a global expansion of the market opportunity for each molecule.
A successful launch of patchouli oil in 2014 would add to the developmental flexibility of Amyris and could allow it to develop additional molecules more quickly. However, while successfully producing one molecule out of 22 contracted molecules does not guarantee success across the platform, it would certainly bring the company one step closer to profitability. Investors are still quite some time away from learning if the company will hit its goal of $1 billion in revenue from its current pipeline of molecules (not including tire applications). Whether or not that occurs, I believe there is plenty of room for growth from the base of $15.8 million in product revenue generated in 2013.
Is Amyris poised for incredible growth?
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