Synthetic biology pioneer Amyris (AMRS -95.20%) has taken investors on a wild ride over the past year. Shares have touched highs above $9 and dipped to lows under $2 as analysts attempted to sort out the impact from restated financial statements, coming and going debt maturities, a lifeline extended by a billionaire, and a shifting product strategy. Uncertainty has been the only certainty lately.
The dust hasn't settled yet. That's not surprising, given all of the recent moving parts and transactions, but investors might have found it difficult to keep track of everything and probably have plenty of questions. Perhaps the most important one: Can Amyris succeed with its latest turnaround?
How did Amyris get here?
Amyris is an industrial biotech company with robust analytical research capabilities. The company deploys automation and machine learning to engineer microbes to produce chemical ingredients at a commercially relevant scale. Commodity chemicals require massive production volumes to make the economics work out, while specialty chemicals can be profitable at much smaller scales.
After starting out in biofuels -- the lowest-value use of industrial biotech -- Amyris has gradually moved up the value chain. It's also altered its business model to align with peers. That is, the business partners with external companies to develop chemicals and collects milestone payments as R&D progresses. If an ingredient is successfully commercialized, then the business can earn royalties on sales, too.
While Amyris, Ginkgo Bioworks, and Zymergen have garnered headlines for inking lucrative R&D deals, the problem is that they're relatively worthless unless chemicals reach commercial production -- and Zymergen (founded by ex-Amyris employees) is the only company that appears to be consistently delivering.
The business model has only created problems for Amyris so far. Shares rose in 2018 as the business reported sizable royalty payments for a vitamin E partnership, but it turned out the business was grossly overestimating revenue due. It had to lower full-year 2018 revenue by $12 million. Meanwhile, a zero-calorie sweetener ingredient encountered delays during initial production. Investors are now pinning their hopes on cultured cannabinoids. Have recent transactions set up the business for success?
What are the bull and bear cases?
A sunny outlook starts with the fact Amyris has retired $87 million in convertible debt this year. It did so by selling the vitamin E royalty stream to DSM (the company that was paying the royalty) for $57 million, securing a $34 million private investment led by billionaire board member John Doerr, taking out a short-term loan for $8 million from Doerr's equity firm, and issuing a new debt note to shareholder Total SA in lieu of paying back the old one.
Now the company can focus on its most lucrative opportunities, such as cannabinoid ingredients produced from genetically engineered microbes. Amyris has an R&D deal with LAVVAN that could be worth up to $300 million in development and milestone payments plus long-term royalties. Cannabinoids might just hit the sweet spot of value (the price per kilogram is sufficiently high to make fermentation profitable on paper) and volume (consumer markets are huge) to deliver the business and shareholders to the promised land.
The bear case is simply that Amyris certainly hasn't earned the benefit of the doubt from investors. Recent transactions mirror the playbook used in 2015 to convert and restructure $175 million in debt, which also came with a $25 million private investment and hopes that new products (bio-opioids, a hand cleaner product, a cosmetic brand, and farnesene) would lead a turnaround. Only the cosmetic brand remains active today. In fact, the business has so far failed to commercialize malaria treatments, renewable transportation fuels, polymers, lubricants, solvents, direct-to-consumer hand cleaners, and pharmaceutical ingredients.
The company also has a troubling history of selling assets and intellectual property for pennies on the dollar to repay debt. It sold off its renewable diesel and renewable jet fuel portfolio to Total in 2014, its sole production facility to DSM in 2017, and then its entire vitamin E technology chain to DSM in early 2019. To be blunt, Amyris has been much better at storytelling and kicking the debt can down the road than building sustainable operations to date. So skeptics doubt it will be different this time around.
Too much uncertainty to get excited
There are still too many unanswered questions for investors to get carried away with the latest turnaround pitch. Amyris still needs to file its 2018 annual report and Q1 report with the Securities and Exchange Commission, which will reveal more details about recent transactions. Investors also have relatively little idea about the company's cash position. Considering the business reported an operating loss of $120 million in 2018, it's likely to require significant new capital just to keep the lights on. And while the cannabinoid project could expedite the turnaround, it hasn't progressed beyond lab scale. Therefore, investors need to remain grounded when evaluating this synthetic biology company's path forward.