One of the single-biggest issues facing investors interested in synthetic biology pioneer Amyris (NASDAQ:AMRS) has been a relatively simple one: product gross margin. The business has routinely spent more money manufacturing products than it has received selling them. In 2019, the business spent $1.27 for every $1 generated from product sales. Needless to say, it's an unsustainable strategy. 

But first-quarter 2020 operating results showed a surprisingly quick turnaround. Amyris reported a product gross margin of 34% -- easily the best in the company's history. Considering the company's history of overpromising and underdelivering, what should investors think of the latest results and the potential trajectory of the small-cap stock?

A stick figure businessman standing on ascending arrows.

Image source: Getty Images.

By the numbers

Amyris is an industrial biotechnology company. It employs scientists who command robots and software to genetically engineer microbes capable of producing renewable chemicals. The business sells bulk ingredients to other companies and markets its own direct-to-consumer brands in cosmetics, personal care, and food markets. 

As is the case for many synthetic biology companies, Amyris has struggled to find its way. The pioneer has thrown its technology platform at markets ranging from renewable fuels to fragrances to cannabinoids because, well, everyone else was doing it. The reality is these markets were never great fits for existing industrial biotech platforms, which many companies have discovered (or will soon) the hard way. 

Although not as sexy as changing the world or disrupting this or that market, consumer brands are by far the superior play for synthetic biology companies right now. They're accompanied by the highest margins and generally don't require large upfront capital investments or deep-pocketed partners, which makes them ideal for development-stage companies looking to quickly increase financial flexibility.

Amyris has only recently begun to prioritize its consumer brands -- Biossance in cosmetics, Pipette in personal care, and Purecane in food ingredients -- but the results have been encouraging. The rapid improvements in first-quarter 2020 operating results compared to the prior year are primarily the result of strength from the company's consumer brands and the rolling-off-the-books of a large start-up expense related to a product in 2019. 

Metric

Q1 2020

Q1 2019

Change (YOY)

Renewable product revenue

$17.8 million

$11.9 million

50%

Licenses and royalties revenue

$5.2 million

$0.1 million

N/A

Grants and collaborations revenue

$6.1 million

$2.4 million

158%

Total revenue

$29.1 million

$14.4 million

102%

Cost of product revenue

$11.8 million

$17.7 million

(34%)

Product gross margin

33.9%

(48.9%)

N/A

Operating income

($31.8 million)

($49.4 million)

N/A

Data source: SEC filing. YOY = year over y ear.

As I've been explaining for years, many synthetic biology companies have inverted business models. The ideal strategy is one that prioritizes product revenue and leans on licenses, royalties, grants, and collaborations to reduce operating losses and improve cash flows. Most companies have done things backwards. 

Amyris is finally beginning to lean into the growth potential of its consumer brands, which has led to sharp improvements in total revenue and product gross margin. Operating margins still require work, but losses improved in the most recent period.

Much of the product revenue growth occurred organically. That is, Amyris is reaping the benefits of growing brand awareness for Biossance, Pipette, and Purecane. That should continue in the second quarter of 2020. In fact, it's likely to accelerate due to the coronavirus pandemic.

The highest margin sales of a consumer brand occur in direct channels, such as through the brand's website. Sales on online retailers are accompanied by the second-highest margins, while those at physical retail stores are third. The coronavirus pandemic has inadvertently pushed all shopping online -- the highest-margin channel.

Additionally, Amyris developed and launched a hand sanitizer product through its Pipette personal care brand in March. While the product sells for a premium compared to bulk sanitizer products, the company expects to produce 1.5 million units per month by the end of June. That could help the company generate $10 million in product revenue per month through the second half of 2020. 

Things are looking up, but one quarter is not a trend

I've been as tough as anyone on Amyris in recent years. While there are finer details investors need to consider when evaluating first-quarter 2020 operating results, it's possible the business is finally turning a corner. It's also possible investors won't benefit from the improvement -- yet. 

Investors who dig through SEC filings will see increasing balances of deferred cost of product revenue for Purecane products, which I'll explore in a future article. There's also the outstanding issue of cash and debt. Amyris said it expects to end 2020 with half the debt carried at the beginning of the year, but doing so will require a heavy dose of dilution from convertible debt (which converts into shares of common stock).

Simply put, right now investors have reasons for cautious optimism but no need to rush into a position. If Amyris can establish a positive and durable trend with positive product gross margin over the course of 2020, then investors can have much more confidence in the company's consumer brand strategy and execution.