Industrial biotechnology companies are often concerned with scaling up their manufacturing processes, but there's an argument that the field should focus more on scaling down in certain areas.
Take Amyris (AMRS 50.00%) as an example. The company deserves credit for surviving multiple pivots -- from malaria drugs to biofuels to performance materials and more -- since its founding in 2003, but it ended June 2020 with an accumulated deficit of nearly $2 billion and relatively little to show for it. Essentially, this industrial biotech has attempted to throw its technology platform at everything, but has accomplished next to nothing from a business standpoint.
While it demonstrated promise with a fast-growing consumer portfolio, that progress is being overwhelmed by its costly arrangements in bulk ingredients, which appear likely to continue weighing on operating metrics for the foreseeable future. To fully unlock the value of its consumer brands business, should Amyris consider splitting itself into two?
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How to not make money in engineered biology
On paper, using genetically engineering microbes to manufacture commercial quantities of chemicals sounds like a sexy idea. The promise is that a single industrial facility could produce ingredients for food, flavor and fragrance, personal care, and various other applications. In reality, novel applications of industrial biotech that rely on highly engineered microbes have mostly failed to overcome challenging economics.
That has left many companies in the field pursuing inefficient business models. Amyris generates revenue from four sources -- selling products to consumers, selling bulk ingredients to business customers, collecting royalties and licenses on rented technology, and earning collaboration payments from development partners. The latter three sources of revenue rely on bulk ingredients -- and that has been an unmitigated financial disaster.
Since the beginning of 2012, Amyris has reported a cumulative operating loss of over $1 billion, including a record first-half operating loss in 2020. No wonder the small-cap stock has lost more than 98% of its value since it went public.
The historical numbers reflect a continuous string of failures in bulk ingredients for a diverse range of products -- malaria treatments, renewable fuels, polymers, lubricants, solvents, flavors and fragrances, and pharmaceuticals. Management might hype rosy projections for current development-stage assets in cannabinoids (the active ingredients found in cannabis plants, but made by microbes instead), flavors and fragrances, pharmaceuticals, and nutraceuticals -- but its track record shouldn't instill much faith in investors.
Given its lack of success in bulk ingredients and its ongoing success in consumer products, Amyris should split itself into two companies: one focused on business-to-business (B2B) ingredients and one focused on business-to-consumer (B2C) branded products.
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How to make money in engineered biology
Consumer products have been and continue to be the low-hanging fruit of synthetic biology success. That's because the ideal business model for the field is one that prioritizes product revenue -- even if that means remaining small, shunning the growth-at-all-costs business model in the era of easy money, and not putting too much value in the vanity metrics of biotech start-up success championed by Silicon Valley (for example, the amount of venture capital raised). Of course, demonstrating success in consumer products can land a start-up huge sums of investor capital, as demonstrated by Impossible Foods.
Consumer products are simple, inherently high-margin, don't require oversize manufacturing facilities or complex financing arrangements, can be sold online or through distributors, generate recurring and relatively predictable revenue, and can be paired with slick marketing campaigns tuned to evolving trends. They're also uniquely aligned with Amyris' moisturizer ingredient, squalane, which can be monetized through virtually any cosmetic or personal care product from lotions to baby wipes.
Amyris owns three consumer brands today: Biossance cosmetics, the Pipette personal care brand geared toward infants and mothers, and Purecane zero-calorie sweetener. In the second quarter, these brands combined to generate $10.8 million in revenue for year-over-year growth of 111%.
Revenue might have been higher if not for the pandemic. While the company successfully transitioned sales to online channels (its highest-margin channels), the shutdowns of nonessential businesses cut into the volume of Biossance products sold at Sephora stores -- its sales through the chain dropped by 45% compared to the first quarter.
More products are on the way. Amyris recently received a favorable recommendation for its human milk oligosaccharide 2'-fucosyllactose, which is naturally found in breast milk and will likely become a key ingredient in an infant formula product. If it's granted a "generally recognized as safe" (GRAS) designation by the Food and Drug Administration, then the company could have a fourth B2C product line in 2021.
Look at it this way: If the consumer portfolio generates $100 million in high-margin annual revenue in 2022, and that revenue is growing by double-digit percentages, then it could be worth a market valuation of $1 billion. But that might only apply to a stand-alone business unburdened by a terrible balance sheet, bloated operating expenses, and low-margin bulk ingredient pipeline.
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A bold move that just might work
Amyris and many of its peers have been too reliant on a business model built on collaboration revenue. It seems great when large upfront payments are rolling in, and investors can always be pointed to the potential royalties just over the horizon, but the business model falls apart when the complexity of biology and economics inevitably stifle progress.
Given the company's awful track record in bulk ingredients, investors shouldn't be left with the cost burden of the unsuccessful B2B portfolio, nor should Amyris' promising consumer brands be forced to bail it out.
If Amyris split into two separate companies -- one focused on consumer products, one focused on bulk ingredient supply -- then investors would have the option to own one or both. It would unlock the full potential of the fast-growing, high-margin consumer portfolio. And, in the unlikely event the B2B portfolio stumbles onto sustainable financial footing, then it might unlock the potential value of industrial biotech that Amyris has been trying to demonstrate since 2003.
