Patience is Key After Amyris Earnings

The waiting game continues at synthetic biology pioneer Amyris (AMRS -33.33%), although investors know they'll have to demonstrate patience for considerably longer before the company's platform lives up to its true potential. The company made progress in production at its first commercial scale facility in Brotas, Brazil, and in raising capital from committed partners such as energy giant Total. More production allowed more product sales to Novvi, a joint venture with Cosan (CZZ), although it occurred at the expense of lower selling prices.

Successfully commercializing the first fragrance molecule with partner Firmenich early next year will pave the way for higher-value products, while additional oils and fragrances being developed with International Flavors & Fragrances (IFF 0.32%) hold even more promise for the company's future. Let's not get too carried away, though; there are still quite a few obstacles to overcome in the near term, especially financially. Investors can find full financial results in the company's press release, but here are the important numbers from the third quarter:

*Beginning of 2013 Source: Amyris

It is obvious that production progress at the Brotas site will be the most important driving force in the company's financial future for the next several years. While Fools sleep soundly at night by taking a long view of the companies they own, each successive quarter will help determine the trajectory of Amyris' long-term future.

Production expectations
Several numbers trickled out in the recent earnings announcement that we can piece together to gauge progress. You just have to know how to put them together.

Source: Amyris, Author's calculations

The average selling price per liter of farnesene dropped considerably, but that was expected as sales of lubricants with Cosan increased in the product mix. Previously, most of the company's sales were the emollient squalane -- the highest-value product made from farnesene -- to the cosmetic industry, as well as renewable diesel -- one of the lower-value products offered -- to various Brazilian transportation authorities. The good news is that production costs have improved mightily with increasing production and are expected to drop to $4 per liter or lower by the end of the year. That will insulate margins even as average selling prices continue their trek downward due to an increased presence of lubricants. 

One thing investors in industrial biotech will have to get used to is scheduled downtime during Brazil's inter-harvest periods, when sugarcane stockpiles dwindle to annual lows. Thus, Amyris is expected to shut down Brotas for several weeks in the beginning of next year. That may sound scary, but all production facilities are actually built around an engineering year, which may only be 325 days. The other 40 days of the year act as a buffer against scheduled and unscheduled downtime for improving a facility's process or upgrading equipment -- and that's exactly what the company plans to do. Any operational days achieved on top of the designed engineering year are considered gravy. 

Questionable statements
Management expects total farnesene production for 2013 to come in at more than 4 million liters. Interestingly, management stated the nameplate capacity of Brotas would only be 40 million liters. That's down considerably from an expected nameplate capacity of 50 million reported in an SEC filing earlier this year. Does the company no longer think it can create the yeast strains necessary for the higher figure? If so, what gives?

Amyris brass also noted that by year's end Brotas will be producing at an annualized run rate of 8 million-12 million liters of farnesene. That doesn't quite jive with the company's 2014 guidance for renewable product sales (discussed below). How would that affect ramp-up, or product sales to partners such as Total, Cosan, and International Flavors & Fragrances? There are a lot of unanswered questions swirling around two seemingly simple statements.

Outlook
Management expects to generate $11 million in collaboration revenue and between $8 million and $11 million in renewable product sales in the fourth quarter. The former is tied to achieving production and commercialization milestones, which doesn't seem too unlikely given recent progress. I wouldn't be surprised if the number came in a bit lower, however, considering only $7 million is needed to hit the low range of full-year collaboration revenue guidance. 

The company expects to cover about 80% of its operating expenses with collaboration funding in 2014 while doubling renewable product sales to between $40 million and $46 million. I expected higher revenue next year assuming Brotas continues to ramp production on its way to nameplate capacity by mid-2016.

Source: Amyris

For instance, consider that the high range of renewable product sales equates to just more than 10 million liters of production at a selling price of $4.50 per liter. However, the company will be operating at the run rate needed to achieve that total by the end of this year. I'm perplexed by management's expectations. Surely, Amyris will continue to ramp production in 2014. Perhaps management is purposely low-balling expectations?

If you want to take an even longer view, CEO John Melo believes that by 2020 Amyris could hold 30%-40% of the flavor and fragrance supply for the molecules it is commercializing with the industry's leading companies, including International Flavors &Fragrances and Givaudan. That would be incredible, especially considering the higher selling prices realized for the products. If the company can continue building momentum with its high-value emollient, squalane, to the end of the decade, the product mix would have a healthy dose of high-margin products. Of course, given the amount of progress left to be made investors shouldn't put much value in predictions for 2020. Just feel good knowing management is taking a long-term view with its disruptive platform.

Foolish takeaway
The number of unknown variables at Brotas may have Wall Street analysts scrambling to fix their models every time Melo sneezes, but individual investors with a long-term view shouldn't be as concerned. I would certainly keep an eye out for further production updates in the remainder of the year, especially since the bulk of collaboration revenue expected in the fourth quarter is riding on hitting milestones. Additionally, I'll be waiting to see how production at Brotas progresses in the beginning of next year to determine if management is purposely setting low expectations.