Amyris (NASDAQ:AMRS) announced today a new partnership with Dowell C&I Co., Ltd. to distribute its Neossance Squalane product in the Republic of Korea. Demand for the renewable squalane in Asia has been strong, but is a specialty chemical commonly extracted from the livers of sharks enough to help Amyris turn a profit?

Shark liver oil? Really?
Squalane is currently sourced from shark liver oil or refined olive oil, but Amyris is able to refine the chemical from sugarcane feedstocks. Amyris is finding demand for its renewable squalane product primarily in the cosmetics industry. But for a company that has only been publicly traded for a little over three years, is delving into smaller, specialty chemical markets really the best way for it to establish itself as a renewable chemical company?

To answer briefly, yes.

Overcoming the barriers to entry in the grander field of transportation fuels is a task that goes beyond the current capabilities of most bio-based product companies. Though collaborations between Amyris and Total (NYSE:TOT) are working toward the development of renewable transportation fuels built from the same sugarcane-based starting chemical that squalane is refined from, the venture should not totally overshadow the importance of specialty chemicals in the long-term success of Amyris. The long-term success of renewable diesel, renewable jet fuels, and renewable squalane are all dependent on the ability of Amyris to cost-effectively scale up the production process of the sugarcane-derived Biofene building block.

Surviving scale-up
Amyris' primary focus in achieving long-term growth is establishing commercial-scale production of Biofene, the company's brand of renewable farnesene. Biofene is a renewable hydrocarbon that can be refined in various ways to create a variety of renewable chemicals that serve as alternatives to petroleum-derived products.

To scale-up the production of Biofene, Amyris needs money. Collaborating with an oil giant like Total who carries a $130 billion market cap helps, but so does getting products to the market. Marketing a product like squalane is a brilliant approach that other biofuel companies can learn from.

The last major announcement from Amyris regarding production numbers indicated a production rate milestone of 1 million liters of farnesene in 45 days, which met conditions for future financing considerations. Assuming this production rate is sustainable and that there are limited interruptions over the course of a year would equate to annual production of about 8 million liters (30 million gallons), which amounts to less than 3% of Brazil's annual diesel consumption. Directing all of this capacity toward the production of renewable diesel that would be sold in Brazil at an end-market value hovering around $6.50/gallon through 2013 would generate $195 million in revenue. At play in this calculation are the massive assumptions of 100% conversion efficiency of farnesene to diesel and unrealistic market value sale prices. All things considered, the best case scenario if Amyris were to direct all farnesene produced toward the production of renewable diesel would be relatively modest revenue returns that don't add up to net income when all costs are considered.

Squalane changes the conditions. 1 million gallons of squalane goes much farther in its respective market than does 30 million gallons of diesel as a fuel. The bigger and more important consideration are the margins that can be realized through specialty chemicals compared with transportation fuels. In establishing supply agreements for the sale of hundreds of tons of squalane to Europe, Japan, and South Korea, Amyris is able to realize the best return on what is currently a product with a limited supply. As production capacities and efficiencies continue to improve, Amyris can transition to lower-margin sales of renewable diesels, but until then there is no shame in letting a shark oil substitute develop as a cash cow for the company.

The takeaway
Shark liver oil may not make Amyris the biggest biofuel fish in the sea, but specialty chemicals just might. Convincing consumers to place plant-based fuels in their vehicles may be a stretch, but convincing consumers to use sugar-derived ingredients in cosmetics in place of fossil fuel-based ingredients seems like a much easier sell. As Amyris sees more success in niche markets, which it seems it will, the company will build up the resources needed to dive into bigger markets.

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