This Next-Generation Biotech Just Set the Stage for a Big 2015

A worker inspects a bottle of farnesene from Amyris' production facility in Brotas, Brazil. Image source: Amyris

The road to success is rarely a straight line. That's especially true for synthetic biology pioneer Amyris (AMRS +0.00%), which has taken investors from over $30 per share all the way down to $1, then back up to $5 in just the last several years. Today, shares are trading near the $3 mark, but don't be mistaken by Wall Street's impatience: this is the healthiest the company has ever been.

The next-generation biotech selling cosmetics, fuels, industrial solvents, fragrances, and more from the same technology platform made that evident during the fourth quarter and full-year 2014 earnings conference call held this week. There are still headwinds and risks facing the company and its growth, but continued progress is beginning to provide a cushion for shareholders. Here's what investors need to know about the most recent quarter and, more importantly, where the company is headed.

Product revenue, production costs, and expanding portfolio
The guidance handed down by management in the most recent third quarter called for $30 million in product sales for all of 2014. To achieve that, Amyris needed product revenue of $11.7 million in the fourth quarter. Unfortunately, the company only managed to muster $4.7 million for the final three months of the year. What happened?

The company lost a "significant renewable fuel deal with a leading global" airline when oil prices collapsed, while foreign exchange headwinds affected final results for the quarter. Amyris doesn't rely heavily on renewable fuel sales in general, which comprised just 20% of total revenue last year, but losing the sale had an outsized effect due to the relative immaturity of its other commercial product offerings. 

A big uptick in renewable product sales was offset by lower than expected collaboration revenue, which was the result of Amyris restructuring partnerships from upfront payments to milestone payments. The switch affected and will affect the timing of when the company can realize collaboration revenue, but it was a necessary step that really won't have a long-term effect on shareholders.

While the quarterly product revenue miss was disappointing, Amyris finished the year with respectable growth in full-year product revenue. More importantly for long-term growth opportunities, production costs fell handsomely despite the greatly increased output from the manufacturing facility in Brotas, Brazil.

Source: Amyris press release

That brings us to an important point I've tried to hammer home: Rather than focus on product revenue, investors should focus on production costs. Lower manufacturing costs will allow more markets to be entered profitability, which will result in production volumes and product revenue growth. The huge year-over-year drop in production costs is the primary reason I labeled Amyris my favorite stock to buy in 2015 -- and the trend is getting better entering the new year.

Consider how the company's production costs have fallen since 2013 with the introduction of new engineered yeast strains and process improvements expressed on a farnesene basis (farnesene is the flagship innovator molecule of Amyris' platform).

Source: Amyris

Amyris realized an average production cost of $3.40 per liter in 2014 -- better than the best production achieved in all of 2013. Fourth quarter production costs were more than $1.50 per liter -- or over 40% -- less than the best achieved in 2013. It will take time to see the production advantages appear in quarterly performance, since the company must make its way through inventory that was produced at higher cost. Nonetheless, the precipitous drop has provided the opportunity to pour resources into marketing and sales efforts this year to ramp product sales in existing markets and seed new markets.

Investors can expect a busy year in 2015. Amyris will launch or ramp several new products including industrial solvents, Muck Daddy (my favorite brand name) industrial hand cleaners, Biossance cosmetics (to compliment the current Neossance cosmetics), and two new fragrance compounds derived from farnesene. When coupled with increased rates of production at Brotas and growth from existing product portfolios, total product revenue is expected to more than double to roughly $50 million.

Management's initial guidance for 2015
Management has a bad history of overpromising and underdelivering. Whether missing full-year product revenue guidance or predictions for reaching cash flow positive operations, investors should be aware of the gaps between past promises and actual performance when considering future guidance (at least until management becomes more accurate with guidance).

With that in mind, here's how management expects 2015 to unfold:

Source: Amyris conference call.

A few important things to note.

• Fuel sales will make up less than 10% of product revenue. If that doesn't demonstrate that Amyris is no longer solely focused on renewable fuels production, then I don't think anything will.
• Amyris should achieve cash flow positive operations in the first quarter. While that's based on the ability to cover annual capital expenditures of up to $8 million, not cash operating expenses of up to $85 million, the company expects to increase working capital by at least $5 million before the end of the year. 
• Amyris ended the year with $43.4 million in cash -- the largest balance to end a year since 2011. That won't be enough to cover total companywide operating expenses in 2015, but the company announced that it has entered into a flexible equity financing commitment that will provide up to $50 million in cash over the next 24 months on favorable terms. 
• On the earnings conference call there was no mention of Novvi, the company's lubricant and base oils joint venture with sugarcane provider Cosan. That's a bit surprising considering it was supposed to be nearing commercialization and a quick ramp in initial sales.

Perhaps the most exciting news for investors is that 2015 could be the year Amyris achieves permanently profitable production from Brotas with product gross profit margins expected to reach 20% in early 2015 before climbing to the platform's targeted 50% by the end of the year. The recent trend certainly supports that after achieving the first-ever positive product gross profit margin in the third quarter.

Source: SEC filings, Amyris press release; chart compiled by author

What does it mean for investors?

Despite my excitement for the company's direction, I'm quick to remember that there are still risks facing investors and growth.

That being said, Amyris is slowly proving that it may be able to make good on the awesome growth potential it promised at the time of its IPO. Production costs (the most important metric for investors) are falling precipitously each year, new product launches are spreading risk across diverse markets, and Brotas is on track to double its utilization rate on its way to reaching full production capacity sometime in 2016 or 2017. Quarterly revenue will continue to be lumpy in the early stages of product commercialization, but a new focus on marketing and sales efforts will gradually smooth out the volatility. While much work remains to be completed, the fourth quarter strengthened my view that Amyris is the best stock for long-term investors to buy in 2015.