The Amyris IPO: Will it fly? Should it? The risks and rewards

September 17, 2010 |

In California, Amyris has filed an amendment to its proposed IPO, indicating that it hopes to generate up to $122 million from the sale of up to 6.1 million shares, at $20 per share.  The company said that it now anticipates that the IPO will net an average of $18-$20 per share, and will value the company at $808 million.

The company also indicated that it has reserved 4.2 million shares under an 2010 Equity Incentive Plan for management, which would generate $84 million in added shares for Amyris management at the $20 per share price.

It’s not easy to say how close the IPO is, but the pressure is building. Numerous capital management firms are pouring through the numbers this week, in a significant uptick in interest in the deal.

Risks and Rewards in the Pursuit of Cash

Accordingly, the long-term rewards for management are clear, but the path to investor riches needs a little more uncovering. Documents filed with the SEC confirm what many voices in the industry have been saying about the Amyris, Gevo and PetroAlgae IPOs – they are “financing events” to fund these companies’ yawning capital requirements rather than liquidity events for investors and management.

Case in point: Amyris, which lost $36 million in the first 6 months of 2010, has $400,000 on hand as of June 30, according to their S-1.

Amyris has a white knight on hand in the form of Total, which has agreed to make a $133 million investment in the company, and Total has agreed to provide up to $50 million for R&D activities. But the agreement comes at some cost. As Amyris confirms:

“An affiliate of Total has made a significant equity investment in our company and has certain board membership rights, as well as certain first negotiation rights in the event of a sale of our company…Total’s right of first negotiation may adversely affect our ability to complete a change in control transaction that our Board of Directors believes is in the best interests of stockholders other than Total.”

“The agreement provides for Total to pay up to the first $50.0 million in research costs for selected research and development projects, but we must agree with Total on the product development projects we wish to pursue and we have not yet agreed on any such projects.”

The risks as Amyris sees them.

In its S-1 filing, Amyris lays out the risks of investment, many of them the usual caveats disclosed by companies, especially early stage ones. But several are worth noting, and weighing in the balance.

Amyris says: We have incurred losses to date, anticipate continuing to incur losses in the future and may never achieve or sustain profitability.

In English: We’ve lost $156 million of your money so far, and the bleeding may not stop for a while.

Amyris says: If we are unable to decrease our production costs, we may not be able to produce our products at competitive prices and our ability to grow our business will be limited.

In English: No one will buy our products at the current prices we make them.

Amyris says: Our ability to commence commercial sales of our products in 2011 is subject to many risks, any of which could delay our sales and adversely impact our customer relationships, business and results of operations.

In English: 2012 is possible too.

Amyris says: Building new, bolt-on facilities adjacent to existing sugar and ethanol mills for production of our products requires significant capital, and if mill owners are unwilling to contribute capital, or do not have or have access to this capital, production of our products would be more limited or more expensive than expected and our business would be harmed.

In English:
Our partners may welsh on the deal.

Amyris says: Our reliance on contract manufacturers to produce our products during construction of our Usina São Martinho joint venture production facility and periodically for additional short-term production capacity exposes us to risks relating to the price and availability of that contract manufacturing and could adversely affect our growth.

In English: We don’t have the fermenters for all the product we said we plan to sell.

Amyris says: The production of our products will require sugar feedstock, and the inability to obtain such feedstock in sufficient quantities or in a timely manner may limit our ability to produce our products.

In English: We need cheap sugar to make this work.

Amyris says: We cannot assure you that our products will be approved or accepted by customers in specialty chemical markets…If we are unable to satisfy the significant product certification requirements of equipment manufacturers, we may not be able to successfully enter markets for transportation fuels, and our business would be adversely affected.

In English: Auto manufacturers have to sign off, and they get funny about that.

Amyris: the background

The Magic Bug: its origins

Amyris had its technological foundation nine years ago in the Keasling lab at Berkeley, when Jay Keasling and his team of post-docs pioneered a methodology to produce isopentenyl pyrophosphate, at rates with commercial potential, from yeast-fermented sugars.

Keasling’s magic bug, genetically enhanced from a soup of DNA obtained from bacteria and the plant world, is a five-carbon base chemical and a high-value target in the world of what is now known as the field of renewable chemicals — its a path to isoprenoids, which are themselves a family of some 50,000 molecules that have applications or pathways for pharmaceuticals, fragrances, cosmetics and fuels.

Keasling filed the patent in 2001, and Amyris itself was eventually formed and funded by 2006 with $14.1 million in Series A investments from Kleiner Perkins and Khosla Ventures among other early backers.

Amyris: from artemesinin to farnesene

The pre-catalyst for the company was its development of synthetic artemisinin, used as an anti-malarial drug, a project backed by the Bill & Melinda Gates Foundation in 2004 with a $2.4 million investment that promised to cut the market price of artemisinin, which can increase cure rates (when included in drugs such as Coartem) in selected global regions from 50 to 96 percent.

According to a profile of Amyris in Technology Review that appeared this past spring, the Amyris team swapped out a single enzyme in their magic bug and, thereby, switched the end product from artemesinin to farnesene.

So what exactly is it? It’s a fragrant oil chemical – that distinctive acrid odor you detect in a Granny Smith Apple, that’s it. You also find traces of it in the hops used for some very nice Czech pilasters and Irish lager beers. It’s used as a component in its own right by manufacturers around the world.

The Amyris strategy — commercialize farnesene on a contract manufacturing basis, then turn to farnesane, which you produce by adding hydrogen to farnesene. Farnesane is the company’s showcase diesel molecule, and forms the basis of its breakout from a speciality pharma and chemicals maker to a fuel player.

Last December, Amyris announced a deal to build a 26 Mgy farnesene facility inside Sao Martinho’s new Boa Vista sugar and ethanol mill in Goiás state, Brazil. The deal has been subsequently modified, but at the time the $80 million payment for a 40 percent interest in the plant, which Amyris acquired, was the highest valuation on processing capacity ever paid in Brazil. Amyris was expressing its urgency.

Under a revised agreement announced in April, Boa Vista will continue to be owned by Sao Martinho. The two partners will now will establish a 50/50 joint venture to build a chemical plant in the Usina Sao Martinho unit in Pradopolis (Sao Paulo state), which will commence production in 2012. The proposed plant will process up to 1 million tones of sugarcane per year.

Since the IPO announcement, there has been a lot more talk about farnesene than farnesane (which from here we’ll call renewable diesel to avoid confusion).

Here’s Amyris on farnesene, from their S-1 registration statement.

We are building an integrated renewable products company by applying our industrial synthetic biology platform to provide alternatives to select petroleum-sourced products used in specialty chemical and transportation fuel markets worldwide. We genetically modify microorganisms, primarily yeast, and use them as living factories in established fermentation processes to convert plant-sourced sugars into potentially thousands of molecules.

Our first commercialization efforts have been focused on a molecule called farnesene, which forms the basis for a wide range of products varying from specialty chemical applications such as detergents, cosmetics, perfumes and industrial lubricants, to transportation fuels such as diesel. We have focused our research and development, business development and production operations on the use of Brazilian sugarcane as our primary feedstock for the foreseeable future, because it is abundant, low cost and relatively price stable.

We intend to secure access to this feedstock and expand our production capacity in a “capital light” manner. Under this approach, we expect to work with Brazilian sugar and ethanol producers to build a new, “bolt-on” facility adjacent to their existing mills instead of building new “greenfield” facilities, thereby reducing the capital required to establish and scale our production. Our first such arrangement is our joint venture with Usina São Martinho, one of the largest sugar and ethanol producers in Brazil.

In 2006, leveraging our research on artemisinin, we launched formal research programs to produce farnesene, a molecule which can be used as a renewable chemical ingredient for consumer and industrial products and as a fuel. We believe that we will be able to enter certain specialty chemical markets with farnesene if we can attain at commercial production scale the 15% yield that we have achieved at two liter scale. We will continue to seek to improve our yield of farnesene and other molecules in order to enter additional markets profitably and improve our production economics.

One of our priorities is to evolve our production processes to transition from laboratory to commercial scale. To do this, we expect to initiate commercial production through the use of contract manufacturing as we complete our joint venture facility with Usina São Martinho which will be located in Brazil.

The construction of the facility at Usina São Martinho will be the first project of this nature that we will design and manage. We expect the construction costs of the new facility to total between $80 million to $100 million. Under the terms of our joint venture agreements, construction of the production facility will take place in two phases. Phase I is designed to construct a facility capable of producing farnesene from one million tons of crushed sugarcane annually, and Phase II will expand that capacity to two million tons annually.

We will provide the initial funding for Phase I and within one year of the commencement of Phase I commercial operations, Usina São Martinho will be required to reimburse us for half of the cost of Phase I, up to a cap of 30.9 million reais ($17.1 million based on the exchange rate on June 11, 2010). Thereafter, Usina São Martinho will co-fund the construction of Phase II and, as necessary, make a final payment at completion such that their total contribution will be 61.8 million reais ($34.2 million based on the exchange rate on June 11, 2010).

Amyris and its farnasene deals

Soliance. Amyris and Soliance announced that they have entered into a partnership combining Amyris’s industrial synthetic biology platform with Soliance’s leadership position in the production and commercialization of renewable cosmetic ingredients. Under the agreement, Soliance has already begun the manufacture of farnesene, or Biofene, in its industrial fermentation facilities using Amyris’s biotech process. Biofene will be converted into squalane which will be marketed directly by Soliance to cosmetics industry customers. In addition to the Soliance production, the parties expect to manufacture in Brazil and possibly additional sites in Europe. Amyris and Soliance will share the profits from this undertaking. More on the Soliance deal.

M&G. On Thursday, Amyris, Inc. and M&G Finanziaria  announced a two-part collaboration agreement. The first part of the agreement contemplates the incorporation of Amyris farnesene as an ingredient into M&G polyethylene terephthalate (PET) processing.  This would culminate in an off-take agreement that would commence upon successful completion of product integration. In the second part of the agreement, the parties will work together to combine access to low cost sugars by integrating M&G’s ProEsa lignocellulosic process with Amyris’s synthetic biology platform to produce renewable fuels and chemicals.

Amyris said it expected production from its São Martinho joint venture may be used to provide farnesene for M&G. M&G is presently the world’s largest producer of PET for packaging applications with production capacity of 1.7 million tons annually.  30 percent of global PET demand is for transparent plastic bottling. Group sales proceeds in 2008 were almost $2.6B. More on the M&G deal.

P&G. Also this past Thursday, Amyris announced a series of agreements with The Procter & Gamble Company (NYSE: PG). These agreements focused on the use of Amyris’s renewable product farnesene (Biofene) in certain specialty chemical applications within P&G’s products. In connection with these collaboration agreements, the parties have also entered into a supply agreement for Biofene which would commence upon successful completion of certain technical and commercial milestones. More on the P&G partnership.

Moving from Biofene to Biofuels

The chemical transition from farnesene to renewable diesel is not difficult, but the pricing environment is a different animal. Amyris has, as its primary post-IPO challenge, to tackle the proof that it can replicate its lab and pilot results at scale.

There are concerns about how robust the engineered yeast will prove in an industrial-scale setting. Concerns generally raised by those familiar with Amyris’s technical challenges, but not yet (at least to the Digest) by the member of the scientific team led by CTO Neil Renninger.

Also, there is the concern over the “drop-in” nature of drop in fuels. Sandia National Lab’s team, led by Ron Stolz, is prepping a comprehensive workshop report on Biofuels and engines and, in the report or elsewhere, is expected to red-flag “drop-in fuels” as an unproven technology until comprehensive engine testing has been completed. Engine experts elsewhere in the industry, as well as oil refiners, have expressed some skepticism over specific drop-ins, despair generally welcoming the technical approach of renewable fuels that do not require infrastructure changes.

In June, Amyris announced its partnership with Cosan with the establishment of a joint venture for the worldwide development, production and commercialization of renewable intermediate chemicals for specific industrial and automotive applications, from sugarcane. Under the joint venture, the parties will jointly commercialize the target products throughout the world, based on Amyris’s synthetic biology platform and Cosan’s product development, manufacturing and marketing capabilities. The parties said that they expect to complete a definitive agreement later this year.

Also in June, French oil major Total agreed to acquire approximately 17% equity interest in Amyris for $133 million and will have the right to appoint a member of the Amyris Board of Directors. Under their collaboration agreement, Total and Amyris R&D teams will work together to develop new products and build biological pathways to produce and commercialize renewable fuels and chemicals. The partnership combines Amyris’s industrial synthetic biology platform and emerging Brazilian production capacity with Total’s technological know-how, industrial scale-up capabilities and access to markets.

Amyris in perspective

The combination of IPO-related communications and the financing and partnership environment has firmly focused Amyris on a chemicals-first strategy, but make no mistake in the company’s intentions by noting that, out of 50,000 potential molecules, they chose a chemical that is one hydrogenation step away from a renewable diesel.

That, combined with a flurry of JVs and partnerships focused both on the chemicals and fuels markets, demonstrates that Amyris is fully embarked on an integrated strategy of flexible product lines, an impressive array of partnerships and contract manufacturing arrangements to keep the company on its “capital light” path.

Key question? Performance of the magic bug at industrial scale.

Achilles heel? Dependence for the near term on Brazilian sugarcane resources for its sugar feedstocks. Sugar is half the price of farnasene in the Amyris equation – near as any analyst has been able to decipher, and with the price of Brazilian sugar doubling in the 2008-10 time frame before retreating this year – the dependency will not only be on Brazilian harvests, but India’s (which are more subject to variance), unless Amyris obtains through Cosan an access to enough sugar to fund all its expansion, and Cosan were prepared to look at the long-term opportunities rather than short-term price opportunities in sugar markets were prices to rise again.

That’s an equation of long-term strategic interests between partners that has utterly eluded the US ethanol and biodiesel industries, which have seen their feedstocks partners take market prices time after time, and if that harms the processors, tough luck.

The Digest’s Take

Will there be good luck in sugar prices or bad luck for Amyris? Ah, grasshopper, that is the key. If sugar is cheap and oil is pricey, this deal flies. Other way around, yikes. But with the outlook for sugar and the outlook for oil, we think that’s the right side of the risk equation to be on.

Category: Fuels

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