Value Investors Club / Amyris, Inc (AMRS)

Description

AMRS – Long Thesis

Summary

AMRS is one of the only public synthetic biology companies investable today. It has an enterprise value

of $765M on a fully-diluted basis with a (decreasingly) levered capital structure. The stock is heavily

owned by retail investors and with some smart money (Fidelity, Perceptive, Casdin) in the top 10 holders

list. A CEO with a history of setting expectations that are too high, a lawsuit, and poor estimation by the

only 2 sell side analysts has sent the stock plummeting.

The stock chart makes the company look much worse than it is – AMRS has several attractive business

segments that are worth as much as the total company is on its own.

At $1.89, the stock trades at just 3x 2021 street sales (which have been heavily revised down thanks to

repeated missing of #’s), despite top line growing in the 50-70% range (accounting for 1-timers). This

compares to private comps that are getting multiples in excess of of 30x (Ginkgo Bioworks and

Zymergen, which have both raised big rounds in the past 18 months), and CDMOs which have similar

operational models that get 6-12x 2021 sales despite being mature, capacity constrained, and growing 10-

18% a year vs AMRS at 30%+.

This is all because the stock is pricing in bankruptcy AND heavy dilution as possibilities. AMRS claims to

be about a year away from net income positivity, and my own assumptions have it possible by early

2022.

Following this stock and owning some personally has been a bumpy ride, though at this valuation I

feel comfortable recommending the business to others, as I feel that the best is right around the corner

and the stock's current valuation makes it look like there is no corner at all.

I think that with conservative revenue estimates (bullish on current products, bearish on pipeline) and worst-case dilution, AMRS can trade from $1.89 today to $10 at 5.5x sales/20x EBITDA in 2025 with upside to $25-$30 if things go right.

Business overview

AMRS is in the business of synthetic biology, which involves modifying yeast or E. coli to turn plants like

sugar into other molecules via fermentation. It is a novel business model that requires a lot of overhead

investment (think beer fermentation with a TON of R&D), with only a few other competitors today. It

has been around a long time, and originally tried to tried to play in energy-related solutions, which

proved to be a painful mistake when oil prices crashed and alternatives were set back by years. AMRS

had to reposition its business completely, taking the lessons learned in energy and re-applying them to

consumer end markets, where pricing is more stable, and margins are higher.

AMRS today has a few segments:

Consumer: This includes 3 branded products – Biossance, Pipette, and Purecane. Biossance is a suite of

clean beauty products on sale today online and at the majority of Sephora locations. Pipette is a line of

baby care products including an alternative to baby powder (and hand sanitizer as a response to COVID).

Both are made using squalane, a commonly used product in high-quality moisturizers. Squalane is

sourced from shark livers (highest purity) and olive plants (~20% less pure), which is both expensive as

detrimental to the ecosystem. While there is a debate on whether additional sharks are being hunted

for their liver oil, AMRS has made squalane at a much lower cost per ton than shark liver costs today,

and at higher gross margins. The result is high-quality products at lower or similar costs than peers with

a “green” component.

Purecane is a natural sweetener product like stevia without the bitter aftertaste, with similar health

profiles.

While Pipette and Purecane are both in early innings of commercialization, Biossance has begun to take

off and could contribute over $55M to AMRS revenues in 2020. With 2/3 of these sales coming from

eCommerce, AMRS likely has plenty of runway ahead of it and has been successful with marketing

campaigns using social media.

Ingredients: AMRS contracts products like its sweetener to offer materials as ingredients to other

products. It has deals in place with baking companies to supply derivatives of its Reb M molecule for

sweetening purposes, and will be adding customers for more molecules over time.

Grants & Collaborations: AMRS also partners with other companies to develop synthetic molecules for

other end markets, such as with the IDRI for a second-gen COVID-19 vaccine. This revenue is lumpy but

drops through at 100% margins when it comes through. For the purposes of my thesis, I discount any

meaningful G&C revenue coming in until beyond 2022 when the company is already profitable.

Pipeline products

CBG: While the lawsuit issue is obvious, it is clear that AMRS is moving ahead with at least CBG for an

additional product in 4Q. This could be material in contribution depending on how it is integrated with

existing brands.

Squalene for vaccines: Squalene is the sister molecule of squalane, which AMRS already makes. AMRS

has developed squalene and sent samples to pharma customers for use in a COVID-19 vaccine. Squalene

is an adjuvant – it effectively enhances your body’s immune response to a vaccine, in turn enhancing its

effects. This is done in many flu vaccines today, and could be useful for COVID vaccines upon approval

early next year (assuming timelines keep getting pushed). This opportunity could easily be $10M in

revenue per contract for COVID vaccines alone, and more down the road for flu. It would all be recurring

and high margin (several times the revenue/per ton of current production, with the same infrastructure)

in nature.

2nd-Gen COVID vaccine: AMRS has partnered with the IDRI to develop a next-gen COVID vaccine. The

problem it seeks to solve is scalability – we do will not have enough vaccine supply for the whole world

for several years, if you aggregate everything that the pharma companies have said about production

and/or look at total current CDMO capacity for vaccines. By using an adjuvant on mRNA vaccines, the

required dose of mRNA goes down by several orders of magnitude, creating a more scalable product

that Moderna is making today, and arguable more so than the others (non-RNA vaccines) as well.

Antibodies: AMRS thinks that beyond the horizon it can create antibodies as well, which are used in

both research and in products related to immunology. Protein creation in general has become an

antiquated process in general (with companies like Bio-Techne having a monopoly by simply keeping a

library of proteins it has made in freezers), and innovation here could be impactful (and margins in this

space are HIGH – TECH’s protein business does 40%+ operating margins).

Why AMRS Trades So Cheap Today

1. CEO execution: CEO John Melo has a history of being extremely promotional, guiding to

revenues levels that are hard to achieve and leading the 2 covering analysts to model

unreasonable revenues (a practice which clearly has stopped over the last 2 quarters). While the

CEO has done a good job of keeping investment capital coming in, we are well past the point

where it is unclear why the CEO is still employed at AMRS. He has lost investor confidence, and

only began to show signs of improvement in recent times, though these changes are too little

too late.

2. Lawsuit: Not mentioned in the business overview is AMRS’s potential in cannabinoids – last year

AMRS signed a deal with a startup known as LAVVAN to develop synthetic cannabinoid

molecules (THC, CBD, CBG) and market them in a deal that could have led to royalties + $300M

in milestone payments for AMRS. The deal however went wrong, likely because both parties

failed to hold up their ends of the bargain. Based on the complaint, it is clear that AMRS took

longer than expected to perfect its molecules, and LAVVAN clearly didn’t make milestone

payments, likely because it failed to raise sufficient capital to operate. The suit asks for damages

of $880M, larger than the market cap of AMRS, though the suit is for patent infringement on a

product AMRS has not made revenue on (yet). AMRS believes it found a loophole in the

agreement to market CBG without breaching the contract with LAVVAN.

3. Need for capital to get to profitability: AMRS is still burning cash heavily today, and another round of funding is

needed soon. AMRS paid down much of its most toxic debt this year using a $200M raise, and it

is likely that another $200-$300M will be needed for AMRS to reach profitability based on my

math. As the prior factors have depressed AMRS’s stock price, they have exacerbated this issue,

as it would lead to more dilution than if the stock were higher. AMRS has stated that it is looking

to sign agreements to sell some of its in-process molecules to cover much of this cost.

In summary, AMRS is not without its fair share of problems. However, 2 of these problems could literally

be solved overnight, and drastically alleviate the third:

The CEO’s days are numbered: A new CFO (Kieftenbald) was hired earlier this year to replace the prior

CFO, who has not been removed from the company, but instead moved to chief business officer. Right

from the first call, it was clear that the CFO was somewhat dominant on conference calls, and clearly in

the driver’s seat at Amyris. The ideal CEO/CFO combo for a company like Amyris would be, effectively, 2

CFOs given the capital structure & funding problems needing to be solved as well as the continued scaleof the business. I believe that the board is ramping this new CFO to take over for Melo. The replacement CFO would likely be someone new. This would give AMRS a second chance at proper street

communication, though hiring a good IR would definitely be useful as well and is completely possible.

The lawsuit seems ridiculous; will end in settlement: The other big overhang, which tanked AMRS ~30%

when announced over a few days, is the LAVVAN lawsuit, which I have spent a large amount of time

looking through. Despite being skeptical of many of management’s words this year, the company

seemed to shine following the suit by releasing the contract that LAVVAN did not include publicly in its

allegations. Comparing the complaint with the contract, it seems clear that LAVVAN missed something

and that AMRS is on the right side of the suit. That said, if the upside scenario is the suit getting thrown

out, the downside case is likely a settlement with a royalty on cannabinoid sales, which would be a

major positive as it’d mean that AMRS can sell cannabinoids of all kinds, not just the ones in the

“loophole”.

LAVVAN is incentivized to settle – AMRS cannot pay $880M with the cash it has access to, and the way

LAVVAN reaches that remedy in the first place is a ridiculous DCF that assumes a huge market share in

CBD and reaching profitability just a few years.

Together the removal of these overhangs could at least restore AMRS to the good graces on investors

and make the idea of one more secondary a much easier pill to swallow.

The capital structure & the path to profitability

Lawsuit and CEO speculation aside, AMRS does need to figure out how to reach profitability.

Here is the AMRS debt schedule as of 3Q:

As you can see, much of this debt has come down since the beginning of the year, and with it most of

the major interest payments have gone away. Most of the paid debt had 12% interest attached to it. As

it stands, about $55M of this debt matures in 2021, and AMRS is likely to burn ~$100-$150M getting to

profitability by 4Q next year. This means that to be safe AMRS will have to raise another $200-$250M to

bridge the gap, which means serious dilution at current levels.

In the event of the stock price rising, warrants could bridge some of the gap, as many expire in 2021:

About 2/3rd of these warrants cash at $2.87, a level AMRS has spent plenty of time above prior to its

most recent earnings report.

Separately, the access to capital question is an important one to answer – several holders have

bankrolled AMRS and stand to lose their whole investment if another round can’t be secured. Investors

such as Fidelity/Perceptive/Casdin & John Doerr are long-term holders, and likely invested on the long-

term thesis that AMRS will be able to not only become profitable, but scale new products in perpetuity

and sustain high levels of growth for the next decade. If that thesis remains intact, holders who could

average down into this investment stand to gain far more than they stand to lose if they are existing

holders capable of a secondary.

Finally, AMRS has said that it plans to self-fund much of this gap. It has molecules in development that it

can license or sell, of which it has identified 4 (which are not part of the core consumer portfolio). Two

of these have already been developed and 2 are in development today.

I take the notion that Melo will sell all 4 of these molecules with a big grain of salt and assume the worst in

my model of the business. Assuming that AMRS is forced to raise $200M at a single dollar per share,

given the pressure on the stock today, AMRS trading at 5x sales in 2025 (at which point it would be

profitable) would imply a per share price of $10, over 5x higher than it currently trades today). This

assumes a growth CAGR of ~35% between now and then, which is not crazy when you look at the

underlying growth of AMRS (product revenues growing in the 50%+ territory) and the number of

pipeline products the company is working on.

Understanding future profitability

The way I think about the profitability of this company is as compared to contract manufacturers at

scale. These businesses make drugs for biopharma customers (and sometimes other products) using

processes that are very similar to fermentation, requiring specific conditions, intense science, and

bioreactors to create products in. These businesses have EBITDA margins in the 30-35% territory. Given

AMRS is not contracting all of its manufacturing with others, it effectively has verticalized its supply

chain, offsetting the lower profitability of high-end consumer products. Mixed with more low-margin

things like ingredients, it seems reasonable that AMRS could achieve 25%+ EBITDA margins over time,

which I model in 2026.

Margins today are heavily impacted by the need to contract parts of production while AMRS builds its

own facility which will be done at the end of 2021 (would improve product gross margins by 30-40%

from what we have seen in the last couple of quarters)

Valuation discussion

Given all of the above, I think it is a matter of time before we see the worst of the dilution, and model

545M shares (vs 336M today if all warrants were in the money) in 2025.

I also model sales of $1B in 2026 based on the following contributions:

Biossance reaching $460M in sales (~44% CAGR, mostly front-loaded)

Pipette reaching $75M in sales (40%, could be higher if Pipette becomes as successful as Biossance)

Purecane contributing $15M in sales (33%, some upside if restaurant adoption is large when those

return in late 2021)

Ingredients $400M (30%, front loaded as COVID headwinds roll off and new deals are made with larger

companies)

Adjuvants $45M & antibodies of $35M (could be much higher but probability-adjusted for now).

At 5.5x sales (well below CDMOs), or 20x EBITDA (in line with the cheapest CDMO CTLT that grows

~10%), I see shares reaching $10 (over 5x upside) with worst-case dilution and complete failure to sell assets or

materially scale new products. At lower levels of dilution and higher 2025+ sales, this could easily be

$20-$25 instead at the same multiples.

To me AMRS has become a classic example of what happens when a stock has a retail trader base and

sentiment gets bad. As Warren Buffet said, “I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will” - this one is actually doing okay and is pretty close to wonderful if you consider who it's been run by. I think that investors will see that in 2021 when many of the overhangs on the AMRS story go away.

Separately, one could argue that Biossance alone is worth the market cap today, with like $80-100M in 2021 sales (at consumer multiples and ~70% GM, this earns 8-10x EV/Sales meaning $640M at the low end). This could be seen as downside protection, and doesn't factor in the massive IP suite AMRS owns.

Risks: Leverage, execution risk, capital markets

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Lawsuit settlement, departure of CEO, developments with pipeline assets, molecule sales, and capital raise success.

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			2020	2021
Price:	1.89	EPS	-1.08	-.44
Shares Out. (in M):	336	P/E	0	0
Market Cap (in $M):	635	P/FCF	0	0
Net Debt (in $M):	141	EBIT	0	0
TEV (in $M):	765	TEV/EBIT	0	0