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Amyris: an Unattractive Risk Reward Profile

|Includes:Amyris, Inc. (AMRS)
Amyris Biotech is an early stage next generation chemical company beginning buildout of capacity to produce chemical molecules from renewable sugars. Amyris uses a patented yeast strain to convert Brazilian sugarcane crush into farnesene, a chemical that can be used as the building block for a wide array of chemical compounds. The company has signed a number of contracts to supply derivatives of its farnesene over the next 5 years.
The up and coming next generation biofuel companies are nothing more than lottery tickets. The company that is most efficient in sequestering carbon will dominate the industry, leaving the others with little value. At its current levels, Amyris offers an unattractive risk reward profile.
There is also the risk that Amyris will not be able to sell its Farnasene derivatives in the specialty chemical markets that it wishes to. The guidance reported in the 2010 10-Q offers a subtle but potentially very relevant change in wording. Prior guidance reported 2011 Farnasene production to 6-9 million liters SOLD, while the 10-k guidance reported 6-9 million liters PRODUCED. The first Farnasene derivative Amyris intends to sell is Squalene, a ~$30 per liter cosmetic ingredient. This product is traditionally derived from shark liver oil or heavily refined olive oil. Amyris’s version of Squalene has been called inferior to these traditional sources. This may be the cause of this early, albeit subtle, change in guidance. This immediately throws up red flags to the long-term potential of Amyris’s Farnasene derivatives.     
The biofuel industry is structurally unattractive. 50-80% of the production cost for next generation biofuel companies comes from feedstock costs, even though this feedstock is derived from waste. There are several companies (Joule Unlimited, Solazyme, Sapphire) in early development of technologies (primarily algal and photosynthetic) that will be able to directly sequester carbon into a biofuel, essentially cutting out the carbon feedstock middle man. If any of these technologies succeed Amyris’s technology will not be able to compete.
Furthermore the success of all biofuel companies relies on the price of oil. In Amyris’s cases, at a 27% yield (as discussed above) they would not be able to compete with diesel prices less than $4.50 per gallon. Inherent in that assumption, is that they can obtain feedstock at the price they currently do, which is at a 35% discount to the current market price. Amyris needs a deep market of either biodiesel or bio jet fuel for it to profitably disperse its fixed costs.
The lottery ticket known as the common equity of Amyris is significantly overpriced at $26. Although, without any devastating news I do not feel Amyris is worth less than the investment made by Total SA for ~$15.70 per share. My short-term price target is, conservatively, in the $18 range. In the short-term there will be significant downward pricing pressure as the semi-bubble formed by the second generation biofuel companies becomes diluted by IPOs. In spite of this I would not go naked short this stock.
My recommendation is the December 22.50 put options. They are currently trading for ~$150.
Stocks: AMRS