BioAmber Remains A Risky Investment As It Pursues Commercialization

| About: BioAmber (BIOA)
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Executive summary

BioAmber Inc. is in the process of becoming a major player in the biobased succinic acid production market following its recent IPO. It is still at least six quarters away from achieving commercial-scale production, however, and the novelty of its pathway makes its commercialization prospects relatively uncertain. While management is optimistic that the company will achieve commercial-scale production by 2015, investors should be aware that the process is very uncertain and the risk of reductions to shareholder equity along the way is not low.

BioAmber Inc. (OTC:BIOA) is a producer of biobased succinic acid. It is one of the newest additions to the ranks of publicly-traded companies that has opted to use biotechnology to produce biobased chemicals rather than just biofuels - Amyris (NASDAQ:AMRS), FutureFuel (NYSE:FF), and Solazyme (SZYM) being other notable examples. Like most other advanced biobased producers, however, Bioamber's share price has performed dismally since the company's IPO in June 2013, falling by nearly 50% in just over three months (see figure). It's most recent decline came in early August as the company reported steep QoQ and YoY drops in EBITDA for Q2 2013 even as revenue reached a record high. The company's investors, likely mindful of the steep losses incurred by those who participated in the IPOs of Amyris and Solazyme, pushed its share price down to a new low in the week following the release of the Q2 earnings report.

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BioAmber at a glance

BioAmber primarily produces succinic acid (as well as smaller amounts of 1,4-butanediol and disodium succinate) from monosaccharides such as glucose and sucrose. Its unique pathway sets it apart from most other producers of all three products, as conventional pathways for their production utilize petroleum-derived hydrocarbons (in the form of benzene, butane, or ethylene, depending on the pathway) as feedstock. (Before the advent of petroleum, succinic acid was produced from pulverized amber, hence the company's name.) Industrial use of benzene in particular has aroused controversy in recent years due to the discovery that it is a carcinogen. Petroleum-based succinic acid has also come under pressure from consumers, however, due to its use by the food industry as an acidity regulator and the pharmaceutical industry as a precursor and additive. This public concern has come at a time of substantial growth in succinic acid demand, creating a unique opportunity for its production from "green" sources. Finally, the production of succinic acid from monosaccharides has a major advantage over the production of biofuels (as opposed to biobased chemicals) due to its high market value: $6,000-$9,000/metric ton, as opposed to ~$700 per metric ton for ethanol.

Whereas conventional succinic acid pathways are catalytic, occurring via carbonylation, hydrogenation, or oxidation reactions, BioAmber produces the chemical biochemically via fermentation. The company originally used both bacteria (e. coli) and yeast to do so, but in August it announced that it experienced the best yields with the yeast pathway (which was developed in collaboration with Cargill) and was abandoning the e. coli pathway as a result. BioAmber has exclusively licensed the genetic engineering technology behind the yeast from Cargill and intends to utilize it as it advances to commercial-scale production. The use of yeast rather than bacteria offers a significant advantage in that it more closely resembles ethanol production pathways, allowing the company to potentially take advantage of some of the decades of commercial-scale bioreactor experience in that sector (although it should be noted that genetic engineered microbes pose novel challenges that this experience doesn't apply to).

BioAmber currently operates (but does not own) a succinic acid production facility in France with a 3,000 metric tons per year [MTY] capacity. This facility has operated since 2010 and has allowed the company to demonstrate the technical feasibility of its pathway, as well as generate some revenue. The company is building a larger facility in Sarnia, Ontario, that will have an initial succinic acid capacity of 30,000 MTY when completed late next year. This capacity is expected to increase to 50,000 MTY by 2016, which would represent a major scale-up over the French facility. The Sarnia facility is a joint venture between BioAmber and Mitsui & Co. (OTCPK:MITSY) and will be co-located with a large petrochemical hub when completed, ideally allowing for its biobased succinic acid to utilize the same infrastructure as the petroleum-based version. When completed, this facility is expected to be the largest of its kind in the world.

Financial performance

While the primary purpose of BioAmber's operations in France is to demonstrate the technical feasibility of its succinic acid pathway, enough product is produced to generate revenue for the company. Its succinic acid sales in Q2 2013 exceeded $1 million, allowing it to generate its highest quarterly revenue to date (see table). Gross profit fell both QoQ and especially YoY, although the company attributed this to a $0.74 million inventory reversal recorded in Q2 2012. Gross profit in that quarter would have been $0.12 million had the inventory reversal not occurred. The company also attributed its lower gross profit in Q2 2013 to lower product margins resulting from higher sales volumes.

BioAmber Financials

Q2 2013 Q1 2013 Q2 2012 Q1 2012 Q4 2011
Total Revenue ($MM) 1.03 0.33 0.61 0.38 0.56
Gross Profit ($MM) -0.38 0.13 0.87 -0.57 -0.28
Net Income ($MM) -5.93 -9.5 -8.4 -10.1 -10.6
Diluted EPS ($) -0.39 -0.92 N/A N/A N/A
EBITDA ($MM) -17.1 -9.1 -7.8 -9.6 -10.4

Source: Morningstar (no data for Q3 and Q4 2012)

Operating income also fell sharply QoQ and YoY, although this was largely attributable to two positive developments for the company in Q2 2013. First, the company reported a non-cash impairment loss of $8.6 million related to its decision to use yeast instead of e. coli for the production of succinic acid when its Sarnia facility begins operations. Second, sales & marketing expenses increased by nearly $0.6 million YoY due to increased headcount and market research. While these expenses hurt the company's Q2 2013 income statement, they were inevitable as the company prepares to scale up to commercial-scale production.

Finally, BioAmber's IPO left it with a strong balance sheet relative to other producers of biobased fuels and products. The total proceeds from the IPO after expenses were $71.7 million. The company also closed on a 3-year term loan for $25 million on Q2, leaving it with total cash and short-term investments of $103 million at the end of the quarter. The value of the company's current liabilities remains low at $10.4 million, giving it a current ratio of 11.1 (see figure). Total liabilities are also worth just 36% of the company's total assets. The company has secured $35 million in subsidies relating to the construction of the Sarnia facility and anticipates securing an additional $25 million in conditional loans associated with its IPO. Based on this additional financing, a $125 million capital cost for the facility, and a 30% equity contribution from Mitsui & Co., it anticipates a total cash outlay of only $45 million for the facility (or $63 million if the conditional loan is not secured). BioAmber's management reported an annual cash burn of $24 million, suggesting that it has enough cash to remain viable until the Sarnia facility begins operations.

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Risks

BioAmber faces a number of notable risks that potential investors should be aware of. First, its recent share price decline has reduced its market cap below $100 million. Such micro-cap stocks tend to exhibit above-average price volatility, low trading volume, and a lack of hedging opportunities.

Second, while the company experienced enough success at its demo-scale facility in France to identify its preferred pathway and move forward with commercialization, a number of potential roadblocks could occur before commercial-scale production is achieved. It is not uncommon for delays in construction and/or the commencement of operations to occur and, given the company's cash burn, these delays have the potential to substantially reduce shareholder equity. One recent example is the experience of shareholders in drop-in biofuel producer KiOR (NASDAQ:KIOR), who have sustained heavy losses in recent weeks due to a slower-than-expected start-up process at its first commercial-scale facility. Similarly, shareholders in biobutanol producer Gevo (NASDAQ:GEVO) experienced a sharp fall in share prices over the course of 2012 as the company ran into scale-up delays. BioAmber resembles Gevo in that both companies use specialized microbes to convert monosaccharides to high-value biobased chemicals (although Gevo's can also be used as a biofuel), raising the prospect that the former could also encounter the sort of yield and scale-up problems that have affected Gevo.

While BioAmber's management is optimistic regarding its commercialization timeline, it is important to note the adverse impact that a delay could have on the company. The Sarnia succinic acid facility is expected to be "mechanically complete" by 2014, in which case the earliest date at which it could commence operations is Q1 2015. The company's reported cash burn of $6 million per quarter will reduce its cash reserve by $36 million in the 6 quarters between Q2 2013 and the start of Q1 2015. If we further assume that the cash outlay for the Sarnia facility is $45 million, then the company's cash expenditures by Q1 2015 will equal a combined $81 million ($36 million cash burn plus $45 million Sarnia cash outlay), reducing its current $103 million cash reserve to $22 million by the start of Q1 2015. Again assuming a $6 million per month cash burn, then this would leave the company with sufficient cash until Q3 2015. While multi-month delays in construction in scale-up are rare, the combination of a delay and higher-than-expected construction costs would likely scare investors. Note that this is the optimistic scenario: should the Sarnia cash outlay end up being $63 million due to the company's inability to bring in the aforementioned conditional financing, then the company would enter 2015 with only $4 million in cash, leaving it with a very narrow buffer. Any delays and/or cost overruns under this scenario would likely result in the acquisition of additional debt or equity financing, both of which would negatively impact share prices. While the company is working to increase its revenues via the production of 1,4-butanediol, it doesn't anticipate meaningful production before the end of 2014.

Competition

Investors should also be aware that BioAmber is not the only producer of biobased succinic acid in the market. First, the overall succinic acid market size is relatively small at 50,000 MTY, which is equal to the upper range of the company's expected capacity in Sarnia by 2016. While the overall market size is expected to grow at a compound annual rate [pdf] of 19% through 2016, product margins should narrow significantly as production capacity increases (the company already experienced this in Q2 2013 on a mere $1 million in revenue). Furthermore, an additional 34,000 MTY in biobased succinic acid capacity is either built or under construction by other ventures around the world, and this competition can be expected to put further pressure on margins. While the current succinic acid price ($9,000/metric ton) and BioAmber's expected capacity in 2015 (30,000 MTY) would suggest annual revenue of $270 million, this will only occur if customers are willing to pay a large premium for the biobased version. Given the large increases in biobased succinic acid capacity that are occurring, the company's actual succinic acid revenue will likely be significantly lower.

Future expectations

The mean analyst EPS estimates for FY 2013 and FY 2014 are -1.85 and -2.35, respectively. Revenue is expected to more than double by 2014 from 2013 to $7.2 million. Both of the FY 2014 numbers are highly uncertain due to the recent track record of other commercial-scale facilities employing novel biobased pathways. If anything this track record suggests that a surprise to the downside is most likely, as unexpected delays and cost overruns are relatively common for such facilities. While the company's share price is currently trading at a mere 0.98 price/book ratio, which is low relative to other bioproduct companies (see figure), delays and cost overruns could push this price down further even while maintaining the current P/B ratio. The path to commercialization for employers of biobased pathways is highly uncertain due to their novelty and lack of progress along the learning curve. Investors should refrain from purchasing shares of BioAmber until the company's commercialization progress has been better established, as I would not be surprised to see the company's share price move significantly lower over the next year due to unexpected complications with the construction and/or start-up process at its Sarnia facility.

BIOA Price / Book Value Chart

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Conclusion

BioAmber is a pioneer in the field of biobased succinic acid production and, following its recent IPO, is poised to be the largest such producer following the completion of its 30,000 MTY facility in Sarnia. While management was optimistic in the company's Q2 conference call that it has enough cash to see it through the facility's start-up in early 2015, investors should be aware that the pathway's novelty makes it unlikely that there will not be any significant bumps along the way. Any large delays or cost overruns could reduce shareholder equity, pushing share prices (which have already fallen by nearly 50% since the company's June IPO) down further still. Finally, the succinic acid market is relatively small and contains multiple players. While BioAmber is expected to be the largest such player when its commercial-scale facility begins operations in 2015, current projections regarding product margins and the company's earnings at the time of completion are highly uncertain. History suggests that investors should refrain from purchasing BioAmber shares until this uncertainty is reduced by BioAmber's progress along the learning curve.

Disclosure: I am long KIOR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.