Now, let's be honest. The Q3’22 earnings call (“EC”) was a complete disaster and a “deja vu” moment from exactly one year earlier.
Amyris is viewed by some investors (institutional and retail alike) as a very binary investment: Extremely risky balanced by an unknown speculative reward.
Our goal is not to rehash what happened (there are good articles for that), but to answer the pressing questions regarding the:
NOTE (12/11/22): All the information below is based on my own primary research from public filings, press releases, news, earnings calls and analyst conferences and has not been confirmed with management (and, as a result, could be incorrect).
Amyris announced on their Q1’22 EC a $250MM Strategic Transaction (“ST”) involving the Marketing Rights for Two Molecules through a multiparty competitive bid process. The structure and value of the transaction proceeded to expand over the next three quarters culminating in a $500MM ST total cash value ($1Bn if you include the exclusive manufacturing rights).
Amyris' track record on closing these type of ST deals has been 100% over the past decade.
The ST is expected to close by year-end and represents the largest ST in the firm’s history:
By Q2’22 EC, Amyris had locked on one buyer to proceed into deeper due diligence and deal structuring:
Many investors question the likelihood and authenticity of the ST despite management’s reiteration numerous times in press releases, filings, and verbal statements:
With the most recent Q3’22 EC, it was disclosed that the ST was pending approval in front of both Boards:
Since then, John Melo (“JM”) reconfirmed the deal status in a 11/30/22 press release:
There seems to be a great deal of confusion on the timing of the Strategic Transaction as to whether it would close in “early December” or by year-end:
A Board Approval is not the same as a Closing Date (i.e., the date of ratification). Companies require time to review/edit/re-draft/ratify Definitive Agreements and/or binding Term Sheets.
To help narrow down an expected time frame, we can look to past STs. Specifically, the last two that were executed in a fourth quarter were announced the week prior to the holidays (i.e., Monday, December 21st, 2020 and Thursday, December 23rd, 2021).
Our research indicates Amyris’ Board may likely have already met in mid-November and the next meeting may likely be one month from then (i.e., between 12/12/22 and 12/23/22) to ratify the deal.
As such, we expect an announcement most likely during the week of 12/19/22 through 12/23/22 (or possibly the week before) in advance of the holidays.
Despite repeated reassurances, the market (as reflected in the current share price that is effectively priced for bankruptcy) remains wary and skeptical with lingering questions:
We hope to address these questions below through deductive reasoning.
We have gathered the following ST public information from various analyst conferences and earnings calls with management:
Amyris has a library of ~250 existing molecules and ~25 molecules in active development (~20% currently in collaborative partnerships; 80% under in-house development and commecialization).
Only 13 ingredients / molecules were in “existence” and “in production” as of the date of the deal announcement:
Of those, only three have a strong relationship with eachother:
We believe the relationship between two of the three molecules caused the correction made by JM when he initially identified the transaction with only "one ingredient", and later adjusted his statement to two.
To clarify, it helps to understand the distinction between all three ingredients:
Since Squalene was not manufactured in large quantities at the time of the announcement, we can narrow the playing field to Squalane & Hemisqualane.
Let’s examine the differences between the two:
Amyris has disclosed that it has produced large quantities of Squalane for nearly a decade becoming a significant market share leader:
To help quantify this, according to Sunil Chandran (Chief Science Officer at Amyris), worldwide there is between 2,500-to-4,000 metric tonnes of Squalane produced, of which Amyris produces >2,000 metric tonnes.
Amyris, in recent quarters, has accelerated efforts to highlight these two molecules throughout its investor presentations/and earnings calls:
Both molecules appear to be on a significant growth trajectory and are the only two molecules that may be considered as “one set” out of the original thirteen. The volumes and growth estimates match the estimated volumes and 30% to 40% CAGRs referenced by JM earlier:
This takes us to the final clue which is the complexity of the deal and why it may have required 7-to-8 months to complete.
Both ingredients are derived from a beta-farnesene precursor (aka Biofene) and require “finishing” through a 50/50 Joint-Venture entity known as Aprinnova (established in 2017 and held in partnership with a third party entity, Nikkol Group).
It is unclear whether the Buyer in this ST will assume Amyris’ interest in Aprinnova, or Nikkol Group’s interest in the JV, or some other alternative structure; however, it may explain why the deal was established from the outset to have an end-of-year completion date resulting from navigating a tri-party deal.
Now that we may have possibly identified the molecules, let us see if we can identify the Buyer using the same process of elimination (again, this information is pure speculation based on our deductive reasoning and primary research into public information and has not been confirmed with management).
JM has elaborated publicly it is not DSM, which, by extension, would eliminate Firmenich who is in the process of a merger with DSM.
Management further indicated publicly that this was a decade’s old partner which rules out Yifan who has been a partner with Amyris since 2018.
Amyris has not been a major supplier to Kuraray, although there are developments underway for commercialization of liquid farnesene rubber. While Kuraray has its own synthetic squalane (using terpene-compound synthesis technology), it is a competitor with Amyris, and does not appear to have worked with fermented Squalane/Hemisqualane in the past. The ST would not be a strategic acquisition for Kuraray as they are focused on the production and sale of functional resins, chemical products, man-made leathers, synthetic fibers, and textiles.
Takasago has focused on fragrances and lacks both commercial familiarity with the Squalene molecule family (other than a patent filing from ~50 years ago) and products in beauty care (i.e., skincare or haircare). Nor does Takasago have the financial strength to support a ST of this magnitude.
The Nikkol Group lacks the financial leverage to support a ST of this size.
This leaves us with Givaudan as the most likely candidate that matches all of the characteristics of the would-be buyer:
To understand how this relationship may have evolved, let us unpack the history of their partnership:
Givaudan and Amyris began their own relationship on 2/24/11, through a collaboration with Beta-Farnesene to develop a key fragrance ingredient.
On 3/14/11, Amyris deepened this relationship by extending it into Squalane (matching the “decade” relationship JM previously referenced):
Givaudan went on to acquire Soliance on 12/9/14, along with their Amyris squalane relationship.
Since then, "Givaudan has been engaged in the research and development of proprietary fragrance ingredients with Amyris for several years" and sought to expand into the research, development and production of active cosmetic ingredients as their entrée into Active Beauty.
Givaudan has grown its Active Beauty business through strategic acquisitions with a focus on cosmetics…
…keeping an eye towards acquisitions in Fragrance & Beauty to expand product offerings that include natural ingredients and biotechnology:
Givaudan has indicated that “Health and Wellbeing” and “Active Beauty” are key priorities:
Acquisitions are a primary method to grow strategic priorities for Givaudan:
To understand if Givaudan has the financial capacity to handle an acquisition of this size, we can reference the metrics noted above and examine Givaudan’s 2021 EBITDA performance to determine how much spare “capacity” to finance acquisitions they have remaining:
From above, we can see that Givaudan generated ~$1.57Bn in EBITDA for 2021 (based on a 1.06 USD to Swiss Franc exchange rate).
Using the 4x-to-4.5x Debt/EBITDA threshold levels referenced in the EC vs. current level of 3.45x, this translates into 0.55x-to-1.05x 2021 EBITDA remaining spare capacity which corresponds to $864MM-to-$1.65Bn (i.e., more than enough to fund this ST).
In my experience in dealing with Boards (e.g., Fortune 500, Academic, Private/Public, Domestic/International and Venture Backed), Directors often times serve as custodians/advisors but generally do not second guess, interfere or oppose prudent management decisions.
Where it can become dicey is when there is a concentrated ownership among individual board members, (i.e., an “Activist Director”).
As such, I thought it would be a useful exercise to investigate if there were any “John Doerr” equivalents on Givaudan’s Board of Directors:
Unlike Amyris, no single Givaudan Board Member owns more than 0.1% and the amounts owned by any member is <$5MM.
These are relatively small amounts (for a ~$30Bn Market Cap firm) and do not scream “red flags” among any of the Directors that may cause them to derail a 7-month process.
It is important to remember that Givaudan has been working alongside Amyris for over a decade and has their supply chain intertwined with Amyris’ supply chain as well.
They need Amyris and the molecules in question just as much as Amyris will need Givaudan’s capital and sales & distribution support.
Were Givaudan to walk away, there are other bidders eager to step in and fill the void.
Given the above, we now know the following:
…one may infer that the deal has been reviewed and has likely been approved. We suspect that the deal is now in its final preparation for ratification.
We can look to the past for a glimpse into the future:
By examining the data from the past four STs above, we can try and gauge the impact on share prices based on the value composition of each deal:
From above, we can see that the % increase in share price is directly correlated with the increase in cash value of the ST as one may expect.
It is notable that the cash value of the current pending ST (i.e., $350MM) is larger than the cash value of all four prior STs combined (i.e., $287MM).
However, a better way to refine that estimate, is to focus on the change in market cap relative to the actual Total Transaction Value (excluding manufacturing rights) to estimate a potential range for shares prices to climb.
We can infer a possible multiplier of ~5.5x to ~22x of the Total Transaction Value (although, the larger the ST, the smaller the multiplier applied). This is useful in understanding how powerful an impact a strategic transaction can have on market value (not so much in pegging a definitive share price).
If these ratios were to hold now as they have in the past, this would imply a forecasted share price of between $6.6/share to $20/share (given today’s share price of $1.68 and ~390MM fully diluted shares).
This appreciation in share price can be driven by a variety of factors:
This ST is just one of many in the development pipeline.
Management has already identified a second molecule that is slated to close in the next few months and we believe the second one is the Squalene molecule (for Adjuvant applications) based on references made by management regarding applications to the pharma industry and the value of Squalene.
A second ST soon following the current ST will solidify four consecutive years of molecular sales and further validate Amyris' powerful engine of recurring ST revenues with ~25 Active Development molecules in their pipeline and three-to-four others under ST consideration:
I see an evolution of thought processes over time on how to view/treat these ST deals:
1. Analysts/Investors are beginning to classify them as recurring revenues, giving credit, for now, only to the upfront cash components;
2. As earnouts are solidified/earned, those same groups will begin to credit and place value on the earnouts in advance at the time of the deal;
3. Eventually, the same groups will begin to see real value in what I believe may be the most valuable portion which the manufacturing annuity streams generated from exclusive manufacturing rights.
In short, the strategic partners that Amyris is choosing are not just based on how much any partner can pay upfront but also on how each partner is posititioned strategically to scale and grow the business over the years to come.
While Consumer Product Revenues have achieved record highs for six consecutive quarters, Ingredients have remained relatively unstable due to global logistics/supply chain, shipping and inflation issues (estimated to have cost Amyris over $150MM to $200MM in unplanned for costs for 2022).
The growth in Consumer Revenues has come at a tremendous cost as a result of similar unanticipated costs related to the use of third-party manufacturers/CMOs and high shipping costs, both leading to gross profit losses (excluding earnout contributions).
There are a variety of factors that led to the higher-than-expected Costs of Product Sold (“COPS”).
Most notably were the use of third-party manufacturers/CMOs for both ingredients & consumer products as well as Airfreight Charges, resulting primarily from Inbound Airfreight used to ship consumer product parts from China (e.g., caps, pumps) and Ingredients from CMOs (e.g., S.A. Antibioticas from Spain whose cost of production is 3x that of Barra Bonita):
Reminiscent of the Q3’21 EC, and as a result of unplanned for global disruptions (e.g., China lock-downs, Freight rate increases, high energy costs), Amyris had to make a hard choice between breaking contract obligations and foregoing earnouts or avoiding demand destruction by incurring larger than expected-unanticipated freight costs and increasing burn.
Like many growth-oriented companies, excessive costs to grow the business to scale have always been par-for-course (i.e., much like Tesla before the debut of their Model 3 and the achievement of scale economies).
Amyris is reaching that inflection point of realizing those true scale efficiencies in 2023 (similar to the inflection point of scale economies achieved by Amazon) with large scale volumes, the commissioning of BB1, the transitioning to in-house production at its consumer manufacturing facilities, and the upcoming co-location of downstream production facilities.
A portion of the costs however are non-cash stock-based compensation which can be stripped out to yield a better understanding of true cash burn…
…leading to a better understanding of Adjusted EBITDA over time:
There are a variety of non-recurring/savings opportunities from a Cash and Operating Expenses (“COE”) standpoint that have the potential for reducing Adjusted EBITDA on a go forward basis.
These are currently being implemented in phases through an internal program called “Fit to Win”.
The original program, announced in the Q2’22 EC, proffered the following savings opportunities:
One quarter later, the opportunities were refined in the Q3’22 EC:
If we were to apply those savings opportunities to the Q3’22 results, we can obtain an understanding of what would have been the impact to COPS and Adjusted EBITDA on a pro forma basis while also using the same technique to forecast future quarters (using Q3’22 as a baseline):
During the Q3’22 EC, Management provided $100MM Core Revenues guidance for Q4’22 and $200MM Core Revenues with $20MM Operating Income guidance for Q4’23.
We will discuss two Methods to triangulate first on forecasted Q4’22 Consumer Revenues.
Management, on the Q3'22 EC, indicated Q4’22 Consumer Revenues will emulate the YoY growth seen in 9-month YTD Consumer Revenues for 2022 compared to 2021.
Using that implied growth-rate range we can forecast 12-month 2022E Consumer Revenues:
This provides us with an estimated range for Consumer Revenues of ~$63.3MM to ~$67.5MM reflecting a 40.6% to 45% QoQ growth-rate:
We shouldn’t trust guidance at face value.
We can turn to historic QoQ seasonal growth for the prior two years to sanity-check whether historical seasonal growth rates yield similar results (which they do: 39.1% to 41.7% as derived below):
Both methods point to similar revenue range estimates and QoQ growth rates.
To help Amyris achieve those targets, there are elements this year that were not included in the Q3’22 Revenue base, which will lower the bar/hurdle:
This will drive down the QoQ Like-for-Like growth requirements on pre-existing brands below ~25% (which is very achievable given the seasonality associated with Q4) and confirmed by the strong D2C and B&M performance mentioned in recent press releases:
One area of uncertainty remains the Brick & Mortar component. While D2C outperformed expectations in many areas, we do not have clear visibility into Q4’22 B&M sales, however we anticipate record B&M sales as well given the outperformance and contribution of China wholesale results.
Turning to Ingredients, we previously saw that Q3’22 ingredient revenues were only ~$13.5MM (significantly lower than previously guided).
Q3’22 Ingredients Revenue expectations as of 8/9/22 were based on all three main production lines (i.e., six 200k liter tanks) starting production one week later:
However, the reality was somewhat different as we discovered in the subsequent quarterly filing:
This was a disappointment relative to the original guidance resulting in a significant miss on ingredient revenues. However, as of 11/8/22, all three main lines are producing:
The launch of all three lines of production should accelerate ingredient revenue growth by >50% QoQ going into the fourth quarter:
This is because only one line was up and running at the start of Q3’22...
...with the second up and running in the middle of Q3’22 requiring ramp-up time for that line to achieve full production.
If you take the Q3’22 ingredients of $13.5MM and increase it by the “well over 50%” you get to >$21MM.
As such, I have set our scenario case range to between $22MM to $24MM.
We now have a relatively tight range forecast for Q4’22 and Q4’23 Consumer Revenues with the following management assumptions for Q4'23:
We can now forecast Q4’22 and Q4’23 COE by allocating a portion of the Adjustments to COE identified previously in various case scenarios:
This drastically reduces Costs of Products Sold (“COPS”) and, while the cash “burn” for Q4’22 is still significant (ranging from ~$95MM to ~$106MM), it remains a significant improvement over Q3’22 results and converges towards breakeven by Q4’23.
I struggle though to see how management will achieve a 10% Operating Margin for Q4’22 without higher top line growth or further reductions in SG&A (e.g., Marketing). However, we do see a path towards EBITDA profitability in Q4'23 which is more than sufficient to demonstrate a path towards profitability.
Some Investors are concerned with Amyris' management of working capital components:
I noted a rapid increase in Accounts Payable balances for the firm:
Investigation into this has confirmed that Amyris is extending its credit terms with vendors/suppliers to a 60-to-90 period, thereby providing more liquidity to Amyris (and not defaulting on payments).
While this balance will shrink somewhat going into 2023, we expect levels to remain elevated going forward under the new structural shift in payment terms.
Amyris has a few receivables that are owed to them:
Inventory levels have climbed to ~$129MM to maintain an estimated ~two quarters worth of safety stock in anticipation of seasonally high Q4’22 demand as well as potential further supply chain shocks (e.g., China).
The high cost of that inventory, sourced from third-party manufacturers, will likely be depleted on a FIFO basis over time resulting in elevated COPS for a portion of the fourth quarter and possibly the first quarter of 2023.
Once that inventory is cleared, margins will improve rapidly under the insourced manufacturing cost structure.
Additionally, Amyris anticipates that they will be able to free up capital from the Inventory liquidation as they will not need to maintain as much inventory going forward and the cost of inventory for similar unit volumes will be significantly lower due to insourcing from their own consumer manufacturing facilities.
Amyris has ~$25MM in prepayments to CMOs.
As the transition to Barra Bonita nears completion, the cash conversion of the prepayments will free up additional capital over the next few quarters.
As a notable example of a large prepayment, a final CBGA production run of ~20 tonnes from S.A. Antibioticos (a Spanish CMO) was made shortly after the termination of its relationship with Amyris:
This volume of CBGA was impressive and likely one last advance production run to be used for future new formulations/SKUs contemplated across various skincare brands (e.g., Biossance, Stripes, and Beckham).
While not a working capital item, we thought it important to note that Amyris has entered into a hiring freeze in November for which no new non-critical hires will be allowed and should an employee leave, the vacancy will not be filled unless the role is deemed critical in nature by Amyris. This policy is expected to continue for some time after the closure of the ST.
Using the earlier estimated Adjusted EBITDA forecasts, we can generate a waterfall of what the cash position of the company may look like over the near future:
The typical value generated for molecules in early-stage development (i.e., unproven from a commercial standpoint) is $50MM to $100MM based on historical transactions:
The market has erroneously priced Amyris for bankruptcy just as the Company lies on the cusp of closing the largest deal of its existence (i.e., $500MM in cash value).
Our belief is that once the deal is announced, the upfront cash funding of $350MM (which will likely be closed in Q4'22 but funded in Q1'23) will lay-to-rest many of the concerns noted above.
The Company's track record in closing Strategic Transactions like these has been 100% over the past decade and historically, deals of much smaller sizes have catapulted the stock to higher levels than they are today.
In the end, the Amyris shareholder base has gone through a rollercoaster ride of emotion over the past twelve months and there is a sense of fear and distrust as a result. The firm has proven it can drive top-line growth and is now turning its focus towards driving bottom-line profitability having achieved scale.
Regardless of whether I am right or wrong on my speculation of which Molecules are in play or who the Buyer may be, I believe this is a pivotal deal that will eliminate erroneous concerns of bankruptcy and dilution and turn the conversation back towards achieving profitability while maintaining growth.
Management will certainly be scrutinized intensely over the coming quarters, as investors seek confirmation that management is truly focused on cost controls. I remain optimistic that in the next two or three weeks we will have good news on the ST and I look forward to turning the conversation back to the future opportunities ahead.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of AMRS either through stock ownership, options, or other derivatives. 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.
Additional disclosure: We truly pride ourselves on conducting extensive primary & secondary research, analyses, and/or interviews with Senior Management, Partners, and/or Customers in order to identify and vet undervalued investment opportunities. That said, we aren't always right and these are just our humble opinions. We always encourage everyone to do their own homework and research and as the saying goes... BUYER BEWARE. In the meantime, Happy investing!