Amyris On Track For Cash Flow, Earnings And 70%/Year Returns (NASDAQ:AMRS)


Amyris is on a path to positive cash flow, 40-50% revenue growth and strong earnings in 2021-24

With a more stable balance sheet, Amyris (AMRS) ($2.53) is in a better position to continue to grow its current Consumer product lines 100%/year, grow its Ingredients businesses 40-50%/year and maximize its R&D pipeline to drive additional growth for many years to come.

On the strength of rapid revenue growth and 40-65% gross margins, Amyris will soon reach positive EBITDA, positive earnings and then rapid 50-100% earnings growth.

Through its financially difficult times, Amyris continued to invest heavily in its science. The result is an industry-leading platform of intellectual property and expertise in engineering yeast strains and in advanced fermentation that have enabled Amyris to successfully commercialize an industry-leading 10 molecules.

Amyris’ mastery of the craft has enabled it to deliver superior products (higher purity) at lower costs than traditional production methods, allowing Amyris to enter new markets, rapidly gain market share and earn high margins.

Better science has allowed Amyris to build successful, fast growing Consumer brands from scratch (B to C) and build strong B to B partnerships with leading multinational brands.

Amyris’ recent track record gives me confidence it can repeat these successes entering new and diverse markets in the years ahead.

We present our earnings model which we believe conservatively shows how Amyris will grow its revenues much faster than its operating costs. The natural result is that once Amyris passes breakeven, its high margins will help grow earnings disproportionately faster than revenues.

Our 2024 EPS estimate is $0.72 fully taxed and fully diluted, from which we arrive at our target price of $21.60/share in 2024 based on a 30 times P/E, for potentially a 70%/year compound return.

We should note that our model is based on our forecasts for Amyris to continue to gain share with its existing products. Any new products introduced in subsequent years would add upside to our estimates.

Q2 revenues came in light, but the real story is management’s more conservative posture on guidance

On August 6th, Amyris reported revenues of $30 million vs. analyst estimates of $35.7 million, initiating a decline of 34% in its share price from $4.94 to $3.26.

Of the shortfall, management reported $2.7 million was due to COVID-delayed startup of production by a contract manufacturer in Italy and timing of collaboration fees for $2 million, with both expected in the 2nd half.

Management also sounded conservative on H2 guidance citing the potential for COVID-19 effects on H2 financials, contributing to analysts reducing full-year revenue estimates. Opco reduced its 2020 estimate from $219.5 to $185.0 million and H.C. Wainwright from $221.7 to $182.5 million.

Yet management kept its 2020 revenue guidance of $220 million. Why? We believe management has truly adopted a more conservative philosophy on guidance and wanted to lower expectations to be able to meet or beat every quarter. We and others lowered our sales estimates accordingly. However, Amyris management must believe it could still meet the original $220 million revenue guidance if it does an asset sale or collaboration deal or receives large vaccine adjuvant or cannabinoid orders.

With greater confidence from a better balance sheet, the arrival of a new CFO, Han Kieftenbeld, with multinational public company experience and a growing base of recurring revenues, it appears Amyris is finally in a position to become conservative.

To be clear, by managing expectations lower, Amyris would appear to be taking a step backwards but is actually taking an important step forward to achieve better stock price performance and lower volatility ahead.

$200 million equity raise fixes balance sheet, provides growth capital and opens the R&D pipeline spigot

On June 4th, Amyris completed an important $200 million equity raise. Amyris used the proceeds to pay down $62 million of debt and reduced interest rates from 12% to 8-9%, making it easier to achieve positive cash flow.

While the $200 million cash raise was criticized by some as being too dilutive, an overfunding does provide “growth capital” for Amyris to pursue its many long-term product opportunities and puts the company in a stronger negotiating posture on any future asset sales, partnering deals and plant financings.

Amyris expects to be cash flow positive in Q4 2020 and analysts expect real GAAP profits by Q4 2021. This is critical, because a company can have the best new products in the world, but it can’t do much with them if it doesn’t have a clear path to profitability. If Amyris can generate more profit, it doesn’t have to sell part of its pipeline to fund growth and can retain more value for shareholders.

Now that Amyris is close to reaching positive cash flow, it is positioned to open the spigot and commercialize more new molecules that have been brewing in its R&D labs. Can’t wait to see what’s next.

Amyris adds new products to its Recurring Revenues

It is not easy to keep growing consumer brands by over 100%/year especially in a COVID environment, but Amyris continues to add new products such as a new sun protection lotion to its Biossance clean beauty line of skin care products. We wouldn’t be surprised to see a men’s line, hair care and deodorants, all very large existing markets.

The Pipette line of baby care and family friendly products added a hand sanitizer with Squalane which is a natural moisturizer. It has met with strong demand since its March 26th launch. Pipette recently added moisturized hand wash and hand lotion products. On May 21, 2020, Pipette announced a new talc free “Baby Cream-to-Powder” product aiming to fill the void abandoned by Johnson & Johnson (NYSE:JNJ) due to the baby powder lawsuits over asbestos in their talc.

PureCane Amyris’ 3rd and newest consumer brand is virtually sold out of its no-calorie naturally derived sweetener until next year. On June 22nd, Amyris signed a multi-year agreement with AB Mauri, a leading commercial baker which could lead to low calorie hamburger buns at major fast food chains and bread at supermarkets in 2021. Our blind taste test confirmed no-calorie PureCane in tea has the same sweet taste of sugar, but without the bitter after-taste of Truvia stevia leaf Reb M sweetener and without the overly sweet saccharine taste of Sweet n’ Low.

On July 15th, Amyris announced “Clean Silica,” a new non-fermentation derived silica to supply the $68 billion color cosmetics industry with a more pure and better performing silica made from recycling sugarcane ashes. This should deliver revenues in 2021.

A new flavor ingredient is being introduced but was delayed by COVID from Q3 to Q4. It is believed by some to be vanilla, which would be an attractive market with high prices.

One might say these are mere line extensions, but a bigger picture view is that Amyris continues to add better performing products from its deep science-based platform to address large already existing markets. Offering better products to large markets improves the odds of successful line extensions. As Biossance and Pipette reach critical mass, thanks to economies of scale and negative working capital from online ordering, better gross margins will show up on the bottom line as incrementally widening after tax margins and higher returns on capital.

PureCane No-calorie Sweetener has significant possible upside in 2021-2024

There is rising awareness of obesity from sugar consumption and sugary soft drinks as discussed in a SynBioBeta article on the obesity epidemic in the U.S.

SOURCE: SynBioBeta: “There’s A New Fermented Zero Calorie Sugar” June 21, 2020

I expect more major bakeries, food and beverage companies to adopt PureCane to remove calories but retain sugary taste. This could boost PureCane’s recurring revenue and earnings upside over the next 2-3 years.

Revenues could start earlier from the beverage companies, perhaps in 2021, as governments scramble to raise tax revenues to cover their COVID-19 budget deficits. Like cigarettes, taxes on sugar-loaded soft drinks would reduce healthcare costs and improve health (reducing diabetes and cardiovascular disease).

Amyris will be adding significant new lower cost sweetener capacity next year from greater yields on its Second Generation Reb M yeast strain.

Recall from my prior May 29, 2020 Seeking Alpha article, “Why Amyris Could Be the Next Tesla,” that much like Moore’s Law for semiconductors, existing Amyris products should benefit from greater yields, lower costs and higher margins with each successive yeast strain.

Disruptive “Higher Value/Lower Cost” Products should provide margin upside

Some of Amyris’ most recently announced new products should deliver more than the normal value and cost benefits to consumers versus competing products already on the market. These new products should showcase the value of Amyris’ proprietary processes which by producing significantly higher value/lower cost products can enhance company margins going forward.

Amyris has already demonstrated it can enter diverse consumer markets and take share fairly quickly due to the superiority of its products, to wit Biossance, Pipette and now PureCane. In my experience, this is not easy and highly unusual to see a science-based company batting 3 for 3 on its first three consumer launches. Can it be repeated?

These launches have been greatly aided by Amyris’ engineered yeast-based designs and fermentation processes that can inherently produce molecules that are naturally sourced, yet more pure and therefore superior to the same molecules found in nature. Custom yeast strains are designed to produce one molecule, the one you want, not several molecules that have to be separated and extracted as currently done with products that are sourced from farm grown plants or animals at great expense and retaining impurities. The single molecule focus reduces costs significantly.

Consumers ascribe higher value to greater purity which should accommodate a premium price in the marketplace. Along with lower production costs, Amyris should be able to enhance its margins significantly.

Amyris also has the option to deliver these new products at such attractive price discounts that it can take larger market shares fairly quickly. My guess is they will do a little of both and launch with margins higher than the company’s average and at lower prices than current competitors. Cannabinoids may well be the first of these disruptive higher value/lower cost product opportunities.

Amyris enters multi-billion Dollar cannabinoid market

The cannabinoid industry is large with CBD used by 14% of Americans and the best known of over 100 cannabinoids. By early this year, Amyris had broken the code and delivered yeast fermentation-based CBD and CBG molecules to its marketing partner LAVVAN.

In 2019, LAVVAN paid its first $10 million cash payment to Amyris for meeting its first technical milestone. Investors awaited the second milestone payment and became optimistic that Amyris really could deliver 20 cannabinoid molecules and earn up to $300 million in cash milestone payments from LAVVAN.

These are big numbers because cannabinoids are a big and rapidly growing market. Cantor Fitzgerald and BDS Analytics estimate the US market for CBD alone was $4 billion in 2019. BDS forecasts the US CBD market will grow 37%/year CAGR from 2019-2024.

Amyris had already stated publicly that its yeast fermentation process could produce CBD at a significantly lower cost and greater purity vs. hemp-farmed and processed CBD as shown in their March 16, 2020 slide below:

Source: Amyris website March 16, 2020 slide

As seen at the bottom left of the slide, Paradigm Capital estimated that “Biosynthesis” fermentation like that used by Amyris can produce cannabinoids at a cost of $500-1,500/kg versus $3,000-5,000/kg cost for cannabinoids from farm grown hemp (“Outdoor Grown”).

Fermentation costs that are 1/10 to 1/2 the cost of current farm grown competitors are truly disruptive and created room for both LAVVAN and Amyris to take a large share of the CBD market at attractive margins.

However, since Spring 2020, the silence on the LAVVAN partnership became deafening and analysts were advised to remove any partnership revenues from our models.

On its August 6th Q2 conference call, Amyris announced it would produce one ton of commercial cannabinoid this year for direct sales to the market (without LAVVAN) through its own Consumer brands and as Ingredients to its partners in the cosmetics and flavors & fragrances industries. Amyris made it clear that its agreement with LAVVAN had carved out these channels for Amyris and its partners to address with cannabinoids.

Amyris followed with a September 1, 2020 press release, with a surprise, saying it had started production of CBG as its first cannabinoid.

CBG is better than CBD

We were pleased that Amyris’ first cannabinoid is CBG, not CBD, since CBG (Cannabigerol) is one of the rarest of over 100 cannabinoids. CBG is the precursor to other cannabinoids and comprises only 1-2% of most hemp strains versus CBD which can be more than 20% of a hemp plant.

Amyris also mentioned that CBG has better efficacy than CBD in 1/3 of current CBD topical applications. I believe CBG will be preferred by consumers for more uses once Amyris makes it more widely available.

A Forbes article discusses CBG’s use in pain management, as an anti-inflammatory, an anti-bacterial, and anti-cancer agent as well as the high cost to extract it from hemp.

We expect that greater availability of CBG at lower prices from Amyris will also lead to more commercial and academic research on CBG’s properties and efficacy and find even more uses to broaden the market for CBG. CEO Melo hinted at markets Amyris’ CBG could address in a recent interview in Nutrition Insight where he cited CBG’s better performance than CBD in topical indications for antioxidant, pain, inflammation and anti-acne applications. These suggest markets that Amyris might address first.

We believe CBG will command a higher selling price than CBD. In addition, Amyris should be able to deliver its CBG in a more pure form and at cheaper prices than farm grown CBG so should enjoy attractive gross margins, perhaps 50% initially. At scale, margins could eventually exceed the high end of the company’s 60-65% gross margin range and perhaps move closer to 80% drug company margins.

One metric ton of CBG or 1,000 kg might generate about $5-10 million in revenues for Amyris based on $5-10/gram pricing for CBG isolate per Kush.com.

A campaign to produce one ton this year is an important announcement as Amyris would demonstrate it can disrupt the entire multi-billion dollar cannabinoids market with commercial lot sizes that are more pure (free of hallucinogenic THC), at a cheaper cost, more sustainably and with more economies of scale than current farm grown, hemp-derived cannabinoids.

So, while LAVVAN’s inactivity has caused analysts to remove milestone payments from their models, Amyris has begun to generate its own cannabinoid revenues.

Amyris said it will produce one ton of CBG this year (in 4 months) which might imply about 4 tons/year at scale. My preliminary guess is with four CBG lines next year, they could produce 16 tons or 16,000 kg. Assuming Amyris will drive prices lower in 2021 to $4/gram, that would suggest revenues of $64 million, versus the $22.5 million revenues we have in our model. We will maintain our more conservative 2021 estimate and wait for additional information.

Assuming gross margins conservatively of 65%, sales of $64 million would deliver $41.6 million of gross profit. If pretax margins are 40%, Amyris could generate pretax profit of $25.6 million or $0.07/share pretax FD. This is not a prediction, but merely serves to illustrate the EPS leverage and upside potential that could kick in when Amyris enters large existing markets with a significantly lower cost product.

LAVVAN Surprise Lawsuit

On September 10, 2020, LAVVAN filed a lawsuit against Amyris claiming patent infringement and trade secret misappropriation. My preliminary interpretation is that LAVVAN has not been able to raise sufficient capital to pay Amyris additional milestones and appears to be trying to break the agreement.

This action caused an immediate 25% drop in Amyris’ stock, down from $3.14, which seems disproportionately excessive. It does not change my views on Amyris. I expect Amyris will be able to sell significant amounts of CBG and other cannabinoids fully in accordance with the LAVVAN agreement. Amyris’ lawyers have not yet responded.

When Does Amyris reach positive cash flow and positive EPS?

While the company believes it could achieve positive EBITDA by the 4th quarter of this year, we would be quick to point out that the first and second quarters of each year are seasonably the weakest quarters and the 4th quarter is the strongest. So, given its seasonality, I expect negative EBITDA Q1 and Q2 of 2021.

My firm’s earnings model is summarized below, revised for more shares outstanding from the financing, the inactivity of LAVVAN, and more conservative company guidance. The net effect is to push out our revenue and EPS estimates by a year:

SOURCE: Benjamin Bratt at Tanaka Capital Management, tanaka.com

It is important to be aware this EPS model assumes full dilution from annual non-cash stock compensation and all 49.5 million warrants assumed to be exercised. This could result in $134 million of cash injected into the balance sheet at exercise prices of $2.87-5.02/share, with $38.5 million received in January/February 2021, $16.6 million in March and $9.4 million in May.

We expect Amyris to be comfortably profitable in Q4 2021 and report a slight loss of $(0.04)/share for the full year 2021. Understand that the actual number may vary based on the unpredictability of asset sales and the timing of receipt of collaboration fees. If you are like me, you will focus more on recurring revenue and profits which will be rising as a percent of total revenue and profits with each passing year.

Amyris is a potential 8-Bagger, compounding at 70%/year to 2024

Our model forecasts fully diluted, fully taxed earnings per share of $0.72 in 2024. With revenues conservatively growing by 28% and EPS by 53% in 2024, it is reasonable to apply a 30x P/E ratio suggesting a $21.60/share target price.

With the stock having dropped on the news of the LAVVAN lawsuit, the stock at $2.53 offers the potential for an 8-bagger or a gain of 753% over the next 4 years, which compounds at 70%/year.

Thereafter, high double-digit growth of existing products and a robust new product pipeline suggest continued strong double-digit revenue and EPS growth, making Amyris a viable investment for a decade or longer.

By late 2021, as operating margins widen, Amyris should begin to generate free cash flow. Our understanding is that capital expenditures will moderate for a few years following next year’s $70 million ingredients plant construction which we estimate will utilize $20 million of company cash and $50 million of project financing.

Consistent with our earnings model, we estimate Adjusted EBITDA of $26 million in 2021, $129 million in 2022, $262 million in 2023 and $380 million in 2024. I would expect some cash would be used to buy back shares and improve EPS, but share reductions are not assumed in our model.

In the meantime, investors should be aware that a valuation of Biossance alone based on next year’s sales is greater than the current market cap of Amyris. The acquisition of a comparable clean beauty company, Drunk Elephant, in 2019 by Shiseido for $845 million was valued at 6.5 times its estimated revenues of $120-130 million. We estimate that Biossance will have revenues of $52 million this year and $110 million next year. At 6.5 times revenues, this suggests a Biossance valuation of $338 million this year and $715 million next year vs. Amyris’ current market cap of $519 million. We also expect Biossance to be nicely profitable next year due to more higher margin online sales and high incremental margins.

Risks to reaching positive cash flow, earnings, successful new product rollouts and 70%/year returns

Amyris still needs to execute and take the next big step to transition from an undercapitalized protracted startup to become a cash flow generating, high-quality revenue and earnings growth company. Above average 50-70% gross margins will make the task easier. So will the simple math of growing revenues 40-50%/year while limiting expense growth to single digits.

Near term, to meet guidance, Amyris needs to reach positive EBITDA in Q4 2020, or investors will be disappointed. We now project positive net income by Q4 2021 as do Sell Side analysts.

The LAVVAN lawsuit could linger longer and act as a drag on the stock.

COVID can cause delays and disrupt supply chains, although Eduardo Alvarez’s operations have been running smoothly and continuously increasing productivity and output.

There may be delays on new product launches as seen with the Q2 flavoring introduction.

There is always the risk of competition. We are watching cannabinoids in particular, but we believe Amyris will be “first to market” with commercial quantities.

CEO John Melo is developing multiple new strategic growth opportunities and at the same time building a team of managers to execute on their plans for growth.

With a new CFO, a complete management team is now in place to execute on these opportunities.

With a much improved balance sheet, Amyris no longer has to rely on serial convertible bond issuances and live from asset sale to asset sale.

The big question is when do investors begin to anticipate and discount the next milestones of positive cash flow and profitability as well as potentially important news flow and upside on new products?

Investors will want to own Amyris before LAVVAN suit is settled, it beats guidance and shows more new products

Over the next 12 months, Amyris will look like a very different company, getting close to producing real earnings, with three Consumer brands generating cash flow, with cannabinoids and at least four other new products being released from its pipeline expected to add 4th, 5th, 6th and 7th sources of recurring revenue at margins above company averages.

I will be discussing the potential upside from some of Amyris’ newest growth opportunities (adjuvants, HMOs, monoclonal antibodies and vaccines) in an additional Seeking Alpha article. There will be more surprises coming out of Amyris’ R&D pipeline.

Hitting their financial targets as well as news on any combination of new product surprises could trigger a bounce in Amyris’ stock and short covering.

Over the next few quarters, new products could inject upside to Amyris’ financials, and our earnings models may have to be adjusted upwards. The CBG example was provided to suggest how we might have to revise our expectations going forward. For now, we prefer to keep our estimates conservative and be favorably surprised.

Disclosure: I am/we are long AMRS TSLA. 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: Additional disclosure:

This article expresses my personal beliefs and opinions relating to the subject matter contained in the article. Other than payment from Seeking Alpha for the publication of this article, I have not been compensated by any entity, and all thoughts, opinions, conclusions and statements contained in this article are my own. Further, I have no affiliations or arrangements of any kind with any entity mentioned in this article. Finally, I have purchased shares of AMRS and TSLA for myself and for my clients in the past, and if the companies continue to perform as I expect, it is likely that I will purchase additional shares of each, both for myself and for my clients.
This report is not, and should not be construed as a solicitation or offer to buy or sell any securities or related financial products. It has been prepared by me solely from publicly available information. The information contained herein is believed to be reliable but has not been independently verified. I make no guarantee, representation or warranty, and accept no responsibility or liability whatsoever as to the accuracy, completeness or appropriateness of such information or for any loss or damage arising from the use or further communication of this report or any part of it. Information contained herein may not be current due to, among other things, changes in the financial markets or economic environment. Opinions reflected in this report are subject to change without notice. This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. The report has been prepared without regard to the individual financial circumstances, needs or objectives of persons who receive it. The securities and investments related to the securities discussed in this report may not be suitable for all investors. Readers should independently evaluate particular investments and strategies, and seek the advice of a financial adviser before making any investment or entering into any transaction in relation to the securities mentioned in this report.

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