Pinned on Paradise

Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Once upon a time Amyris (NASDAQ: AMRS) was the darling of the sustainable chemicals industry. It was championed by legendary VCs Kleiner Perkins Caufield & Byers and Vinod Khosla, who individually suggested they transition from malaria wonder-drug artemisinin to impurity-free, drop-in diesel fuel. That suggestion catapulted the company into the center of the biofuels conversation just a few short years ago and created a vision that, through investor’s eyes, remains a resounding failure to date.

The Promise Problem

Amyris was founded by a group of three post-docs from the Berkeley lab of synthetic biology pioneer Jay Keasling. After successfully creating a bioprocess for creating artemisinin at production cost (which it essentially gave away in a licensing agreement with Sanofi-Aventis ADR (NYSE: SNY)), the company decided to turn its focus to another worldly problem: petroleum-free fuels. After hammering out a feasible biological pathway for building block molecule farnesene the founders set out to find the right business minds to realize their dream. Amyris, a product of academia, quickly tapped John Melo, British Petroleum president of American fuels, to become the inaugural CEO. Little did they know it would be one of the most transformative decisions in the company’s young history.

Scientific advancement and Wall Street rarely see eye-to-eye. In reality, that’s not really the fault of science but that of large investors eager to raise money on the public market before their companies are strong enough to fulfill a fiscal responsibility to shareholders. The clash of ideologies between the scientific founders and the petroleum-minded CEO gradually grew into a string of forced “retirements.” It is also responsible for the lack of direction in target markets. By focusing on producing No Compromise® fuels (at major losses) the company may have compromised its own future.

It doesn’t help that oilman John Melo, who viewed millions of liters of annual production as a comical capacity, was quick to promise investors that Amyris would be able to produce at least 6 million liters of farnesene by 2011 and up to 50 million liters by 2012. Engineers, scientists, and investors got the message, but yeast cells don’t have ears. Through the first nine months of 2012, Amyris has produced just over 2 million liters of farnesene. Oops.

All Eyes on Paraiso (Yeast Cells Don’t Have Those Either…)

It goes without saying that Amyris – especially CEO John Melo – has been humbled in 2012. After initially targeting three commercial scale facilities (two in Brazil, one in Spain), it enters the end of the year with one active (Paraiso) and the other two idle (São Martinho, Antibioticos). Furthermore, the uncompleted Paraiso facility (expected completion next year) has yet to produce anywhere near the 2.5 million L per quarter (only 810,000 L in 2Q12) that is needed to prove economic feasibility.

<img src="/media/images/user_6293/amrs_paradise01_large.png" />

Paraiso is Portuguese for "paradise". Anyone else see the irony here? Photograph taken in early 2012. Source: Amyris

In reality, the production numbers currently coming out of Paraiso are meaningless. The facility is still under construction (see picture above), and the commercial production of farnesene has yet to be optimized. I’m waiting for production numbers from the first full quarter of operations to gauge the long-term viability of the company -- most likely 2Q13. Nailing the production process at Paraiso will justify resuming construction at São Martinho and operations at Antibioticos, which could both be completed by 2015.

That will drastically increase the company’s production capacity. It should also allow enough time to be competitive (depending on margins) with its better managed partner Solazyme (NASDAQ: SZYM), which is currently on target for 500,000 MT of renewable oils by 2015. Even in that scenario, Amyris will not be profitable until 2016 at the earliest, but there is too much value in the company’s platform to write it off just yet.

<img src="/media/images/user_6293/amrs_products0712_large.PNG" />

A general list of chemicals that can be manufactured from farnesene (C15) and the partners patiently waiting for them to be produced. Source: Amyris

If the company can successfully achieve 2.5 million L or more per quarter, its financing options will open up. That will certainly ease the concerns of investors and, more importantly, big partner Total SA. (NYSE: TOT), which is expected to double its diesel capacity from 17 million tons today to 32 million tons in 2020. The company has maintained financing to Amyris but is clearly worried about poor production results to date.

Foolish bottom line

The next six months will be absolutely crucial for Amyris. About 20+ partnerships, a handful of JVs, multiple billion dollar markets, and perhaps investor sentiment of industrial synthetic biology are pinned on Paradise. Meanwhile, Sanofi-Aventis is planning on producing artemisinin at full scale by the end of 2012. While it is no longer a part of Amyris, it could provide a big boost for company morale that would trickle down to investors.

I booted Amyris from my portfolio at $4.18 per share, after jumping in at $4.65 on a major drop in March. If it wasn’t for a family emergency that led me to liquidate most of my portfolio, I honestly probably wouldn’t have sold my position. With new information available in the last few months it certainly looks like I lucked out. It would take a very big, upbeat development from Paradise for me to consider starting a new position.

Follow me on Twitter to keep up with my future posts on energy, sustainable chemicals, and undervalued growth companies @BlacknGoldFool.

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