When Scaling up Brings You Down

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.

Despite sky-high hype before their IPOs and the honeymoon periods shortly thereafter, nearly all sustainable chemical producers trading on the public market are deep in the red today. The capital intensive and headache-filled task of scaling up has been met by Mr. Market’s valuation catapult with a one-way ticket back to reality. Investors who fell to the Siren Song of these greentech IPOs are now (wrongly) questioning the viability of the all things preceded with the term “bio.”

It is important to note that, with the exception of Renewable Energy Group, all companies below went public at ridiculous valuations and well before they were healthy enough to fulfill their fiscal responsibility to shareholders. So the following table shouldn’t be all that surprising:

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Share price (IPO)</strong></p> </td> <td> <p><strong>Market cap (IPO)</strong></p> </td> <td> <p><strong>Market cap (current)</strong></p> </td> <td> <p><strong>Book value (IPO)</strong></p> </td> <td> <p><strong>Book value (current)</strong></p> </td> </tr> <tr> <td> <p><strong>Solazyme</strong> <span class="ticker" data-id="225376">(NASDAQ: <a href="http://caps.fool.com/Ticker/SZYM.aspx">SZYM</a>)</span></p> </td> <td> <p>$18.00</p> </td> <td> <p>$1,078 million</p> </td> <td> <p>$420 million</p> </td> <td> <p>$4.42</p> </td> <td> <p>$3.37</p> </td> </tr> <tr> <td> <p><strong>Codexis</strong> <span class="ticker" data-id="224470">(NASDAQ: <a href="http://caps.fool.com/Ticker/CDXS.aspx">CDXS</a>)</span></p> </td> <td> <p>$13.00</p> </td> <td> <p>$453 million</p> </td> <td> <p>$78 million</p> </td> <td> <p>$3.08</p> </td> <td> <p>$2.48</p> </td> </tr> <tr> <td> <p><strong>Amyris</strong> <span class="ticker" data-id="224486">(NASDAQ: <a href="http://caps.fool.com/Ticker/AMRS.aspx">AMRS</a>)</span></p> </td> <td> <p>$16.00</p> </td> <td> <p>$702 million</p> </td> <td> <p>$152 million</p> </td> <td> <p>$7.01</p> </td> <td> <p>$1.30</p> </td> </tr> <tr> <td> <p><strong>Gevo</strong> <span class="ticker" data-id="224970">(NASDAQ: <a href="http://caps.fool.com/Ticker/GEVO.aspx">GEVO</a>)</span></p> </td> <td> <p>$15.00</p> </td> <td> <p>$396 million</p> </td> <td> <p>$63 million</p> </td> <td> <p>$3.49</p> </td> <td> <p>$2.79</p> </td> </tr> <tr> <td> <p><strong>KiOR</strong> <span class="ticker" data-id="225509">(NASDAQ: <a href="http://caps.fool.com/Ticker/KIOR.aspx">KIOR</a>)</span></p> </td> <td> <p>$15.00</p> </td> <td> <p>$1,517 million</p> </td> <td> <p>$651 million</p> </td> <td> <p>$2.41</p> </td> <td> <p>$1.75</p> </td> </tr> </tbody> </table>


The valuation question

As you can see, the period of utter excitement and potential has been followed by a crushing sense of hopelessness. It will inevitably get better for some, if not all, of the companies as they race to fulfill their initial commercial capacity commitments by 2015 (more on that below). Even with good times ahead, it is difficult to say that share prices won’t continue sliding toward book value, which is how the market is evaluating the industry. Mr. Market has spoken and he no longer has an appetite for DCF or potential.

In May 2012 I proposed that the industry will gradually move toward book value as a result of the lag time between going public and building scale. I received numerous comments and emails about why that wasn’t necessarily true. The main problem was that Solazyme continued to trade at lofty valuations. Several months have since passed, new data has arisen, and Solazyme has fallen into place. I understand that each company is individually affected by its own developments, but take a look at the charts below. Perhaps we were picturing the trend incorrectly:

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

Simply looking at the dates shows a general downward trend in share price, but it is pretty messy. If we instead look at share price vs. days public we see a much cleaner trend:

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

Hopefully for investors, this trend will evolve into a horseshoe curve – where product sales lead to price appreciation.

The chart above suggests that sustainable chemical companies have between 250-350 days to enjoy the greentech hype before Mr. Market asks for results. That is obviously impossible without commercial capacity, thus the slide to book value.

The bottom feeders

Someone has to be in last place. Unfortunately for Amyris and Gevo, they share the dubious title. It is difficult to believe that they both traded above $25 not too long ago, but a series of over-ambitious scale-up promises (both companies) and patent lawsuits (Gevo) have weighed on shares. Gevo recently announced they will switch butanol capacity to ethanol production to save cash-flow while hammering out the (hopefully) final details about their economical bio-butanol platform. The setback occurred shortly after a $100 million ATM withdrawal (dilutive financing round). Meanwhile, Amyris is focusing on a similar set of goals: cutting losses while achieving consecutive runs at Paraiso. If the company can produce near 2 million L of farnesene in 1Q13 or 2Q13 (depending on completion of Paraiso) then they shouldn’t need to go to the ATM. That’s because big partner and oil giant Total is waiting nervously to form a JV.

The middle-man

Codexis was clobbered after Shell decided to end their funding partnership in favor of more traditional thermocatalytic processes. While it is certainly a setback, the development is also good news for the long-term viability of Codexis’ product line. Had Shell decided to walk away just one year later, Codexis may have been left for dead, as most enzyme partnerships will likely be filled by 2014. Recent results for their newest generation of C1 enzymes handily beat the competition, while progress is also being made on their carbon capture anhydrase enzymes. That won’t matter much without meaningful partnerships, which need to happen within the next two quarters for Codexis to snag a sizable share of the cellulase market.

The new-comers

Solazyme and KiOR have done just about everything right, except for their lofty IPO prices. KiOR recently completed its first renewable cellulosic diesel and gasoline facility in Mississippi, which will receive generous support from the EPA thanks to a lack of cellulosic options. The company’s first-mover advantage should help it establish a strong position in the industry, similar to the country’s leading biodiesel producer REG.

Solazyme has recently slid on large insider sells despite announcing additional capacity plans with Bunge for 2016. Given the fact that two full years lie between now and full commercial scale (which has yet to be achieved), I have long been wary of the company’s valuation, which is finally descending to more reasonable levels. The renewable oils company will see a permanent boost to shares once they sustain their process at 700,000+ L compared to the 128,000 L achieved today.

Foolish bottom line

The sustainable chemicals industry has experience a horrific ride during its short time on the public markets. But believe me, as a bioprocess engineer I am the industry’s biggest fan – my future livelihood depends on it! The overvaluation of IPOs allowed the companies to build a quick cash pile, which some have used more responsibly (Solazyme) than others (Amyris). Although the disruptive potential of the industry has not changed, investors are better off waiting to get into the action until more sustainable results are witnessed.

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

Make better investments with science.

BlacknGold owns shares of Codexis. The Motley Fool owns shares of Solazyme. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus