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Summary:

The disclosure on last week’s earning call from Amyris that it was shuttering or scaling down production at two of its three facilities, effectively putting off major biofuels production for another two to three years, is not altogether surprising.

Amyris IPO Update: DOE Funds Roll In, Losses Top $136M

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The disclosure on last week’s earning call from Amyris that it was shuttering or scaling down production at two of its three facilities, effectively putting off major biofuels production for another two to three years, is not altogether surprising. Once technology risk is surmounted in the lab and a feedstock can be converted into a petroleum at a decent yield, the question always becomes: Can you do it at scale?

Early optimism

The original goal had been for Amyris’s three facilities to produce 7.5 million liters of product a quarter, though the company has struggled with yield and separation loss, turning out just over 900,000 liters this past quarter. More importantly, the low production runs pushed the average selling price to $7.70 per liter, well above what the market will bear. Hence, Amyris’s decision to focus on smaller markets with lower volumes and higher selling prices, like the moisturizer ingredient squalene, which sells for $25-30 per liter.

It’s no secret that the EPA drastically overestimated what the bioufels industry could do. In 2012 it had thought that 500 million gallons of cellulosic biofuels would be possible, even though the reality is that the industry should do a bit over 10 million gallons this year. On last week’s earning call Cowen and Company’s Managing Director of Equity Research Rob Stone pressed Amyris CEO John Melo on the question of why production wasn’t scaling and why yields had disappointed.

Melo responded that it had taken Amyris “a lot of learning to be able to get the strains to perform….as well as they have in our environment” along with the challenges presented by separation and the fermentation process. Scaling biofuels is a massive engineering feat that requires tuning to maximize performance. Unlike some industries where being first to market is advantageous, in renewable energy, there’s often a first mover disadvantage because scaling the initial technology is as difficult (or more) than proofing the tech in the lab. Even if we look at Amyris’s share price, which has been bludgeoned from its $16 per share IPO price to about two bucks today, there’s a compelling case to be made for a second mover stepping in, buying the assets (the market value of the entire company is a scant $115 million compared to almost $2 billion at its peak), recapitalizing the company, and making a decent return.

The big picture for biofuels

Amyris is not alone. Other leading biofuels companies Solazyme, Kior and Gevo are off at least 40 percent from their 2011 IPO share pricings. What keeps investors in the game is the massive reward being floated. If biofuels succeed, they have two major advantages. 1) Unlike corn ethanol which had a pricy food feedstock—corn—many of the advanced biofuels are largely feedstock agnostic and 2) it’s a drop in fuel with no limitations on the percentage that can be used. It’s ready to go, direct into the transportation fuel supply, replacing imported crude oil.

Despite asking difficult questions and having neutral recommendations on Amyris and Gevo, Stone is still cautiously optimistic. “This industry is in crossing the chasm phase. You went through a phase where there was a lot of enthusiasm and lot of companies went public, and now a lot of companies are pushing out the ramp up on production, and stock prices are way down. We’re waiting for the upturn on the other side of that gap where realities and perceptions will start to move in a favorable direction.”

Stone’s models indicate that with oil prices as low as $70 a barrel, a company like Kior could compete with imported crude if it can scale its future plants to processing 1500 tons per day of feedstock (its Columbus plant, which is expected to be on line in the second half of this year, could theoretically do 500 tons per day). And it’s proving that the initial facilities can scale reasonably in the first place that is going to be critical.

As my colleague Katie Fehrenbacher has pointed out, companies like Kior IPO’ed and raised money in public markets with very long term risk/reward horizons, and to further scale, all biofuel companies are going to have to raise more cash. That fundraising ability will all depend on showing production capacity at initial plants. Amyris raised an additional $83.7 million in February, and Stone noted of the timing of the Amyris raise, “had they waited to put out this quarterly release they may not have been able to raise as much on the same terms.”

The dream of replacing foreign oil dependence with a renewable transportation fuel is a big dream and a bigger market. But from the lab to the production facility, there’s enormous risk, and if the commercialization hurdles can’t be crossed, it’ll be just that–a dream.

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  1. When you wrote that the industries are still in “Crossing the Chasm Phase” it made me think of Geoffrey Moore http://www.geoffreyamoore.com. As I saw him say once a company needs to work extremely hard to cross the chasm and they would have no idea when it will happen, they just need to keep at it. That’s what I think these bio fuel companies need to do. Just keep at it. Eventually something will happen. Thanks for the interesting read.

  2. Amyris’ product, farnesene, will never, ever, make it as a fuel or as a precursor to a commodity chemical or plastic. Any chemist can tell you that farnesene’s opportunity is in specialty chemicals, but it’s executive management team is staffed with just the wrong people (chemical engineers, biologists, and MBAs) to understand this. These self enriching executives blew Amyris’ opportunity. Chemists run chemical companies…the others are posers.

    1. agreed. I’m a professional chemist and farnesene is a very attractive intermediate for various specialties, if it can be made cheap enough, because it will allow many products to become “green”, therefore demand will be very high if costs are OK. Growth could be rapid and plenty of market possibilities if yields and economic hurdles are successfully met. This is far more interesting than trying to make a fuel that competes with many other fuels, limiting revenues to the cost of the other fuels. Successful “green” sourced specialties would be highly competitive to existing petrochemical-source products, even at similar or slightly higher prices, leading to huge growth potential.

    2. what chemicals produced by biofuel companies show promise as a fuel?

    3. Gabriel Manzanarez Scientist Tuesday, July 17, 2012

      Why do you say this? is there a chemical product being developed out there that you consider a good alternative?

      1. Gabriel, Amyris proposes to manufacture and sell fuel, which is a mixture of hydrocarbon molecules having no oxygen atoms (approx. 86% C and 14% H), where this fuel must have very low other impurity substances, and where this fuel is made from sugar (27% C, 8% H, and 65% O) that is obtained from crops which need to occupy large areas of land by the action of yeast in vessels, and in so doing will produce CO2 because the yeast need to respire. The manufacturing costs will be higher than fuels made from petroleum, natural gas, shale, and sands, and there are really no great social/environmental advantages to justify it. All that said about fuels, the molecule farnesene that Amyris produces is beautifully equipped for a number of specialty chemicals that I believe can sell in specialty applications.

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