Just a few short months ago it seemed like synthetic biology pioneer Amyris (NASDAQ: AMRS) was finally on the right path. The company reported surprisingly solid results from its new business model that relied more on licensing and royalty revenue from partners and less on its ability to commercialize products on its own. By early October, shares had delivered a year-to-date gain of nearly 150% and the company was valued at close to $600 million.
Then it all came crashing down. Shares have fallen 70% since the October peak. Turns out, those surprisingly solid results were because Amyris was grossly overestimating royalty revenue due from its largest customer, although investors that took the time to read regulatory filings would have known that well before the crash.
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Now that 2018 results are finally in (sort of), what do investors need to know?
1. Amyris missed its revenue guidance by 58%.
It shouldn't be much of a surprise considering the company hasn't met a single issued guidance since at least 2013, but Amyris whiffed on expectations last year. Management projected full-year 2018 revenue in the neighborhood of $190 million. The business actually delivered just $80 million in revenue for the year -- 58% below the midpoint of guidance. It also originally projected full-year 2018 EBITDA of $10 million, but didn't even bother reporting the metric in its earnings press release.
CEO John Melo stated that the underwhelming results were due to the company's failure to close a $50 million deal in China regarding the sale of inputs for manufacturing vitamin E. Sometimes deals just don't work out, but the explanation highlights a glaring problem with the current business model: Amyris is much too dependent on massive, one-time research and development deals.
In 2016, the company closed a last-minute collaboration worth as much as $20 million with Ginkgo Bioworks to boost its full-year revenue totals. The pair are no longer working together. In the fourth quarter of 2017, Amyris sold off manufacturing assets and licensed technology to DSM for $57 million. That was equivalent to 40% of total revenue for the year.
Investors desperately need the company to issue more realistic guidance going forward and successfully commercialize a product (or three) to begin generating consistent product revenue that's insulated from the uncertainties of collaborative pacts.
2. The business is struggling to improve.
A habit of inking headline-grabbing R&D deals that end up going nowhere hasn't put Amyris in the position to succeed. The company reported full-year 2018 revenue that declined 44% compared to the year-ago period, while operating expenses climbed 10% in that span. That's not a winning formula. That led to a worsening operating loss of $120 million last year, compared to an operating loss of $39 million in 2017.
While investors might be hoping the digression is temporary, other details from the income statement don't provide much reason for optimism. Royalty revenue, which sent shares of Amyris soaring in the first half of 2018, fell off a cliff after the company struggled to reconcile its estimated royalties with the amounts actually due. It reported royalty revenue of $18.3 million in the first half of last year, but only $1.3 million in the second half of 2018.
Meanwhile, product sales -- the least-risky source of revenue -- aren't providing the shot in the arm investors are looking for. Amyris spent $1.15 for every $1 in product sales generated. That's likely the result of a manufacturing delay encountered in the fourth quarter of 2018 for its zero-calorie sweetener product. However, given the company's history of failing to manufacture non-speciality products at a profit, investors can't easily dismiss a negative product gross margin, especially given the importance to the business going forward.
3. The cannabinoid customer has been unmasked.
Shares of Amyris soared in February 2019 after it announced a huge R&D deal with an unnamed customer in the cannabis industry. More details were revealed in mid-March.
The synthetic biology pioneer will set out to manufacture cannabinoid ingredients in genetically engineered yeast grown in a bioreactor, rather than plants grown in a greenhouse, for a newly formed cannabis company called LAVVAN. The cannabinoid compounds could be used in pharmaceutical and consumer applications -- and the deal could prove lucrative for the industrial biotech.
Amyris stands to receive up to $300 million in R&D and commercialization milestone payments plus long-term royalties on sales. The company thinks it can receive up to $30 million in payments under the collaboration in 2019 and "a significant portion" of the total deal value by the end of 2020.
Will this be just the latest R&D deal to go nowhere, or will Amyris finally leverage its technology platform to create tremendous value for shareholders? History suggests the former outcome is more likely.
This synthetic biology stock doesn't belong in your portfolio
Investors simply can't be very confident in Amyris. It whiffed on guidance, saw royalty revenue go from a growth engine to a throbbing headache, and ended 2018 with a book value of negative $179 million. Making matters worse, the company failed to file its annual report with the Securities and Exchange Commission on time for the seventh consecutive year. There's just no way investors should have this stock in their portfolio.
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