Amyris Inc (NASDAQ: AMRS) is having an overwhelmingly rough day in the market today, trading down 21.07% at the time of writing this article. While the dip is concerning to some, I see this as an opportunity.
I’ve followed AMRS for quite some time now, and I believe that announcements made to date this year represent a compelling opportunity for all involved. Here’s why I believe that this stock is a strong pick for the long term:
What Is Amyris?
Before we get into the long-term opportunity offered up by AMRS, it’s important that you know just what the company is. The company is ultimately a chemistry/biology company. It produces and refines chemicals for a wide array of indication.
For the most part of its existance, AMRS has operated in the petroleum, beauty, health & wellness, and flavor and fragrence segments. However, the company recently jumped into what I believe will be the most lucrative industry it has taken part in to date, the cannabis industry.
AMRS In The Cannabis Industry
I’m going to start with the company’s activities in the cannabis industry as I believe that it’s this industry that offers the most compelling opportunity for Amyris and its investors.
On February 5, 2019, AMRS announced that it had entered into a binding term sheet surrounding planned cannabinoid development, licensing and commercialization. The actions would take place in a partnership that was valued at up to $255 million, not including significant royalties once the products are commercialized.
In the release, the company said that a confidential partner would make up to $255 million in payments. These payments will take place through an upfront payment with the ramainder linked to milestones that are expected to take place over 12 to 36 months.
As time passed, the agreement started to evolve. By March 18, 2019, not only did we learn the name of the partner, LAVVAN, Inc., the value of the agreement grew. On March 18, it was announced that the agreement had been finalized, and that the value of the agreement grew to $300 million plus significant royalties on commercialized products.
Moreover, the company said that based on the expected development timeline, it will be able to access a significant portion of milestone payments by the end of 2020. In fact, the AMRS said that it is expecting for the agreement to drive between $20 million and $30 million in milestone payments this year alone.
Most recently, on March 29, 2019, AMRS announced that it has achieved its first milestone. As a result of this milestone achievement, the company received a payment of $10 million as part of the $300 million in total royalties up for grabs. In a statement, John Melo, President and CEO at AMRS, had the following to offer:
We are pleased with meeting our first milestone and confident in the capabilities of our R&D team toward rapidly meeting the objectives of this major agreement.
We can create highly pure CBD molecules and we can bring down the cost significantly to support broad consumer adoption. This is the start of what we believe will be a mutually rewarding relationship with our partner, LAVVAN.
My team is truly excited to be working on this project with the support of LAVVAN, and is pleased with having delivered the first milestone on plan.
The large body of work done prior to the announcement of the deal further strengthens our confidence in successfully developing and commercializing a large family of cannabinoid ingredients.
The above statement was followed up by Etan Bendheim, CEO At LAVVAN. Here’s what he had to say:
We are delighted with Amyris’s ability to quickly meet the initial milestone requirement of our agreement. This meaningful laboratory achievement further confirms our thesis that Amyris is best suited to meet the task of commercializing cannabinoid ingredients in a highly disruptive and cost-efficient fashion. LAVVAN is busy laying the groundwork to scalably leverage Amyris’s platform and we believe we will achieve a sizeable return on our investment in this rapidly expanding market.
Why The Cannabis Space Is Such An Important One For Amyris
At the moment, the cannabis and CBD industry is a quickly emerging one, offering up plenty of opportunity. In fact, it is estimated that in the United States, the CBD market will grow to be worth $22 billion by the year 2022.
Should the company’s work in the space lead to a strong line of products in this market, the revenue potential is incredible. Not to mention, the R&D side of this agreement is nothing small. In fact, at $300 million, this is the biggest agreement the company has ever signed, which goes to show the incredible revenue potential involved in the cannabis and CBD space in the United States.
AMRS Is No One Trick Pony
While I’ve focused heavily on the cannabis market so far, it’s important to mention that this is not the only space that the company works within. This is important as if something goes wrong in the cannabis and CBD space, the company has plenty of other business to fall back on.
In fact, on February 12, 2019, the company announced that it had received a $4.4 million, 5-year grant from the National Institute of Allergy and Infectious Disease to discover sustainable alternatives to shark squalene to use as vaccine adjuvants.
Adjuvants are often added to vaccines in an attempt to enhance efficacy. With the new project, AMRS will work to discover and evaluate novel, sustainable squalene-like compounds produced by bio- or chemcial engineering for vaccine adjuvant applications.
Also, on December 12, 2018, the company announced that it had received a successful GRAS notification from the US FDA surrounding its zero calorie sweetener. As a result of the notification, the FDA has accepted the unanimous conclusion of panel and food safety experts that the company’s zero calorie sweetener is safe for use.
The sweetener is made from sugar cane and has the highest level of purity available today. This means that the sweetener will come with a better taste. Moreover, it is made through a sustainable production process using fermentation.
Moreover, the company announced on December 10, 2019 that it has executed an expanded agreement for its existing production contract with ADL Bionator Solutions. ADL is a leading European R&D company focused on the development of health products and services. This announcement marked the second expansion of the original agreement with ADL in the biotechnology space.
Going further back, I could come up with a large number of examples where AMRS has achieved success across a wide array of industries. At the end of the day, the company has proven its ability to successfully work across various industries. With an entrance into the CBD space, there’s no reason to expect that we would see any different.
It’s also worth mentioning that the company’s position from a financial standpoint is a relatively strong one, especially considering the just over $200 million market cap. For the three months ending on December 31, 2018, the company generated a loss of approximately $53.25 million. While that seems like a big deal, let’s look at the money the company has and will have on hand:
- First and foremost, at the end of the fourth quarter of 2018, AMRS had $35.35 million in cash on hand and $113.26 in current assets. Based on this, the company has enough liquid assets to make it through about a year and a half.
- Under the CBD agreement, the company is expecting to access all $300 million by the year 2022. With the cash and current assets on hand, the company has plenty of funding through the completion of this agreement, driving $300 more through the door for enough funding to run for an additional 5+ years!
- Finally, with the royalties and product revenue that the company is already seeing, it is generating $33.6 million in annual revenue. However, with royalties from the CBD product line, should it come to fruition, have the potential to generate multiples of this revenue.
All in all, looking at AMRS from a financial stability standpoint paints a bright picture for the future.
Why AMRS Is Falling Today
The declines in the value of Amyris today seem to be associated with a letter that the company received from Nasdaq a couple of days ago. The notice has to do with the fact that NASDAQ, and investors, are waiting for the company to file its annual report with the SEC.
Unfortunately, the filing has been held up by an inability to sort out the financial impact of various transactions negotiated in late 2018 with the Dutch company, DSM. DSM just so happens to be the company’s largest source of revenue.
The agreements include liens against IP, share purchase agreements, and a potential overstimation of royalty revenue throughout 2018 from the company. As investors continue to wait, they are becoming ancy, pushing the value of the stock down.
However, as mentioned above, I believe that the declines that we’re seeing on the stock today are a short-term opportunity to get in on strong growth at a hefty discount.
Consider The Risks
Any time an investment is made, there are risks that should be considered. When it comes to AMRS, when making an investment in the company, investors should consider the following risks:
- My bullish thesis is highly dependent on the company’s ability to successfully access the full $300 million under the CBD agreement and commercialize a product. Should this not take place, the long term outlook would be very different.
- Amyris is a company that builds products through partnerships. Should any of its partnerships dissolve, we could see declines in the value of the stock.
- Finally, with a market cap of under $300 million, AMRS is considered to be a penny stock. Penny stocks are often rooted in high-speculation. While I don’t believe that Amyris is as speculative of an investment as others in the penny stock realm, it’s always important to consider the added risks involved in investing in smaller companies.
The Bottom Line
The bottom line here is that the delayed 10-K isn’t great. However, what it is doing is creating a discount for those that are looking to get involved in the long term growth of AMRS, and I believe that there is plenty to look forward to.
While the company has had plenty of successes across various industries, the big story for me is the potential of the company to increase revenue through its CBD partnership. With cannabis and CBD emerging in the United States and abroad, the opportunity to get in early and carve a niche in the space is a big one. Not to mention, the contract surrounding the project will drive more milestone revenue than the company has earned under any of its previous agreements.
This, combined with the continued success of the company in the various industries in which it already operates suggests that before today’s drop, AMRS was already undervalued. With today’s declines, the stock has become a long-term opportunity that’s hard to pass up in my opinion!
Well this article won’t age well.
I appreciate your comment, but I have to disagree with your assessment. While AMRS has some struggles, the stock looks like a good buy to me, especially considering the large drop in value that’s likely an overreaction to the 8K filing. Thanks again.
Looks like Amyris will most likely report by the 22nd of July. Are you still bullish?