Great science leads to better-performing, higher margin Consumer Brands

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In the last 24 months, Amyris (NASDAQ:AMRS ) has made significant changes and invested heavily in its business model to become even more vertically-integrated and to leverage early successes launching its own Consumer Brands. This flurry of activity caught investors by surprise as major investments in new plants, 8 new Consumer Brand launches, acquisitions of consumer brands and innovative influencer/marketing technology companies, new management additions, and new agreements with marquee Retailers boosted spending which contributed to a massive decline in the stock, already weakened by a bear market decline in Biotech and the overall stock market.

While this burst of investing surprised and scared investors over a potential need for continuing dilutive capital raises, we believe the heavy lifting is mostly done, cash burn will begin to decline in the 2nd Half of 2022 and into 2023, and that marketing exclusivity sales, better than expected milestone payments from ingredient deliveries out of the new fermentation plant and traditional plant financings, should bridge Amyris to positive cash flow in the next 9-12 months.

Thereafter, we believe continued rapid 50-75% revenue growth in high-margin Consumer Products and better Ingredients margins thanks to the new fermentation plant should begin to deliver positive earnings, possibly in the next 12-18 months. (We will present a more detailed analysis of the financial aspects of the Amyris business model in another Seeking Alpha article very shortly.)

This article focuses on how the new Amyris' Vertically-Integrated Business Model has been set up to deliver many years of rapid profitable growth:

The science of synthetic biology can be complex and the fully-integrated Amyris business model has many moving parts. As we describe the Amyris business model, please refer to the flowchart below as best my partner Ben Bratt and I can depict. At the outset, note that Amyris' competitors' horizontal business models stop at the second step, delivering the engineered organism to their customers, leaving it to the customers to complete the remaining steps:

Amyris' commercial success at delivering 13 out of 13 ingredients from its R&D pipeline and now its more recent success at launching and rapidly growing several Consumer Brands where consumers can see the better performance of its "Hero" Ingredients are clear indicators the Amyris business model is working.

For Amyris investors, the heavy investment period building this integrated business model has been painful, particularly in the last 9 months. Amyris now just needs to execute to earn a payoff on these investments.

It has taken Amyris years of investing with a lot of experimental trial and error research, analysis, and spending to develop its unique and highly integrated business model. For companies following Amyris, given the newness and unpredictability of fermenting with living organisms, there will be few shortcuts and we believe the path will be daunting.

As we work down the Business Model flow chart above, it is important to understand that Amyris' model has developed lines of communication and data flow up and down the vertical stack. From the fundamental lab science, strain engineering, ingredient selection, fermentation, production scaling, clean chemistry, downstream processing, and product formulations to industry partners, influencers, major retailers, and final consumers, the arrows go both directions as data inform those above and below in the stack to improve efficiency, quality, and time to market.

The result is that Amyris can make better decisions on which molecules to research or which tweaks to make to yeast strain designs to optimize production efficiencies or how much chemistry to use vs. biology or what changes need to be made with ingredient formulations to get better performance in the end products for consumers.

Amyris has established a multi-year lead in its science as discussed in our prior Seeking Alpha article, "Amyris Is Strengthening Its Lead In the Next Industrial Revolution" on March 30, 2021.

Over its almost 20 years of existence, Amyris has accumulated substantial know-how and intellectual property or IP. We have been informed by biochemists that Amyris has established domain dominance and key patents in all stages of its business model.

The illustration below (credit scientist Wiffle1 (u/Wiffle1) - Reddit) presents just some of the patents that Amyris has established in strain discovery and engineering of both the host organism (yeast at this point) and pathway enzymes, scale-up of fermentation, and downstream processing, which includes filtering, purification, and additional chemistry. It is widely recognized in the industry that Amyris has particularly strong IP dominance in terpenes. It is the largest chemical class with 80,000 compounds (out of 350,000 known chemicals), many of which have been extracted from plants and crude oil and used in the manufacture of biopolymers, inks, flavors and fragrances, pharmaceuticals and cosmetics, biofuels, and natural rubber as described in "frontiers in Science".

According to Wiffle1, Amyris IP in terpene technology and Acetyl-CoA flux technology sit on top of the strain stability IP (left below). One of Amyris' core strengths is its strain stability during fermentation runs which typically take several days. If not run with ideal conditions, fermentation batches could develop mutations that lead to reduced yields and higher costs/kg., making precision fermentation of target molecules difficult to scale.

Amyris has a significant head start in the synthetic biology industry with an extensive library of organism strains that it developed under a $34 million 2015 DARPA (Defense Advanced Research Projects Agency) grant. Amyris has been able to take its learnings from the DARPA "Living Foundries: 1000 Molecules" program to "develop tools and processes" and by trial-and-error engineer strains of yeast and other organisms that would consume sugar and produce through fermentation 250 different target molecules that had been identified by the US government as strategically important.

Since then, Amyris has improved on those original strains using CRISPR, machine learning, AI, high-performance computing, biology, and chemistry to engineer increasingly efficient yeast strains and enzymes and is actually producing some of those molecules at scale today.

Amyris has used those learnings to build a high-grade R&D pipeline of 25 molecules, which it has carefully evaluated and cultivated to address several large, high-margin market opportunities. Some of these are being developed at the request of industrial partners, and some by its Consumer Products teams for Amyris' own Consumer Brands.

At a NASDAQ Investor Day event on April 11, 2022, Sunil Chandran, Amyris Head of R&D, reiterated that Amyris has mastered most of the 21 known chemical families and pathways which show the breadth of opportunities and why we believe that synthetic biology will be the next big industrial revolution with Amyris leading the way.

To underscore the breadth and depth of Amyris' scientific expertise, Sunil mentioned that Amyris could engineer strains of organisms to ferment almost all of the 326,000 molecules known in nature in my December 15, 2020 interview with Sunil and CEO John Melo. The 2nd half of the interview is here: Part 2 of the R&D interview.

At NASDAQ, Sunil also mentioned to me that Amyris' dominance in terpene IP derived from its early struggles to make farnesene for biofuels. He explained that once you develop platform capabilities in one chemical family, you can apply the learnings to other chemicals in that family.

It's nice to have dominant expertise in terpenes, the largest chemical class from which Amyris has already been able to develop and produce at scale the artemisinin anti-malarial treatment, biofuels, vitamin E, squalane, hemisqualane, cannabinoids (CBD and CBG), and Reb-M sweetener.

The science is difficult, but scaling production is not easy and Amyris has just successfully initiated precision fermentation of vanillin at its new state-of-the-art Barra Bonita plant (shown below). With 8 large fermentation tanks (left), this facility will allow Amyris flexibility to ferment five different ingredients at the same time plus time for clean and prep, offering much greater efficiency and lower cost to Amyris and its partners.

Amyris website: Barra Bonita photos - August 2021 showing 8 large stainless fermentation tanks - 8/10/21 Opco Tech Conference slides (left) and plant just before June 23, 2022 commercial production - 6/14/22 Opco Consumer and E-commerce conference slides (right)

The potential savings and efficiencies are enormous. To date, partly due to its rapid growth and capacity shortages, Amyris has relied on expensive third-party contract manufacturing organizations to do batches of upstream fermentation runs as well as using other CMOs for downstream chemical processing and final consumer product form, fill and packaging. This has been costly due to inefficiencies and delays as well as vulnerabilities to inflationary pressures exacerbated by Covid and supply chain shortages, particularly from China.

Our understanding is that it will take a few quarters to transition from CMOs to Amyris' new fermentation facility as well as to its two consumer finishing plants. On the Q1 conference call, CEO Melo said that Barra Bonita would help boost target gross margins on "Technology Access" Ingredients from 27% to 35-40%.

The new Barra Bonita plant has two 100,000-liter fermenters and six 200,000-liter tanks that are twice as tall as the older 200,000-liter fermenters at the DSM Brotas plant, allowing gravity to mix the fermentation broth with much less energy consumption. (Amyris built the first-generation Brotas, Brazil plant in 2012 to make only farnesene in one line. The Brotas plant was later sold to DSM to raise capital.)

Sunil confirms that Amyris has also installed some of its own unique proprietary equipment and processes at the Barra Bonita plant. A scientist in the Amyris subreddit community shared this very insightful article "On Why Industrial Scaling Is So Challenging" to offer just one example of how Amyris cleverly uses genetic switches to maximize yield in the fermentation broth -- just one of many IP obstacles that will make it more costly for competitors to follow Amyris.

Recently, management stated the new Barra Bonita plant is already sold out through 2023 and that its next capacity expansion in 2023 will be the installation of four already existing 600,000-liter stainless steel fermentation tanks that Amyris had built a few years ago to make biofuels. They were mothballed after the last oil crash.

We would like to learn how quickly those mega tanks can be installed in a "Barra Bonita 2" facility and how much greater efficiency, productivity, cost reduction, and revenue increases could result from these large fermenters.

As Barra Bonita 1's infrastructure and utilities were designed with extra space to accommodate add-on facilities (visible in the photos), our understanding is that a Barra Bonita 2 expansion would come at significantly lower incremental capital cost/ton of fermentation capacity.

While all key ingredients need to be purified from the fermentation broth, some may need clean chemical processing steps to more efficiently produce a target molecule.

CEO Melo and Sunil Chandran have both indicated it is not widely appreciated that biology is only half of the formula for successful Synthetic Biology. The other half is chemistry. At NASDAQ, Sunil explained that there is a tradeoff. Sometimes, it is expensive to do it all in biology or it might make more sense to use biology to produce an intermediate step and finish with chemistry.

For example, Amyris ferments farnesene and uses chemistry to convert it into squalane or jet fuel, an important part of downstream processing. As reflected at the right side of the previous "Amyris Multi-stage Patent" Pool illustration, Amyris has considerable patent protection and know-how in large-scale chemistry and downstream processing.

At NASDAQ, Chief Strategy Officer Annie Tsong described the importance of formulation in developing final products that make a difference for consumers. She emphasized both chemistry and know-how are needed to combine Amyris' Hero Ingredients with other clean and sustainable ingredients to make products that are better for consumers and better for the environment.

While it is critical to have Hero Ingredients that perform noticeably better for consumers, you need other ingredients to make the product work, such as the right emollients which keep the squalane oil from separating from the other ingredients.

The illustration below from Wiffle1 describes how Amyris has not only constructed an integrated business plan but has developed intellectual property and patent filings to protect all stages of the Amyris' process from raw material building blocks to the biosynthetic pathway to manufacturing and finally to product formulation.

This again gets a bit technical but shows the strength and thoroughness of Amyris' IP, in this case, for the production and formulation of its Reb-M stevia sweetener. As you view this patent portfolio for just one molecule, be aware that CEO Melo informed me that Amyris' know-how is as important as its patent filings.

We've discussed how difficult it is to develop innovative biology and chemistry to engineer organisms to efficiently ferment better-performing molecules, then to be able to scale precision fermentation, then to do downstream processing to deliver better-performing and more pure ingredients, and then formulate your active ingredients with other ingredients to produce better-performing and clean and sustainable finished products for consumers.

We were surprised to learn that "form, fill & packaging" costs are a higher percent of sales than the actual ingredients for Amyris' consumer products. The cost structure has been challenged initially by producing at low volumes and in start-up mode for many of its product SKUs. It has also been costly to be growing so rapidly and having to rely on 3rd-party contract manufacturers in a time of supply chain shortages and Covid slowdowns, especially in China. These factors should improve as Amyris scales its own new finishing plants.

For Consumer Products, the new Reno and Sao Paolo finishing facilities have already started making products, and this should contribute to improved cash flows. While management has said they expect to deliver a 5-10% point improvement in Consumer gross margins, we would expect faster cycle times and possibly even better margin performance from economies of scale and improvements in the purchasing department.

Amyris has developed great science, fermentation processes, and formulations that make a difference, but it is also not easy to create several different products for multiple end market verticals simultaneously. Amyris has spent much time, effort, and capital in the last few years to establish an increasingly diversified mix of ingredients as well as finished consumer products for a variety of end markets -- some with partners (shown below under "Technology Access") and some for its own "Consumer Brands":

Source: Amyris June 14, 2022 Oppenheimer Conference

The original Amyris business model was to engineer organisms that would produce specific molecules that industry partners requested. These partners could use molecules in their own products, having the advantage of already knowing what their customers want and having a sales force to create demand.

Indeed, for many ingredients for large already existing markets, it is more efficient and a faster time to market for industry partners to use their large established sales forces to access their consumers than for Amyris to try to address those markets.

For example, the Amyris website quotes James P. Zallie, CEO of Ingredion, Amyris' new partner for the Reb-M non-calorie sweetener:

“The Amyris partnership and collaboration on Reb M from fermentation is progressing well, and initial customer feedback for this great tasting product has been very positive ... fermented Reb M ... has tremendous benefits from both the costs and sustainability platform, and we couldn’t be aligned with a better technology partner in Amyris, a leader in synthetic biology.”

In reality, the Ingredients part of the model has not yet worked well financially as Amyris has struggled to generate positive gross margins on Ingredients (segment now called "Technology Access") due to its heavy reliance on expensive outside contract manufacturers and recently significant supply chain problems.

Amyris does not disclose Ingredient or Consumer Product gross margins but has said recently that Consumer gross margins are in the 60-70% range. So, if we assume Consumer Product Gross margins of about 64% in 2021 and 2022 (lower percentages in prior years) and subtract estimated Consumer gross profit from total company gross profit, we estimate by subtraction Ingredients had negative gross profits in each of the last 4 years as shown in the table below. Ingredients had a very large implied loss of $63 million in 2021 due to elevated supply chain delays, expenses, and $10 million airfreight costs. Even if some of those supply chain costs were incurred in the Consumer Products area, that is a big number and represented a large part of the "cash burn" issue of the last few quarters.

We should point out these numbers exclude what management refers to as "one-off" gains on the sale of specific molecules and the "upfront" fees collected on the sale of molecule exclusivity rights exercised by partners opting to purchase exclusive rights to Amyris' production of a particular molecule. In 2021, these "upfront" fees were $150 million from DSM and $10 million from Ingredion, which, if included in Ingredients, would have produced an Ingredients segment gross profit of $97 million.

Tanaka Capital Management estimates by subtracting estimated Consumer gross profits from Corporate gross profits

We believe it is important to understand that Amyris expects to do more Molecule Exclusivity sales as an ongoing feature in its Business Model, they are very margin enhancing and structured quite differently from the outright sales of yeast strains for Vitamin A or Vitamin E in 2017 and 2019. It is an opportunity for Amyris to get paid a premium by certain partners that are willing to pay up for a more dominant position in a specific market and for a reliable high-volume source of pure ingredients. Note that deals require Amyris to be the producer (with Amyris benefitting from future fermentation cost efficiencies) and may allow Amyris to sell its own Consumer products with the ingredient as in the case of PureCane with Reb-M. While the timing of Molecule Exclusivity sales is difficult to predict, it appears that future sales will include annual earnouts and profit sharing which we believe should be included in analysts' estimates of ongoing revenues and earnings for modeling purposes due to their relatively recurring nature. We highlight in yellow above the annual earnouts estimated for 2022-2025 from the DSM and Ingredion exclusivity deals signed in 2021 which at 100% margin enhances the Ingredients margins, for example, from 36.2% to 51.9% in 2025 by our estimates.

It is also important to realize that as Barra Bonita and downstream processing facilities ramp in the next few quarters, there could be a massive $91 million positive swing from the $63 million gross profit loss in 2021 to an estimated $28 million positive gross profit in 2023. This highlights the importance of a smooth startup of Barra Bonita. We believe the new low-cost Barra Bonita fermentation facility will enable Amyris to manage its production much more efficiently, with higher yields, lower costs, significant economies of scale, and more favorable gross margins vs. Amyris' past dependence on CMOs.

We believe that the combination of Amyris-managed plants replacing CMOs and the layering in of Molecule Exclusivity earnouts should boost Ingredient margins dramatically over the next 12-18 months and could become the most important contributors to the bridge to Amyris profitability.

A smooth startup of Barra Bonita could be the biggest step in the swing to profitability and may have already begun. CEO Melo messaged comments and photos from the new facility on Instagram on July 15, 2022:

Note the size of the Barra Bonita facility (left) and the tank truck leaving Barra Bonita on July 18, 2022 filled with vanillin:

Amyris website from video showing large plant footprint (left) and Ingredients truck leaving Barra Bonita in July with vanillin (right)

If the original business model was to produce and sell ingredients to industry partners, why is Amyris developing its own consumer brands, possibly in competition with its industry partners?

In 2017, Amyris launched its first Consumer Brand, Biossance, out of necessity. Beauty industry partners were slow to change and use its ingredients and Amyris wanted to prove they really perform better. CEO Melo told me leading cosmetic companies were using only 3% squalane as a moisturizing ingredient in their formulations despite studies demonstrating that 10% or more squalane would be more effective. Amyris believed in its science and launched its own brand, Biossance.

To launch Biossance, Amyris recruited industry veterans Catherine Gore (formerly at Sephora and grew Kendo Brands to $500 million sales in 5 years) and Caroline Hadfield (LVMH, Sephora, The Body Shop, now CEO of Rose, Inc.). In the last 5 years, they found Amyris could formulate its own clean cosmetics (meaning safe and sustainable) line and grow it faster than many believed. Biossance has become the fastest-growing clean beauty brand at Sephora for over 3 years. It has also built a robust online Direct-To-Consumer presence to become over half of revenues. The online DTC business became a valuable asset during Covid and has become an invaluable DTC blueprint for additional Amyris consumer brands.

Biossance has grown revenues from $19 million in 2019 to being on track to double in 2022 to over $100 million according to CEO Melo at the UBS Conference. That is a CAGR of 74%/year for Biossance during Covid and has caught the cosmetics industry by surprise. Why?

We believe a large part of Biossance's success can be attributed to its science-based formulations using "Hero" Ingredients. Amyris calls them "Hero" Ingredients because they actually deliver noticeably better and cleaner performance for consumers. We also believe its success resulted from Amyris' ability to attract top management and team members who want to join companies that are winning with great science and new innovative ingredients that are clean and sustainable for consumers and the planet.

As seen below, Biossance has been winning many awards with its innovative formulations powered by science and Hero Ingredients such as "squalane" and is now one of ten Amyris Consumer Brands:

Source: Amyris website and June 14, 2022 Oppenheimer Conference

Many wondered if Amyris just got lucky with Biossance. With no history in the cosmetics industry, Amyris was fortunate to have Sephora take on Biossance as a new clean beauty brand. Biossance was also fortunate to launch an online DTC presence well before consumers started shopping more online during Covid.

Could Amyris be equally successful launching brands in other consumer end markets and could the Amyris consumer model work with other "Hero" Ingredients beyond squalane?

In 2019, Amyris launched PureCane, a line of more pure versions of the Stevia, no-calorie sweetener, to showcase to the food and beverage industry the benefits of a pure (no bitter after-taste) Reb-M sweetener as the Hero Ingredient, and Pipette, which has become a category leader in clean baby and family care products, including baby shampoo, bath wash, lotion, hand wash, hand sanitizer, and 50 spf suntan lotion with squalane as the Hero ingredient.

Last summer, Amyris launched several new Consumer Brands, including Terasana (for acne, skin redness, and inflammation), JVN (clean hair care), and Rose Inc (clean color cosmetics). While Terasana has not done as well as expected due to limitations on its ability to advertise the amazing efficacy of its Hero Ingredients CBG & squalane for acne and inflammation, JVN and Rose Inc have greatly exceeded expectations. JVN is expected to generate $50 million in revenues and be profitable in its first year, already matching Biossance's 4th year of revenues.

JVN utilizes a new Hero ingredient, hemisqualane which Amyris scientists developed from the squalane molecule to better nourish hair, reduce frizz, and replace silicone which is damaging to the health of hair and to the water system. With this miracle molecule, hemisqualane, we believe JVN can challenge Olaplex (OLPX), which is a $9 billion market cap haircare brand, expected to do $824 million in revenues this year.

Google Search Trends data below reflect how JVN's search interest is already years ahead of the launch of Biossance which has become a category leader in clean beauty.

At the Oppenheimer Webcast on June 14, 2022, CEO Melo reconfirmed that Consumer Brand revenues will grow over 150% in 2022 and mentioned that Rose Inc will grow 480% this year, JVN by 300%, PureCane by 347%, and Pipette by 178%. We caution that the first two are new brands growing from a very low base year.

The real surprises are the 347% and 178% growth rates for PureCane and Pipette, which are two older brands. For Pipette, this growth is likely related to the nationwide rollout of Pipette by Walmart into all its US stores which just began on July 20th. PureCane must be lining up a similar large retail arrangement or contracts with a large food or beverage company through its partner Ingredion, but this would be news to us.

We look forward to hearing more about Costa Brazil, MenoLabs, and the soon-to-be-launched EcoFabulous for Millennials, Stripes brand for menopause, a new brand to be launched at Walmart, and a new men's care line to be introduced in 2023.

We have believed for some time that the Amyris family of consumer brands could benefit from a synergistic halo effect with cross-selling opportunities as consumers learn to associate the name "Amyris" with clean, safe, and better-performing proprietary "Hero" Ingredients powered by science.

Amyris has long been aware of the lure of the very large and high-margin healthcare markets that could very well benefit from its ability to ferment healthcare molecules, including pharmaceuticals more cheaply and in more pure form than by traditional pharma industry methods.

Fortunately, Amyris is also aware of the very long lead times, regulatory hurdles, and high failure rates in drug development, so it is moving carefully into healthcare with industry partners.

One of the most promising near-term potential healthcare opportunities is the first of 4 vaccines being developed by AAHI, the Access to Advanced Health Institute, formerly called IDRI. We discussed this very large but high-risk opportunity in our November 12, 2021 Seeking Alpha "Amyris Buying Opportunity Created By Q3 Miss, Mega Convert & Potential Revolutionary COVID Vaccine".

In June, 50/50% partner ImmunityBio (IBRX) initiated enrollment for multiple Phase 1 human trials in South Africa and Botswana. We expect little information flow until trials have progressed over the next few months, but if positive, it could be worth multiples of Amyris' current market capitalization and you may want to read that SA article.

We are confident that Amyris will continue to add new Consumer Brands, add more SKUs to existing Consumer Brands, add more Ingredients, sign more Molecule Exclusivity deals, and enter new end market verticals like Healthcare.

The final step in the Amyris' Vertically-Integrated Business Model is about marketing and establishing multiple channels to generate revenue where Amyris is exceeding expectations.

We have discussed how Amyris is partnering with industry leaders to access Health, Beauty, & Wellness markets more quickly as well as by building its own Consumer brands Direct-to-Consumer online sales platforms and through a few select retailers. This year and next year we expect brick-and-mortar retailers to take off, providing significant scale to the distribution of several Amyris brands.

Ironically, we expect that in the same way Amyris demonstrated the better performance of its Hero Ingredients to drive demand from industry partners, we believe that Amyris is demonstrating the superiority of its Consumer Brands by virtue of their rapid uptake by consumers in the DTC channel which is persuading brick-and-mortar retailers to jump on board.

The success of Biossance and now JVN and of Rose Inc out of the gates has apparently caught the attention of not only the personal care industry but also some of the major retailers. In the next 12 months, based on company announcements about adding new retailers to sell its Consumer Brands, we believe that the addition of a large number of doors to carry Amyris consumer products, and the addition of Walmart in particular could materially boost Consumer revenues. Beauty is a $42 Billion category in the US and Walmart is "leaning hard into beauty...adding 40 new labels...and expanding its emphasis on serving people of color" according to TalkBusiness on October 16, 2021.

Anne Myong, former Chief Administrative Officer of Walmart China Retail and SVP of Walmart Global eCommerce, was recently named President of Amyris Consumer Brands. At NASDAQ, she told me the addition of 4-5 Pipette SKUs in all 4000+ Walmart stores all at the same time is unusual and must reflect Walmart's confidence in the brand. She also pointed out when Walmart takes on a brand, other retailers will take notice immediately.

The layered mountain graph below shows the dramatic rise in the number of retail doors announced to carry Amyris consumer products this year (credit: Mattccccc at r/Amyris reddit). We expect 2022 and 2023 will be big years for brick-and-mortar retailers to boost revenues for Amyris Consumer Brands and possibly provide upside surprise to Consumer revenues in the next few quarters.

CEO Melo mentioned Walmart had expressed interest in carrying JVN. However, Amyris wishes to preserve its "masstige" (mass prestige) JVN price points but offered another brand designed specifically for Walmart. At the June 14, 2022 Opco webcast, CEO Melo mentioned that Amyris expects to be "delivering operating profitability...for a brand we are building for launch into Walmart stores this year." We believe it will be a women's clean hair care line, and recent online activity suggests that it may be a clean beauty brand with actress Tia Mowry who has 10.7 Mil. followers, twice JVN's. We repeat that CEO Melo said at Opco this new Brand for Walmart is expected to be one of four Amyris brands expected to have an operating profit in 2022.

Amyris has had great success adding star power influencers to its Consumer Brands, beginning with Reese Witherspoon for Biossance, Jonathan Van Ness for JVN Haircare, Rosie Huntington-Whiteley for Rose Inc, Francisco Costa for Costa Brazil, Naomi Watts for the new Stripes menopause care line and now Tia Mowry for a new women's line. We hear that an additional high-profile male sports figure may come on board for a new Men's line next year. The formula has worked well for Biossance, JVN, and Rose Inc, and we'd expect Amyris to continue to follow this strategy for new brands.

As noted at the bottom of the Business Model Flowchart, Amyris acquired MG Empower and Beauty Labs which we have not heard much about. Amyris is a tech company and we are looking forward to learning how these industry leaders in social media-based "influencer marketing" and in AI virtual "try-on" technology for in-store and online conversions will be used by Amyris to enhance marketing and sales.

We believe Amyris' use of science and clean chemistry to produce clean products that make a difference for consumers and the environment is under-appreciated. Amyris' mission is to Lead the Way to a More Sustainable Future. All products must meet three criteria which it calls its "No Compromise® standard: lowest cost, best performing and most sustainably sourced."

While Amyris is deeply committed to this credo, we have noticed that there are significant secondary benefits. In addition to providing a compelling and economic pathway to a more environmentally-sustainable planet by reducing dependence on crude oil and carbon-generating chemicals, Amyris is (1) meeting the needs of consumers who are increasingly committed to buying cleaner and more environmentally-sustainable products; and (2) Amyris is able to attract and engage employees, leaders, and influencers who are devoted to the same ideals, helping to make its goals more attainable and the company itself more sustainable.

In contrast to Amyris' Vertical Business Model, synthetic biology industry players like Ginkgo (DNA) and Zymergen (ZY) employ a "Horizontal" model where they focus mostly on optimizing engineered strains of organisms to produce specific molecules for industry partners. They hand over those strains to their partners to scale production with either the partners' fermentation plants or with CMOs, and the partners go to market selling the ingredients or finished products to their existing customer base.

In our SynBio Business Model Flowchart, the Horizontal Model players focus on doing an excellent job in the first two steps and stop there. We are confident that those perfecting the Horizontal SynBio Model are very good at strain engineering. However, our research into the Amyris' Vertically-Integrated model would suggest that engineering strains are less than half of what is needed to successfully deliver molecules at scale and at required yields, purity levels, and cost/kg.

We have heard from the industry that Zymergen's highly-touted Hyaline flexible screen molecule may not have been able to achieve purity levels needed to meet customer specs. While it was unfortunate for Zymergen, we fully believe that it is not surprising given the unpredictability of biology and of living organisms which can mutate and reduce yields and purity if not managed with precision as production is scaled.

As we discussed earlier, we have learned that Amyris has already been down these treacherous paths over the years and has developed processes, systems, and controls with feedback loops and learnings in its databases designed to avert the causes of losing the recipe, lower yields, and higher impurities.

We apologize for the length of this article, but we felt it important to describe the many critical steps after strain engineering that are required to ferment molecules at scale that then need to be further processed using chemistry and biology to create final products that consumers can truly perceive as performing noticeably better.

The fact that Amyris has been able to commercially produce 13 of its 13 latest molecules at scale successfully and convert some of its best Hero Ingredients into category-leading Consumer Products is proof positive that the Amyris' Vertically-Integrated model works.

Our research would suggest that there are no shortcuts in Synthetic Biology and we believe that the unpredictability of biology will surprise many of those venturing down the Horizontal Model path and even those that may elect to follow a Vertical Integration path.

There are many reasons it has taken Amyris over 15 years spending over $2 billion making mistakes, going through innumerable "design, build, test, analyze" cycles in the lab, and attempting to scale to arrive at where it can execute with near 100% certainty on producing new molecules. Kudos to Amyris' scientists and technicians that have done the hard work. It will soon pay off.

As the Synthetic Biology industry evolves and grows, we expect that Amyris' success constructing all phases of the Vertically-Integrated Model will enable it to move laterally or horizontally into adjacent end markets, one new vertical at a time and have a higher probability of success.

So far, this "vertical to horizontal" strategy appears to be faster to revenues, at lower cost and lower risk than the "horizontal-only" business model. It is also looking like Amyris could be the first in the SynBio industry to profitability.

We believe the construction of the Barra Bonita 2nd Gen fermentation facility and the related finishing plants will add a whole new dimension to Amyris' leadership role. If Amyris' Ingredients segment does see a strong boost to profitability from Barra Bonita as we suspect, it may reveal what might become a tragic flaw in the Horizontal Model which is that dependence on CMOs and other first-generation fermentation facilities could lead to low profitability or losses as Amyris has experienced in the last few years using CMOs.

Looking forward, we will be curious to see what kinds of additional advancements Amyris can make with the greater ability to control all aspects of the production process and experiment with new processes as it builds even newer generation plants. Like Moore's Law for semiconductors, we fully expect Amyris to make continuous improvements to its processes and continue to increase yields and drive down costs/kg for an increasing number of ingredients. The opportunity is there for Amyris to do what Intel (INTC) did in the multi-decade Digital Revolution by maintaining its technology lead in design and process engineering as the Synthetic Biology Revolution flourishes for decades to come.

There is one last aspect of the Amyris' Vertically-Integrated Business Model that we only became aware of recently. We believe it further underscores how Amyris is maximizing on the massive opportunity that the Synthetic Biology Revolution promises as precision fermentation replaces old chemical processes of the past.

We discovered that Amyris can realize about 100 times more revenue and profit dollars per milliliter of its active Hero Ingredients if sold in its own consumer-branded bottles rather than if sold as a bulk ingredient to the established cosmetic industry leaders.

At the June 14, 2022 Oppenheimer presentation, CEO Melo said that "selling molecules captures only 10% of the value, selling Ingredients realizes 20% of the value and that selling Consumer Products captures the entire value chain."

We needed to understand what that meant so we asked at what price Amyris sells squalane, its biggest selling Hero Ingredient as a bulk ingredient to the cosmetic industry as well as how much squalane is contained in its most popular Biossance product, "Squalane + Vitamin C Rose Oil which sells for $72/bottle.

We did the math and we estimate that Amyris can generate about 100 times greater revenue and profit dollars per milliliter of squalane by selling its active Hero Ingredient inside a finished Biossance-branded bottle versus large amounts of the ingredient sold in bulk at volume discounts. (We also adjusted for the differing amounts of active ingredients in various SKUs as well as promotions and wholesale pricing.)

This dynamic becomes more relevant when you consider that Amyris and its CMOs have not been able to make enough Hero Ingredients to date and will likely be short of capacity through 2022 and 2023 due to rapid growth, even with Barra Bonita coming on stream.

We believe that the successful rollouts of Consumer Brands are making the Amyris' Vertical Business Model significantly more robust and more valuable for shareholders. Strong brands, if nurtured, can become quite durable over the years and we believe each new Amyris Consumer Brand can become a "gift that keeps on giving" by generating higher revenue and earnings growth than if Amyris just remained in the Ingredients business.

We will discuss this Consumer Multiplier Effect further in a follow-on Seeking Alpha article. It will update our financial models to be consistent with our now more complete understanding of the Amyris' Vertically-Integrated Business Model and its multiple growth drivers creating upside to revenues, earnings, and stock valuation as Amyris transitions from investment mode to payoff mode.

Our concerns are largely short-term as Amyris completes the heavy investment spending and looks forward to new plant efficiencies.

1. Amyris has been investing heavily to build its business platform, and cash "burn" surprised investors in Q1 2022 at a negative $193 million. Many are concerned that losses will be just as big in Q2 and we know there must be Barra Bonita startup costs in June and July as well as ongoing Consumer Brand launch expenses. However, on the Q1 conference call, management indicated it expects spending and cash burn to decline in the 3rd and 4th quarters, turning positive in Q4 before capex, which we believe is consistent with significant cost savings on scaling the new Barra Bonita plant and high incremental margins on Consumer Brands as they gain traction.

2. There is concern that Amyris will continue to rack up losses, run out of its $287 million of cash, and have to resort to additional dilutive capital raises. We believe that there are sufficient non-dilutive sources of capital from marketing exclusivity sales, Ingredient milestone payments, and traditional plant financings to bridge the company to sustainable positive cash flow sometime in the next 9-12 months.

3. There is always a risk that a large new plant could have difficulties starting up and delay the Ingredients transition from losses to profits. However, Barra Bonita began production in mid-June and by mid-July management said the 1st line was already producing tons of vanillin a day, and to our surprise, the 2nd and 3rd lines were already starting up. This implies a smooth startup of the new Barra Bonita fermentation facility.

4. The rapid growth of the important Consumer Products piece of the business model may fall short of expectations. So far this year, the flagship Biossance and Pipette brands as well as new brands are off to a strong start and should benefit from additional retail distribution.

We highly recommend viewing this video interview of Eduardo Alvarez, COO of Amyris to understand how Amyris is leading the SynBio industry to the next level of precision fermentation at scale, further enhancing the power and value of its Vertically-Integrated Business Model.

In a follow-on Seeking Alpha article, we will discuss the financial implications of the 100x Consumer Products Multiplier Effect, the new plants at Barra Bonita, Reno, and Sao Paolo, selling Marketing Exclusivity options, and the significant operating leverage of 40-50% revenue growth at high incremental margins. We will update our financial models to be consistent with our now more complete understanding of the Amyris' Business Model and the multiple growth drivers creating upside to revenues, earnings, and stock valuation as Amyris transitions from investment mode to payoff mode.

This article was written by

Disclosure: I/we have a beneficial long position in the shares of AMRS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: WE ARE LONG AMRS AND TSLA. Many thanks to my partner Ben Bratt for his support and work on the Business Model Flowchart and the Ingredient Gross Margin table. This article expresses my personal beliefs and opinions relating to the subject matter contained in the article. Other than payment from Seeking Alpha for the publication of this article, I have not been compensated by any entity, and all thoughts, opinions, conclusions and statements contained in this article are my own. Further, I have no affiliations or arrangements of any kind with any entity mentioned in this article. Finally, I have purchased shares of AMRS and TSLA for myself and for my clients in the past, and if the companies continue to perform as I expect, it is likely that I will purchase additional shares of each, both for myself and for my clients. This report is not, and should not be construed as a solicitation or offer to buy or sell any securities or related financial products. It has been prepared by me solely from publicly available information. The information contained herein is believed to be reliable but has not been independently verified. I make no guarantee, representation or warranty, and accept no responsibility or liability whatsoever as to the accuracy, completeness or appropriateness of such information or for any loss or damage arising from the use or further communication of this report or any part of it. Information contained herein may not be current due to, among other things, changes in the financial markets or economic environment. Opinions reflected in this report are subject to change without notice. This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. The report has been prepared without regard to the individual financial circumstances, needs or objectives of persons who receive it. The securities and investments related to the securities discussed in this report may not be suitable for all investors. Readers should independently evaluate particular investments and strategies, and seek the advice of a financial adviser before making any investment or entering into any transaction in relation to the securities mentioned in this report.