The Intrepid Investor – How are biofuels IPOs performing and why
This is a series by BiofuelsDigest.
Who’s up, who’s down, who’s in the queue, and where might all this take us? Plus, an important update from Coskata.
In Part I, today, we look at the performance of the six IPOs to date in the aftermarket, the Ceres IPO which is ready to price its IPO tonight, and look towards the IPO queue at important changes in Coskata’s recent filings.
In Part II, tomorrow, we look at how Ceres performed, we’ll have an update on Amyris, and we’ll look at the other companies in the IPO pipeline – Myriant, PetroAlgae, BioAmber, Elevance, Genomatica, Enerkem, Mascoma, and Fulcrum Bioenergy.
Who should care about IPOs and company performance? Well, investors, without question. But other producers too – as ‘news you can use’ and also because strong IPOs mean strong investor interest in venture funds. Policymakers, too – strong IPOs make viable companies and drive commercialization and balance sheets that lead to scale. Plus, the R&D community – IPOs offer indicators of the direction research will take, as well as making strong collaborative partners.
For the intrepid retail investor, IPOs have been running hot, performing cold. Though many early-stage venture capital investors can still realize returns on their investments in companies such as Codexis, Amyris, Solazyme, KiOR, REG or Gevo – for the average small investor, it has been a rough ride.
In the IPO window that opened in April 2010 with Codexis’ successful IPO, six companies in the biofuels and renewable chemicals sector have gone public, and as a class they are between 8 and 61 percent off their IPO price.
Crushed in the aftermarket
It wasn’t always so. Last spring, as Gevo and Solazyme were going public, the stocks were flying off the shelf, and investors pushed stocks like AMRS as high as $33.85, SZYM up to $27.47, and GEVO up to $26.36.
|IPO Date||IPO Price||Post IPO Hi||Low||Today||Change||Market cap ($M)|
|Renewable Energy Group||1/19/12||10||10.29||8.56||9.24||-8%||264|
Since then, most of the companies have stayed entirely in line with their original plans, as expressed to their investors in there pre-IPO road shows and beyond, and most have stayed in line with their technical and economic targets and on their growth curve. Market reaction? They got crushed.
Accordingly, we can see the current price environment as more of a measure of the public’s appetite for risk (like, about zero), than as a verdict on the technologies and companies themselves. The stocks went through dizzying declines that pushed the Biofuels Digest Index by almost 15 percent in six months, and individual stocks lost as much as 75 percent of their value.
Generally, the six (REGI, being only three weeks in the public markets, doesn’t factor much in to the aftermarket analysis), have recovered off their lows. Gevo has rebounded 80 percent from its $5.04 low, Solazyme (SZYM) has recovered 53 percent to $11.78, and KIOR is up 50 percent to $13.01.
But market caps tell a story about the expectations of the market, in a different way than price does – who is expected to go big? There. we see a lot of differentiation. Pyrolysis rules – KIOR, with its $1.3 billion market cap, leads the way. The remainder, with the exception of REG, are fermentation technologies. There, Solazyme is in the $700 million range, Amyris trails at $400 million, and the rest are in the $180 million to $243 million range.
REG, which focuses on transesterification of veggie and waste oils into biodiesel, is at the top of the trailing class, at $264 million.
Opportunity? GEVO, KiOR and SZYM are trading close to their most recent $9, $14 and $13 targets (respectively, as projected by Raymond James analyst Pavel Molchanov), while AMRS has a pretty good upside, with a target price of $20, as of December.
The Ceres IPO
Ceres is expected to price tonight, and has dramatically cut its expected price range to $16-$17, down from the $21-$23 range expected just a few weeks ago.
It’s been a common theme. Amyris struggled on price at the gate, as well as Codexis and KiOR, and more recently, Renewable Energy Group. Gevo and Solazyme performed better in the IPO itself, but of course have fallen off substantially since.
Now, Ceres is the first of the biotechnology feedstock plays to come to market. It’s upside? Potentially, there are a lot of customers for energy cane, switchgrass and sweet sorghum, among the crops targeted by the company, which focuses on improving traits such as salt tolerance, drought-resistance and works on yield enhancement.
Coskata, INEOS Bio settle lawsuit: Coskata revises S-1
Moving over to Coskata, the company recently revised its IPO documentation to reflect a settlement of its lawsuit with INEOS Bio, which reflected a trade secret dispute.
From the revised S-1: “On January 12, 2012, the parties signed a settlement agreement in which they agreed to dismiss all claims. Pursuant to the settlement, Ineos will receive from us a $2.5 million cash payment and 2,125,000 shares of Series D preferred stock, after which all the asserted claims will be dismissed, and a mutual release of future claims will become effective.
“However, the release does not preclude Ineos from bringing claims against us arising out of conduct occurring after the effective date of the settlement agreement, or from bringing certain claims against us arising out of conduct prior to the effective date of the settlement agreement.
“In addition, Ineos has the right to receive 2.5% of future ethanol royalties and license fees received by us from third parties who license our technology, subject to a cap with a net present value of $20 million, which will be increased based on future interest rates.”
Bottom line for INEOS? Validation, broadly speaking, of their claims of harm, and some potentially valuable relief through participation in Coskata’s upside. For Coskata, the company has more freedom to operate, and can offer a far greater degree of certainty on IP risk to its investors in the IPO process
Other Coskata IPO updates? Shutdown of the demo plant; aiming at natural gas and biomass mix?
The most striking update is that the company quietly shut down its Lighthouse demonstration unit in Madison, Pennsylvania.
The company explains: “We suspended continuous operations at Lighthouse due to the considerable costs associated with such operations and because our key objectives for operating the facility had been met. These objectives included confirming commercial design metrics, testing commercial-ready microbial strains and demonstrating the conversion of multiple feedstocks into ethanol. Most of Lighthouse’s personnel were relocated to the research facility at our headquarters in Warrenville, Illinois. Our Lighthouse facility is available to be restarted as new micro-organisms are ready for evaluation at this scale and the site lease is extended.”
Another update? Coskata might well be joining the group of XTL technologies. This is a group of technologies that are working on a broader set of feedstocks than biomass (BTL), including natural gas (GTL) and in some cases coal-to-liquid (CTL). In its revised filing, Coskata has signaled its interest in working with natural gas, which itself has attracted increasing attention from the Obama Administration and the Congress as a base for enhancing energy security.
The company explains: “We plan to install a natural gas reformer to ensure a continuous supply of syngas. Consistent with operations at our Lighthouse facility, we expect to operate this reformer on a nearly continuous basis. It is therefore likely that a portion of the ethanol produced at Phase I will not be considered renewable.”
The bottom line for Coskata: freedom to operate, and conserving cash through shutdown of the demonstration unit, which after 15,000 hours had likely yielded up all the engineering data needed for the first commercial plant. Its tough not to be able to work on demonstrating other feedstocks, but Coskata’s focus is clearly on the first commercial facility, and taking on other challenges later. Tough business decisions, and a transformative technology: two reasons why Coskata has quietly emerged as a favorite among analysts looking at the IPO pipeline.
In California, Amyris announced major changes to its financing, strategy and near-term production targets, disclosing that it has produced only 1 million liters of biofene to date at three tolling facilities, compared to a 2011 target of 9 million liters originally set in April 2011, and reduced to 1-2 million liters in an update later in the year.
Abandoning previous cash flow, production targets
In other news, the company abandoned its 2012 production target of 40-50 million liters of biofene for 2012, after reconfirming that target last year at the time it dropped its 2011 forecast down to 1-2 million liters. At the time, the company described the reduced 2011 volumes as a reflection of difficulty in start-up that would not affect its 2012 production plan.
Raising more capital
As a result, the company also abandoned its forecast on positive cash flow, and said that, in order to strengthen its finances, it has commenced raising a private equity round, of undisclosed amounts, which it “expect to close with investors who know us well.” The company said that it had also obtained up to $40 million in project finance, of which $10 million was already funded.
Difficulties reaching targeted production yields at scale
In recognizing its production difficulties, Amyris CEO John Melo said that the company had had more difficulty than expected in translating peak yields in the lab to stable and reliable production at scale.
The company said that it had increased its production rates to expected levels, at all three of its contract fermentation sites.
Focus on high-value products; high-volume through JVs
Accordingly, the company said that it had also abandoned plans to directly produce high-volume products, such as fuels, through its own commercial plants, but would focus on production of high-volume products through its joint ventures with Total and Cosan, and would focus its own commercialization efforts on high-value polymers, flavors & fragrances, cosmetics, and consumer products.
Melo said that the company was producing at Tate & Lyle and Antibioticos; he said that the company had had significant operational issues in 2011 at Biomin, but had stabilized that operation by year end. stable at end of 2011 at Biomin.
Abandoning production expansion for now at Antibioticos
In recognizing the operational challenges of translating yields in the lab to commercial-scale production, and the resulting drop in production volumes, and pressure on the company’s cash and tea, Melo said that the company would abandon plans to simultaneously expand production capacity at Antibioticos as well as establishing its new production facility at Paraiso – and instead would focus solely on completing its Paraiso facility.
Melo said that, following completion of the 50 million liter facility at Paraiso, it would focus on completing its 100M liter San Martinho project. Melo confirmed that the company would maintain its contracts for access to feedstock, and described the changes in ramp-up strategy as being conservative and prudent with cash.
Melo, who noted that he is “proud of team’s accomplishment and humbled by the challenges,” said that the company would no longer set production targets, but would instead make quarterly announcement of production volumes achieved.
Analyst Reaction: Cowen & Co, Raymond James
In a generally positive note to investors, Rob Stone and James Medvedeff of Cowen & Co wrote: “The stock will likely be depressed N-T, but we believe the L-T opportunity is unchanged. It has produced 1MM+ liters to date and is delivering to customers. Feedstock supply, collaborations, and Total R&D funding remain in place. By 2013, we believe multi-plant ramp plans could resume.”
A more sanguine Pavel Molchano at Raymond James writes: “While we had previously considered Amyris to have the most rapid timeline to profitability within the peer group, today we are suspending our rating, pending additional details on the 4Q11 call (February 27). We are providing new estimates – though, to be clear, our conviction in these new numbers is very low. Bottom line: We remain positive on Amyris’ positioning in the Gen2 biofuels space, and we don’t think that yesterday’s news permanently condemns its technology platform. That said, it will clearly take time for the growth curve to materialize – and for the stock to get out of its penalty box.”
The Bottom Line
A massive set of changes for the company, which will accordingly be announcing higher losses in 2012 than expected, and presumably in 2011 as well when it announces its full year results later this month. For sure, the changes in strategy are prudent given the company’s situation.
Critics are bound to point out that the company went to the public markets in its IPO without conducting a more thorough demonstration of its technology at sufficient scale, to eliminate the risk of problems of this magnitude happening post-IPO (and after the company had issued targets of 40-50 million liters of production in 2012).
It can be expected that the announcement will cast a pall over companies that are coming to market without demonstrations of the technology at sufficient scale, and could well have a knock-on effect on the valuation of other companies also using advanced fermentation technologies and still going through scale-up.
With Amyris, as with all early stage companies, we re-caution investors as we did in May 2011: “Use this owners guide to measure progress – analysts are using it too, to project value and set target prices. Watch the flow of announcements – is Amyris hitting its targets in terms of market entries, and timelines.”