Green economy

The Bioeconomy Investor and the decline in information channels

Friday, August 11, 2017

Investing in the BioEconomy is a complicated endeavor, but can offer significant opportunities for the informed investor. The industry drivers are numerous and presents a puzzle that demands quality information flow, insight and analytics to succeed. Three storylines this week offer us evidence of a growing information gap, with fewer channels for insight and information to flow between companies and investors, that is beginning to impact the industry’s ability to raise capital in a significant way.

At BioAmber: rising sales, new financing, a dangerous put option retired, and a tanking stock price First, BioAmber got roughed up in the public financial markets. Trading at $2.70 per share a month ago, the stock has tumbled to $0.523 as of yesterday. What happened?

As Cowen & Co’s Jeff Osborne notes in an elegantly economical and (given the circumstances) upbeat note:

This morning, BioAmber priced an $11mn secondary offering with full warrant coverage. Following the pullout of Mitsui from the facility in Sarnia, Ontario; delays in moving the CJ joint venture in China forward; and increased risk disclosure in the 10-Q regarding funding for Plant II in the U.S. or Canada, shares have been under pressure in recent days.

BioAmber has had a tough few weeks but hopefully the painful dilution from today’s secondary offering bridges the gap to either the China JV or Plant II having clarity. The initial Sarnia facility is ramping up and validation of biosuccinic acid with new customers is progressing; however, from an investment standpoint this facility as a standalone site is not enough to bridge the gap to profitability. We continue to model the CJ joint venture moving ahead in 2H18 and Plant II commencing production in 1H20, but acknowledge both of these items are binary outcomes and present a great deal of risk to our forward looking forecasts should the facilities not move forward.

BioAmber COO Fabrice Orecchioni added color in the quarterly investors call this week:

The key takeaways from second quarter of 2017 we would like to convey to shareholders are the positive sales momentum BioAmber has experienced year-to-date and our purchase of the minority position of our Sarnia production facility from Mitsui & Co. Q2 2017 sales of bio-succinic were a record $4.1 million, a 64% increase year-over-year and a 94% increase over Q1 2017. In addition to the record revenues, we had a record 9 new customers buying bio-succinic acid in Q2 and a total of 16 new customers, year-to-date, and we believe this trend will continue in Q3.

Orecchioni conceded that “while our sales cycle has proven longer than initially expected, we are seeing solid traction amongst the over 200 companies that have received our bio-succinic acid.”

On the Mitsui transaction, he added:

Turning now to our purchase of Mitsui’s equity position in the Sarnia joint venture…Given Mitsui’s long-standing presence in Canada and its shareholding in BioAmber Inc., the parties negotiated terms that allowed Mitsui to achieve its corporate objectives, while enabling BioAmber Inc. to assume full ownership of the Sarnia facility. The sale has been concluded for nominal considerations. However, another key aspect to take into account is that Mitsui had a put option which could have allowed them to sell back their shares at 50% of their total investment. With this deal, BioAmber secured a 38.9% equity position and removed the risk of their put option being exercised resulting in a need for significant amount of cash. This is a great transaction for BioAmber shareholders.

As Osborne notes, it’s been a rough month but not entirely bereft of shareholder benefit when you consider the Mitsui put option and the rise in BioAmber sales. Yet, we see the field cleared out in terms of investors — too many sellers, not enough buying pressure. We’ll come back to that theme again, shortly. Let’s turn for now to Amyris.

Over at Amyris: fresh capital, revived strategic interest, strong product sales growth, and a tanking stock price

In California, Amyris revealed the closing of the $50 million second and final tranche of its previously announced financing. The second tranche of $50 million was led by a $25-million investment from Koninklijke DSM with the remaining $25 million contributed by Vivo Capital.

“We are pleased with the progress we’ve made thus far in working closely with Amyris to plan how best to leverage each other’s strengths to create value and foster growth,” said Chris Goppelsroeder, President & CEO of DSM Nutritional Products. “Amyris fits well with our strategy of focusing on growth companies with leading underlying technology, a strong intellectual property portfolio and market potential,” said Frank Kung, Managing Partner and Founding Member of Vivo Capital.

As part of the previously announced equity investment DSM is making into Amyris, DSM and Amyris have agreed to focus on a number of short- to medium-term product development & production opportunities in vitamins and other nutritional ingredients. This agreement is the first of what is expected to be several of such development and production projects. As part of the agreement, DSM will partner with Amyris and fund the development of the technology to produce the specific molecule that Amyris will scale and supply long term to deliver improved performance while growing its business. DSM will take the molecule to market.

Yet, shareholders haven’t been exactly enthralled with the new investment. Shares in Amyris dropped 9.15% to $2.85, and shares have tumbled from an effective price of $10.50 in mid-April to $2.78 today.

Amyris CEO John Melo notes that $86 million in debt has been retired and that the company’s financing needs are “largely behind us” and that the company is now focused on executing on strategy. Melo said that “we are on track to more than double our product revenue this year to over $60 million and continuing delivery on our stable $50-60 million of annual collaboration revenue.” Yet, despite new capital, a new major strategic partner, and rising sales, we see the field cleared out in terms of investors — too many sellers, not enough buying pressure.

We’ll come back to that theme again, shortly. Let’s turn for now to our third theme for today.

An industrial sector, almost bereft of equity analysts

If you happened to spot the BioAmber investor call transcript this week, you’ll note two equity analysts on the call, Cowen & Co’s Jeffrey Osborne and AltaCorp Capital’s Dirk Lever. These are bright stars and smart cookies, but where’s the rest of the pack? Raymond James’ Pavel Molchanov continues to track an astonishing range of companies — and really, you wonder when he sleeps — but these people are the exception rather than the rule.

We believe there has been a fundamental shift in the investment industry that has led to fewer information channels, a shrinking knowledge base, declining company awareness and less fundamental research being conducted on emerging growth companies, including the BioEconomy.

This change impacts not only the companies themselves, but also current shareholders and potential investors. Driven by significantly less active sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community and is especially relevant for smaller institutions, investment advisors, family offices and the average investor. The net result being fewer channels for insight and information to flow between companies and investors.

Too often these days we see notes like these: We are discontinuing coverage of XXXX because of finite research capacity. Our previous investment rating, price target, and earnings estimates are no longer in effect and should not be relied upon. (That’s an actual note received this week from a noted equity analyst).



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