Amyris IPO – When Wall Street gets it right

10th August 2012

A lot has been made of the negative impact that listing a company on the stock exchange can have on innovation – see the euphoria and comedown of the Facebook IPO.

The point of listing, however, should not just be to pad the pockets of executives but to allow the market to judge the prospects for a business idea. As such should we complain when investors find fault and send the share price tumbling?

Case in point

In September 2010 private company Amyris (AMRS), a much-hyped biofuel producer, was readying itself for a public listing. It was seen as an exciting, innovative firm at the forefront of the technological developments in its field and backed by increasingly favourable government policy.

At the IPO the group raised $84.8m at $16 a share. Although this was below the target of $18-20 a share the listing was nevertheless seen as proof that significant investment demand existed for green-tech.

Fast forward less than two years, however, and the optimism that greeted Amyris' listing has all but evaporated. In May the company announced that it was it was shuttering or scaling down production at two of its three facilities.

As Adam Lesser writes on GigaOM:

"The original goal had been for Amyris's three facilities to produce 7.5 million litres of product a quarter, though the company has struggled with yield and separation loss, turning out just over 900,000 litres this past quarter. More importantly, the low production runs pushed the average selling price to $7.70 per litre, well above what the market will bear."

Lesser indentifies the major problem as an inability to scale a number of the processes used to produce the biofuel. That is as may be, but behind the scenes Amyris' problems reflected an internal cultural battle as much as flaws in the business model.

Before joining in 2007 John Melo, its chief executive, worked in the oil industry and in the run-up to the IPO he built a sales pitch that reflected his experience in the commodities business. He set ambitious production targets based on the as-yet-unproven ability to scale the fermentation process used to turn cane syrup into the biofuel  farnesene.

The team of scientists charged with meeting these goals, however, proved less than enthusiastic about Melo's attempts to drive the business forward. Daniel Grushkin at the Fast Company quotes Melo as saying:

"They didn't want to be measured. They said, 'Metrics? What metrics? You can't measure this stuff. It's science–it's about innovation, about us having space, about us thinking. Just leave us alone, and we'll do great science for you.'"

Failure to meet these targets began to weigh on investor sentiment and from a high of over $20 in October last year Amyris' shares dropped to under $4 in May. By this point tensions inside Amyris were made manifest with the dismissal of its chief technology officer Neil Renninger, one of the founders of the business, along with the president of global operations and its general counsel.

What lessons should be learned

Markets are not necessarily the enemy of the investor. Indeed looking at the history of a company's shares can reveal a great deal about its fortunes, although this should form only a small part of any analysis.

Sure, the story of Amyris speaks to the dangers of investing too early in unproven technologies. Many investors appear to have been lured by the promise of large scale production of biofuels before the model had even been tested. A slick sales pitch does not necessarily equate to real world results.

Yet for investors even the sniff of a divide between the management and employees charged with delivering production targets should have set alarm bells immediately ringing. If the premature IPO was not itself responsible for undermining innovation it certainly helped to widen the cracks between the creative and executive branches of the business.

If seen in terms of a long term investment, the story of Amyris and that of biofuels is far from over. After all the United States Environmental Protection Agency claims that 9% of all fuel used in 2012 should come from renewable sources and set a target of "at least 1 billion gallons" of  bio-diesel to be produced in 2013.

Whether it can recapture its initial lustre will now depend on the company proving that it is capable of delivering. Melo's team should be under no illusions; those investors who have stayed loyal are no longer blinded by the sugar rush.


More on Mindful Money

China is trying to 'create the ultimate monopoly' in the rare earth market

IPOs: Doomed to fail?

Why biofuels could be bad for the world and for your wallet

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21 thoughts on “Amyris IPO – When Wall Street gets it right”

  1. Ian Jones says:

    Food banks = free food = infinite demand. If I was on benefit I’d use the food bank and spend my benefit money on other things instead of food.

    1. Anonymous says:

      Pity you are not poor enough to understand that you can only use a food bank 3 times in any year and even then you have to be recommended by a gateway organization.

      And you could not make this bit up

      The Trussell Trust describes itself as “a Christian charity that
      does not affiliate itself with any political party”. It is controlled by
      Tory Party Councillor and Mayor of Worthing, Neil Atkins and director
      Chris Mould, who splits his time between the Trussell Trust and the
      Shaftesbury Partnership.

      Churches pay
      the Trussell Trust £1500 in set-up fees plus a “small annual donation”
      (value unstated) and must use the Trussell Trust Branding.

      1. Ian Jones says:

        I’m quite keen on the idea of food banks. If we reduce benefits and give the money to food banks then the state subsidy for Sky, the tobacco companies and alcohol manufacturers could be reduced too. Win win.

        1. Anonymous says:

          Daily mail boring today?

  2. Drf says:

    So much then for those economists, journalists, politicians (and others) who have argued all along that QE is not debasement and does not cause inflation!

    1. Anonymous says:

      Hi Drf

      I guess their real problem is dealing with those who remember the economic growth that was promised to follow such measures! They had to look hard in the dictionary to come up with the term counterfactual as a response.

      The same group are promising the earth in response to the monetary easing from the Bank of Japan (from whom we will hear early tomorrow) apparently forgetting it has expanded the monetary base there again and again without any great success.

  3. forbin says:

    Hello Shaun,

    it came as no surprise to me that a miniscule 0.3% is hailed as a major economic miracle by our lack lustre leaders !

    what else could we expect?

    There’s really nothing being done about the millstone of the banks around our necks other than to extend the FLS and soon QE again

    until they realise that the banks need to be let go then we’ll get more of the

    same old record

    mind you I wonder if we;re set up for the Spanish economic miracle ……

    There was this poor guy on manufacturing in the UK on the 1 o’clock news – he got it right – we cannot compete with the far east lo cost lo wage dont give a monkeys about the enviroment competition – they have a far too low a cost base ! compare even housing and food and fuel – got us beat!

    This is my posit – bad banks, lots of debt and unfair competition = no growth ( sure revise all you like – but we cannot have growth)


    this is my posit – bad banks , d

    1. Anonymous says:

      The housing costs could be controlled – simply by capping housing benefit – the lefties scream it’s ethnic cleansing to move the workshy from London to the North. The Tories are hit by the buy to let brigade’s pain. Result is gridlock.

      But more pertinently, Germany does not compete with China on cost. The average German worker is far wealthier than the average Chinese worker, yet Germany competes successfully.

      1. Grumpy Old Paul says:

        Housing costs – yet another argument in favour of a massive programme to build houses for rent by councils, housing associations, charities etc. This really is a “no-brainer” which says something about our politicians!

        1. Anonymous says:

          Hi – I’d suggest ending the near monopoly of big builders (including councils). Let people have easy planning on individual building plots – self build & small contractors can release lots of economic dynamism. It would be hard for individuals to build worse slums than the councils manage.

      2. Anonymous says:

        I’ve always loved Shaun’s work and particularly the way in which those who respond to his articles have avoided using political or partisan terminology. It makes for a civilised environment. Using phrases such as ‘lefties’ and ‘work-shy’ and describing all social housing as ‘slums’ seems to break this gentlemanly tradition. It tends to turn the thread away from economic debate and towards emotive commentary more suitable to the threads in the red tops.

        I hope we can return to a more considered tone in future or I will sadly have to cease reading.

        1. Anonymous says:

          I think you are over-reacting. You should concentrate on correcting me with a persuasive argument. I don’t support any political party rote. You are welcome to disagree with me on council housing – I’ve lived in dodgy parts of London and also in nice parts of the home counties (tory country). I know where I find it safer to walk down the street. I know where I prefer.

          I welcome suggestions how I should call the group of people who want “somebody else” to pay for extortionate rental subsidies because they dislike moving people a small distance into more affordable housing.

          I never said all social housing was a slum, but that councils have a poor track record of building
          desirable homes. I did say that workers should be able to acquire building land cheaply, to lower their housing costs and give them the option of self build. Yes it’s a capitalist free market approach. And
          yes – the USA now has plenty of affordable housing. It is also consumer choice – those that want to live on council estates can, but those that want to self build should not be forced to accept monopoly uniform social housing. Who gets a nice state/council/association house ? A friend of the bureaucrat ? A person who pays the bureaucrat a bribe ? (Note this was standard practice in communist states)

          You should also face facts : there are a few (by no means all) beneficiaries that have never paid a penny tax and do not want to work. – This is abuse of the system by the workshy.

          I suggest that England needs cuts like the Canadian Liberals did in the 1990s. This center left party realised the choice was either hard cuts to preserve their welfare system or continued borrowing and the destruction of their welfare system. They chose to balance the budget with cuts. This was a smart and honest choice which is a credit to the politicians responsible.

    2. DaveS says:

      Hi Forbin

      The banks are broken but what do you mean by fixing them ?

      We can nationalise them and impose losses on debt and equity holders (depositors too ?) – we probably should (although remember that probably means your pension fund).

      But then what. Doesn’t matter who owns them – their balance sheets are too big to fund – so either they shrink them or Mervyn funds them with “Funding for Lending” (haha) or probably both, That is what they are doing now.

      What do we want them to do ? Lend more money ? To who ?
      Where are they going to get the money from to do it ?
      Do we want them to pay proper saving rates ? Definitely but then that means borrowing costs have to go up to. – that means housing market crash and a world of pain.

      Surely we don’t want more mortgage or credit card lending – thats what got us into this mess. And as for SME’s – then I think the majority of small/medium business struggling will be the kind of shops/pubs/hotels/nail salons etc that make up our glorious service economy. They can’t survive because they shouldn’t survive.

      Yes, you can always find examples of credit starved worthy manufacturers who want to expand or can’t get trade financing (although there are other schemes for that). But lets face it they are a tiny proportion of the economy, Cheap credit is not going to rebalance the economy anymore than GBP depreciation will – globalisation is not reversible, at least not enough to make a difference.

      And if we nationalise them and force them to recognise losses, as we should, then those losses then go on the national debt. More downgrades, rising Gilt yields, more QE to push the yields down – another world of pain.

      So I don’t disagree, its the proper thing to do but it isn’t gong to fix this mess we are in.

  4. pavlaki says:

    Your summing up in ‘comment’ is a good one but I am cautiously optimistic based upon nothing more than what I see as I travel around the country and talk to folk. Things were very flat and depressing and yet in recent months I notice consumers are out in force and small businesses I talk to are more optimistic and this is in less wealthy areas. It’s not scientific but often the consumer ‘mood’ is a good barometer of the economy as a whole. Time will tell!

    1. Anonymous says:

      Hi Pavlaki

      I hope that you are right about that as one of the reasons we are in the quagmire we are in is that human psychology has changed and a more optimistic shift would help. But should this generate more resources I fear that our leaders will fritter it away on more support for the banks.

      So putting it a nutshell I too am hopeful about people but I am pessimistic about the abilities of our political class.

      1. Patrick says:

        Hi Shaun,

        Could we ever reform our financial system/banks without there being an enforced global standard for banking regulations?


  5. ernie says:

    It is very gloomy, but I do think there’s one “improvement” if that’s an appropriate word. One of my children was telling me the other day that she had £25 extra in her monthly wage packet this month due to the raising of the tax band on basic rate. Maybe this factor will give a bit of temporary relief to the consumption part of the economy in the next few months?

    1. Anonymous says:

      Great, except that her costs have gone up by £50.

      1. ernie says:

        I take your point but actually (so far) that’s not so. For some reason, car insurance seems lower this year and her rent has stayed the same (private renting). Probably energy costs would be the rising item. Don’t find food prices much different over a weekly shop although naturally some things have gone up, but others are on offers etc. I thought back in Brown’s time that the basic rate threshold was way too low so I do back this policy, though it should be attended by proper public sector spending cuts.

    2. Anonymous says:

      Hi Ernie

      That policy of raising the income tax threshold is something that I am a fan of as it helps for example with the poverty trap amongst other things. You can argue that there are more efficient ways of doing that but at least it is a policy that heads in the right direction. We do not have so many of those that we can afford to be churlish I think!

  6. Anonymous says:

    Food banks are an interesting development. Given that the USA has 48m on food stamps, we are quite a long way behind. The problem with the UK’s welfare system is that too much has been allowed to go via uncontrolled housing benefit to some pretty well heeled landlords, and not enough now remains to live on. Thank you Labour. That’s especially true for single people with no dependants. Families are far better treated and in most cases should have enough to eat given all the credits and premiums and all the rest that they qualify for. I also take Ian Jones’s point that there do have to be strict controls or we will end up like the USA, feeding 15% of our population directly at taxpayer expense. There will always be poor people, especially with our relative definition of poverty. But, providing they are not spending their benefits on drugs or alcohol, we do need to be sure they can afford to eat!

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