Jeffrey MacIntosh, Financial Post · Nov. 2, 2011 | Last Updated: Nov. 2, 2011 3:08 AM ET
Medieval alchemists laboured like Trojans to turn lead into gold. More recently, the drive for energy security and low-carbon footprint fuels has produced a new generation of bio-alchemists. These modern-day Merlins spend their midnight hours seeking to turn biomass, or better still, sunlight, carbon dioxide and water, into "drop in" fuels that will power our planes, trains and automobiles with little or no modifications to either engines or infrastructure. A very Brave New World, indeed.
There are too many variations on these technologies to come close to an exhaustive enumeration in a short compass. However, what we're talking about is mostly designer strains of algae, yeast and bacteria (including e. coli). These Frankenbugs have attracted a sultan's ransom of government, venture capital, corporate and public funding. Promoters and underwriters routinely dangle the lure of a trillion-dollar energy market before mesmerized investors. But is there really an algal bloom in our collective energy future? Or a looming vapourware bust, reprising the bubble disasters of a decade ago?
Take Amyris, ranked No. 1 in the Biofuels Digest list of the "50 Hottest Companies in Bioenergy for 2010-11." Amyris makes genetically engineered strains of yeast that ferment biomass into various "target molecules" that can be converted (so sayeth the company's prospectus) into "a wide range of products varying from specialty chemical applications such as detergents, cosmetics, perfumes and industrial lubricants, to transportation fuels such as diesel."
In its September 2010 IPO, underwritten by such blue-chip underwriters as Goldman Sachs, J.P. Morgan and Morgan Stanley, Amyris managed to raise US$85million from public investors. The post-IPO market cap was $688million. Post-offering, the market cap soared to a lofty $1.5-billion, although more recently it has fallen back to about $830-million. It would seem that lots of people, including bulge-bracket investment banks and sophisticated institutional investors, think that Amyris is brewing up something really special in their industrial scale kitchens.
And yet, even the galloping gourmet might have reason to worry. In its prospectus, Amyris fesses up to having no revenue from renewable products. Its financial statements disclose losses of $12-million, $42-million, $65million, and $37-million in 2007, 2008, 2009 and the first six months of 2010. The "Risk Factors" section of the prospectus extends to an impressive 27 pages, and includes such sobering statements as "we have incurred losses to date, anticipate continuing to incur losses in the future and may never achieve or sustain profitability."
As is the fashion, the "Use of Proceeds" section in the prospectus is couched in essentially meaningless boilerplate that allows the company to spend the money on pretty much anything. Interestingly, prior to the IPO, the company was sitting on a cash position in excess of $200-million. Based on its average R&D expenditures in the three years preceding the offering, that amounts to about eight years of R&D (or four years, based on its spending in the first six months of 2010). So, why the public offering?
That question is also addressed with tried-and-true boilerplate, including "to create a public market for our common stock." What this means, in particular, is that pre-IPO investors can make a very large pile of money by selling their stock into the public market.
As a general matter, this is one of the great virtues of an IPO. By creating a public market in which early-stage investors can monetize their holdings, the ability to do an IPO rewards entrepreneurs and other investors for their vision, risk-taking and elbow grease in building a company that public investors are lining up to buy. That in turn supplies a powerful incentive to create companies that are generators of public, and not merely private value.
But the seedy downside of the IPO is that it also enables insiders and market-savvy underwriters to capture moments of "irrational exuberance" by floating long-shot companies at unrealistic market valuations, driving unhappy public investors from the money tree when the chickens finally come home to roost. That's what happened, in spades, in the tech bubble of the late '90s and early 2000s.
Is Amyris really worth $890million? Or are we being treated to something of a mini-bubble in bioenergy stocks? Examination of other public companies in the renewables arena does little to quiet one's burgeoning dyspepsia. Take Solazyme, No. 2 on the Biofuels Digest list. Solazyme relies on designer algae to gobble up sugars derived from biomass, and (once again using a fermentation process) transform the resulting gooey sludge into "drop-in" liquid fuels, including biodiesel that has been successfully tested in U.S. Navy ships and airplanes. Solazyme has an impressive list of industrial partners, including Unilever, Dow Chemical, Genentech and Chevron. In May of this year, it too went public, raising about $200-million.
Like Amyris, however, Solazyme has a substantial accumulated deficit (in this case, $60.2-million pre-IPO) and essentially no revenue from its renewable-energy products. Far from forecasting profitability, the prospectus states that "our annual operating losses will likely continue to increase in the short term." It too has a Herculean "Risk Factors" section in its prospectus, extending to 25 pages. In order to be profitable, Solazyme will have to dramatically lower the cost of its algae-based fuels.
Gevo, another high-flyer in the Biofuels Digest list, paints a similar picture. It too, has no revenues from its renewable energy products, and sports an accumulated deficit of $78-million. Its prospectus baldly announces that "we expect to incur losses and negative cash flow from operating activities for the foreseeable future."
These companies are far from the exception. They forge a template that has become emblematic of renewable energy companies.
Amyris is one of the lucky ones. It still trades above its public offering price by about 14%. By contrast, Solazyme is currently trading at about half its IPO price of $18. So is Gevo, which went public in February of this year at $15 per share. Other notable placers on the Biofuels Digest list have suffered similar fates. Codexis, which went public at the end of April 2010 at $14, now trades below $5. Rentech, whose market cap topped $600-million in 2006, now makes do with a market cap of $272-million. In its most recent Form 8-K (filed with the SEC), Rentech stated that it is significantly cutting back its plans to build renewable-fuels facilities, and that "the revised strategy reflects the company's expectation that project finance debt or equity for large, first-of-a-kind energy technology projects generally will not be available in the market."
All of this should be cause for sober reflection on the part of investors who may be misled into believing that there is some magic energy bullet out there that is poised to find its mark.
Jeffrey MacIntosh holds the Toronto Stock Exchange Chair in Capital Markets Law at the Faculty of Law and is a past director of the Capital Markets Institute at the University of Toronto.
