The Industrial Biotechnology Platform Scorecard

The emergence of industrial biotechnology companies on the public market can be viewed as both exciting and confusing. The potential is enormous, but, ugh, what the heck are they doing with microbes? What exactly are they producing? Is this industry doomed to failure? These questions and more are well-deserved, so I have set out on a mission to remove the curtain of uncertainty from the nascent industry.

One of the first steps to understanding the handful of companies pioneering the major exchanges is knowing which markets their products will be disrupting. While synthetic biology is being considered for applications ranging from cleaning up nuclear waste to terraforming and colonizing Mars, the companies listed below are all focused on applications that are a little easier to crack with our current understanding of A, T, C, and G.

Get your pencils out
What do Amyris (AMRS 86.67%), Codexis (CDXS 1.06%), Gevo (NASDAQ: GEVO), and Solazyme (TVIA) have in common? They are all building synthetic biology platforms that will produce or enable the production of fuels. Each platform will also be able to produce or enable the production of various other high-value chemicals. Therefore, each company can be classified as an energy company and a niche chemical manufacturer.

Knowing that most of the target markets for the companies listed above overlap it is nearly impossible to invest in one over another based on that premise alone. Don't believe me? Here is a checklist of each market currently in the sights of each company:

Source: Company websites         

Remember, the checklist above only represents chemical applications in the crosshairs today. Let's discuss the scorecard in a little more detail.

On a case by case basis
To be fair, Amyris and Solazyme have almost limitless potential in the products and target molecules they will be able to create. Amyris gets a check for each category because its main product is farnesene, which is a chemical building block that can be processed into a countless number of useful chemicals. My grades are not based on potential, though, as the company has partnerships in place or is developing products for each category.

Solazyme can produce any number of renewable oils with its platform as well. However, it has to do more of its research and development upfront. Whereas companies such as Gevo and Amyris are producing building block molecules with their platforms, Solazyme produces tailored oils directly with its platform. There are advantages and disadvantages to each process, but it is an important distinction to make nonetheless.

Another company that could one day get a check for each category is Codexis, which produces enzymes that enable the production of chemicals and increases the yields of various chemical processes – both synthetic and renewable. The diversity means that, in theory, the company's platform has the broadest scope of any listed. In fact, the cellulase enzymes produced by Codexis enable the use of next generation feedstocks and make it a potential partner for every company in the field. However, the company is effectively being squeezed out of industrial biotechnology platforms by well-funded competitors Novozymes and Genencor.

Gevo will likely never be able to get a complete scorecard with its current technology. Isobutanol is a very useful building block with high value derivatives, but as far as I know it doesn't have many food, fragrance, or health care applications. That doesn't mean you should cast the company aside as a failure. There a numerous applications for the building block – such as solvents, coatings, and polymers – that could be quite profitable for the company.

Don't be shy about fuels
I hear some talk around this industry that breaks down to "my investment can beat up your investment." There are a handful of investors for each company that are quick to note the high-margin, non-fuel applications of their investments while associating low-margin biofuels with the field, as if to distinguish one company from the rest. There are valid reasons to look beyond fuels – prohibitive costs, selling prices, and volumes – but fuels will help to validate production platforms and fill capacity in the early goings.

The "more than biofuels" argument is common with Solazyme. If the checklist above wasn't enough to show what the field can do, then consider the following. Adding up the company's total non-binding fuel agreements with Qantas and United Airlines shows that 313,000 metric tons of the company's oils could indeed go to low-margin jet fuel (keyword: non-binding). The company will have a total production capacity of 125,000 metric tons by the middle of 2014.  

It is time to acknowledge that even Solazyme will be producing large amounts of fuels. Take a deep breath. It is okay. It won't help with profitability, but proving these platforms with fuels will enable the construction of fuels-only biorefineries down the road.

Foolish bottom line
The scorecard presented above is in no way a comprehensive list of each company's capabilities or potential. It also does not account for the financial health of each company. I just want investors to know as much about the companies they own as possible.

Each company will continue to pile up annual losses for the next few years, but investors in companies that are still in the developmental stage are keenly aware of that fact. Short-term profitability aside, I'm not aware of any petrochemical companies that can produce fuels, foods, and fragrances with essentially the same platform. The value waiting to be unlocked is worth keeping an eye on.