Industrial biotech companies are developing technology platforms that will be able to produce a wide range of products that, historically speaking, have been produced by isolated industries. Solazyme (TVIA) is developing renewable oils from heterotrophic algae for uses in foods, high-end personal care products, fuels, and more. Synthetic biology pioneer Amyris (AMRS -46.43%) has a suite of yeast that can produce building-block molecules for a similarly diverse range of applications. The theme holds everywhere you look: The status quo is being turned on its head.
This nascent industry has a long way to go and a lot to prove before it begins to challenge petrochemical processes for market dominance, but make no mistake about it: Industrial biotech is here to stay. Consider that when I went to school for bioprocess engineering only two schools in the country had such a program. Now just five years later, there are close to one dozen schools offering these degrees in the U.S. and many more internationally.
Combine that with the billions of dollars of private and public support granted to dozens of companies and it is easy to see that this is no fading trend. It will take years before any of these investments bear fruit, but long-term investors may want to break the ice now. Here are the best stocks to invest in the budding industry.
5. BioAmber (NYSE: BIOA)
BioAmber's first product can be used in numerous high-value markets. Source: BioAmber SEC filings
This recently public company does things its own way -- even spurning the biotech-heavy NASDAQ to list on the NYSE. BioAmber produces and sells bio-succinic acid produced from its demonstration facility in France to 19 different customers. It proved its production metrics at commercial scale years ahead of competitors and continues to operate the largest bioreactors of any industrial biotech firm.The company is planning a commercial scale facility in Sarnia, Ontario, with partner Mitsui that will have a maximum annual capacity of 50,000 metric tons. Two more biorefineries will be built in the next three to four years, perhaps churning out commercial quantities of adipic acid and caprolactam, additional building block chemicals under development.
4. Gevo (NASDAQ: GEVO)
All eyes are on this biorefinery in Luverne, Minn., the first commercial bio-isobutanol facility in the world. Source: Gevo
The production of corn ethanol is a highly controversial issue. Gevo's solution? Convert ethanol producers into isobutanol manufacturers. The company is developing a biocatalytic platform that will turn the starch in corn into the value-added building block molecule isobutanol, which has applications in solvents, plastics, drop-in fuels, and more. Of course, the idea hasn't exactly ignited the ethanol industry just yet. Should Gevo successfully prove its platform at commercial scale over the next 12 months at its Luverne, Minn., facility, investors may finally see additional customers come into the revenue mix.
3. Codexis (CDXS 1.40%)
A highlight of the company's journey to commercial detergent alcohols, or CodeXol products. Source: Codexis
This industrial enzyme company is hoping to enable second- and third-generation feedstock use throughout the industry. Aside from offering industry-leading cellulase enzymes for breaking down cellulosic biomass (albeit without a commercial partner), Codexis also serves the pharmaceutical industry from small research kits to large-scale manufacturing processes for "Big Pharma" companies such as Pfizer, Merck, and TEVA. The company is commissioning a demonstration facility for detergent alcohols in Italy this quarter with partner Chemtex and, after proving production metrics, will begin shopping for a commercial partner.
2. Amyris
After optimizing its process for farnesene, there is no shortage of building block molecules for Amyris to tap next. Source: Amyris
This synthetic biology pioneer was the first to begin steady operations at a commercial-scale facility in December 2012. Amyris' building block molecule, Biofene (farnesene), has applications in a wide range of industries including cosmetics, personal care products, fuels, polymers, and more. As such, the company has an impressive stable of partners and established joint ventures throughout many industries. Investors can look forward to a second commercial-scale facility in Sao Paulo once Amyris further hones its production process.
1. Solazyme
Expected average selling prices and gross margins across Solazyme's three segments are quite impressive. Source: Solazyme
The renewable oils manufacturer is leading the race right now, especially given its strong cash position of $239 million at the end of March. Solazyme is using that cash hoard to build out its first wave of commercial capacity -- annual production of 125,000 metric tons -- on three continents. That should allow it to easily leapfrog to the top of the industry in terms of manufacturing capability and revenue by 2015. As shown in the picture above, the company is initially targeting a wide-range of products in three broad markets: fuels and chemicals, nutrition, and skin and personal care.
Foolish bottom line
These are the best stocks to invest in industrial biotech. It is important to reiterate that "caveat emptor" is stamped across each of these investments. It is no secret that each company has fallen dramatically since its over-hyped IPO price (except for newly public BioAmber). Additionally, none of the companies above are profitable and will not be so for the next several years. If you do invest in the industrial biotech industry it will surely test your buy-and-hold psyche. Will you be taking a position in any of these stocks anytime soon? Let me know in the comments section below.
