Synthetic biology company Intrexon (PGEN 0.76%) has been busy lately. In the last six months the company has entered into and expanded several exclusive channel collaborations, or ECCs, for numerous health care applications and completed the acquisition of stem cell company Medistem. While pharmaceutical development presents a massive opportunity for Intrexon, the company is also building product portfolios aimed at the food, energy, and environmental markets. The latest developments could bring synthetic biology to your doorstep.
Intrexon Energy Partners, or IEP, was formed to develop a biocatalytic process for creating isobutanol for gasoline blending from natural-gas feedstocks. It is a bold move that directly challenges the efforts of more-established companies such as Gevo and Butamax, the latter a joint venture between British Petroleum and DuPont, which are using engineered yeasts to convert sugar into isobutanol. Can Intrexon succeed on a timeline that will satisfy investors in the face of fierce competition? Does switching sugar for natural gas provide any economic benefits?
Surveying the competition
Time to be blunt: Gevo is in a pretty poor place financially, despite touting successful investors such as Richard Branson. While it is further along in commercial development than Butamax, the pair continues to meet in the courtroom over intellectual property quarrels, which could limit timely progress, distract management teams, and dissuade external investment. That sets the stage for more focused teams to enter the market and attract capital from investors for development of competing, yet distinct (and therefore safe from patent litigation), platforms. That would seem to benefit Intrexon, but the company's feedstock approach may paint a different picture.
The problem with natural gas as a feedstock
Natural gas is cheap, abundant, and here to stay. That was the consensus when the nation was drowning in gaseous hydrocarbons in 2011 and 2012, anyway. The reality is that natural-gas pricing is volatile, infrastructure is lacking, and next-generation technologies have the feedstock in their crosshairs. Any business or technology strategy that relies heavily on cheap natural gas trips alarm bells in my mind. Why? Assuming historically volatile natural gas will remain a low-cost alternative is nothing more than wishful short-term thinking.
The mad dash by industry to develop technologies that take advantage of low-cost natural gas are akin to the investing environment surrounding biofuels in 2006. When oil hit an all-time high of $147 per barrel venture capital poured into unproven start-ups. In the three-year period from 2006 to 2008, a total of 161 deals in biofuels ventures were closed with a cumulative value of $2.55 billion. To put that into context, only 60 deals worth $252 million had closed in the four years prior. It did not turn out so well for the investors and start-ups involved.
Whether there are parallels between enthusiasm for biofuels when oil hit an all-time high and for natural gas at a surprising low, it appears recent all-time spreads between raw sugar and natural-gas costs are tightening once again. Further speaking to the volatility in natural-gas prices, consider that in the last 10-year period the maximum price for natural gas was 10 times higher than the low. Raw sugar is relatively volatile as well, but the maximum price for the commodity was only six times higher than the low on the same basis.
Source: Natural gas data from EIA.gov, Sugar data from USDA.
Rising natural gas prices are bad news for those looking to use the carbon source as a feedstock, especially in biofuel and commodity chemical applications where feedstock expenses comprise 70% and 50%, respectively, of total product costs. Couple that with the technical hurdles facing gas-to-liquids biocatalyst production systems and I find it difficult to be enthusiastic about Intrexon's latest venture at this time.
Foolish takeaway
An ambitious gas-to-liquids project is not a red flag, but rather an approach with significant hurdles. Of course, the competition does not instill much confidence when it comes to isobutanol development, and it is not as if Intrexon's entire business hinges on successful development -- far from it. But while synthetic biology can and will be used to convert natural gas into higher-value chemicals, I see such platforms being held captive by the volatility in pricing that is inherent to the carbon source. I would much rather see Intrexon throw its weight behind next-generation sugar feedstocks with lower volatility than chase a short-term market trend.
