The field of engineered biology, often referred to as synthetic biology, has been popular among individual investors for years. That's not too surprising considering next-generation genetic engineering tools have the potential to treat or cure diseases, improve crop yields without chemical pesticides or fertilizers, grow real meat without animals, grow cannabinoids without plants, wipe out an entire species of mosquitoes (or resurrect extinct species of plants and animals), and more.
Then again, that wide-open potential also has been a huge a problem for individual investors unequipped with the technical understanding needed to sift through the avalanche of presentations discussing "disruptive" technologies. How do you really know? Let's just say there are a lot of ski poles sticking out of the snow -- even on Wall Street.
Investors (and analysts) may use simple indicators, such as stock returns, to figure out where to invest their attention -- and maybe even their hard-earned dollars. That would put two synthetic biology stocks on investors' radars: Amyris (NASDAQ:AMRS) and Codexis (NASDAQ:CDXS), which have gained 155% and 140%, respectively, in the last year. Which one is the better buy?
Approach 1: Industrial fermentation
While Amyris has presented investors with many iterations of its business model over the years, it now may have one worth keeping. Before, the industrial biotech company deployed a go-it-alone approach focused on designing microbes capable of producing low-margin, high-volume products for bulk markets. Today, the company provides research and development (R&D) services for customers looking for new sources of high-margin, low-volume products such as cosmetic ingredients, fragrances, and flavors. If an ingredient is successfully commercialized, then Amyris stands to receive royalties on product sales, too.
The business model is similar to those deployed by privately held peers Zymergen and Ginkgo Bioworks -- both of which are valued higher than Amyris -- and Wall Street likes what it sees. In the first half of 2018, the industrial biotech reported a 23% increase in total revenue compared to the prior year, thanks to a huge royalty agreement with industry leader DSM.
Plus, Amyris is about to launch and ramp up a novel fermentation process to churn out the zero-calorie sweetener ingredient called Reb M, found in the stevia plant. If initial production runs in late 2018 are successful, then that could trigger the resumed construction of a much larger production facility in Brazil in 2019, and set up the business for long-term growth.
However, considering the company has failed to execute throughout its history, investors are right to be cautious. There's also the potential for accounting deficiencies to derail the growth story altogether. Long story short, Amyris may be overestimating royalty revenue in response to a new accounting rule, therefore boosting operating results. If forced to restate financial numbers, then the year-over-year first half of 2018 revenue growth of 23% would become a 19% decline.
Approach 2: Enzymes and stevia leaves
In contrast, Codexis has decided to skirt the risks of industrial bioprocess scale-up by focusing on the niche market of enzyme engineering. The company's technology platform uses machine learning to design enzymes and proteins for various applications. That includes the historical niche of pharmaceutical manufacturing and more recently, applications in food and beverage production, next-generation sequencing diagnostics, and even in biologic drug candidates being developed in-house to treat disease.
Everything started to come together for the biotech innovator in 2017. Full-year product revenue soared 75% compared to 2016, while product gross margin increased to 46% from 36%. Codexis began supplying enzymes for a food ingredient manufactured by industry leader Tate & Lyle, announced a biologic drug partnership with Nestle Health, and readied enzymes for DNA sequencing applications.
Despite disappointing guidance for 2018, the business has maintained its momentum this year. Codexis initiated phase 1a clinical trials for its lead drug candidate and expects to announce top-line results by the end of the year. Perhaps more importantly, the company is getting ready to supply enzymes to help Tate & Lyle manufacture its own zero-calorie sweetener brand of Reb M. The project easily will become the company's largest supply contract and a major contributor within the next few years -- and it's one of the key differentiators between these two synthetic biology stocks.
Sweet success or sour grapes?
While it may seem like Amyris has greater potential for its Reb M ingredient than Codexis because it will have a more direct role in manufacturing and marketing, there are financial and technical risks awaiting the industrial biotech.
First, the company doesn't own a manufacturing facility -- it has to pay DSM to produce the sweetener -- and it will be very expensive to complete construction of the second facility in Brazil. Amyris simply doesn't have the capital reserves required, which means it will need to turn to debt, dilution, selling equity in the technology, or a combination of those.
Second, even if a dedicated manufacturing facility gets built, Amyris hasn't sustained profitable manufacturing operations in its history. That's why it sold its lone manufacturing facility to DSM in the first place. Until it proves it can do that, announcing supply and distribution agreements is meaningless.
Third, other companies -- notably Evolva -- have tried and failed to manufacture stevia compounds such as Reb M through industrial fermentation. The field simply doesn't have a great understanding of scale-up yet to make businesses based on larger-volume products work.
Codexis doesn't face those risks. The company is selling to Tate & Lyle -- an industry leader that brings exceptional know-how to the partnership -- multiple enzymes that will be used to efficiently manufacture Reb M from stevia leaves. The process requires 1% of the reactor volume of an industrial bioprocess to produce the same amount of product, is lower cost, and doesn't require multi-hundred-million-dollar investments to scale.
The better synthetic biology stock is...
With a better track record of success, a diversity of high-value shots on goal for product revenue, the ability to license its machine learning software tools, and fewer technical risks, Codexis is the better synthetic biology stock in this matchup. While Amyris appears to be turning a corner with a new business model that focuses on royalty revenue, investors should be very concerned with the red flags reported in SEC filings. Investors looking to own a piece of the field may want to take a closer look at the enzyme designer.