What happened

Shares of Amyris (AMRS 80.00%) rose nearly 50% today after the company announced it had signed a development, licensing, and commercialization agreement for a cannabinoid ingredient. The specific partner, cannabinoid ingredient, and timing weren't disclosed, but the industrial biotech said the deal includes $255 million in milestone payments and the potential to receive royalty payments. 

Some of the announced bounty will be received up front, while the remainder can be earned for hitting certain milestones in the next one to three years. Considering Amyris sported a market cap of $240 million at Monday's close, Wall Street is cheering the idea that it might be able to earn $255 million in milestone payments in the near future -- and enter an exciting new industry, no less.

As of 11:18 a.m. EST on Tuesday, the stock had settled to a 35.1% gain.

An arrow bouncing up shelves on a wall.

Image source: Getty Images.

So what

Cannabinoids are typically harvested from growing cannabis plants. But agriculture and genetically modified plants aren't always the most efficient methods for producing large quantities of product. Growing cannabis plants is time-consuming, takes up a considerable footprint, requires significant controls to reduce contamination, and doesn't always result in a homogeneous product. Processing plant material to extract the useful product can be inefficient and accompanied by low yields.

That's why a number of companies are exploring the use of industrial biotech as an alternative production process. On paper, it's possible to port over the metabolic pathway that allows a plant to create cannabinoid compounds into an industrial microbe such as yeast. The microbe can be grown in a large bioreactor by fermentation, the cells can be harvested once they reach a sufficient density, and the cannabinoid compound of interest can be purified after that. The full-process turnaround time is less than two weeks -- allowing more product to be produced in a smaller footprint year-round.

In reality, industrial biotech has struggled to launch with highly engineered microbes. Cannabinoid compounds might hit the right sweet spot of selling price and market size to make it all work, but they're relatively complex molecules that will be difficult to make at spec. That hasn't made cannabis companies any less curious though.

A Canadian start-up named Hyasynth Biologicals began developing industrial microbes to produce cannabinoid compounds years ago (before it was cool). It's a licensed dealer under the Narcotic Control Regulations of Health Canada and has received investment from cannabis company OrganiGram Holdings. Others have piled onto the trend only recently. Ginkgo Bioworks, an analytic lab specializing in engineered microbes, signed a deal with Cronos for specific cannabinoid compounds. Intrexon announced a vague unpartnered project last summer. And now Amyris is getting in on the action.

Check out the latest Amyris earnings call transcript.

A stainless steel bioreactor.

A stainless-steel bioreactor in a pilot facility: a future source of cannabinoids? Image source: Getty Images.

Now what

The promise of producing cannabinoid compounds through fermentation cannot be dismissed entirely. It could be an important product for the fledgling and struggling field of synthetic biology and create significant value for cannabis companies. However, aside from Hyasynth Bio, the biotech players piling onto the trend lately have each struggled to follow through on major partnerships and to commercialize products. Amyris may be the worst offender.

In recent years it has told investors about big plans for malaria treatments, renewable transportation fuels, polymers, lubricants, solvents, direct-to-consumer hand cleaners, pharmaceutical ingredients, zero-calorie sweeteners, cosmetics, and now cannabinoid compounds. It hasn't delivered much success to date, so investors will want to remain grounded despite the latest announcement.