If you've been watching the stock market lately, it might seem like investor interest in life-sciences businesses is as boundless as the technology they're producing. Enthusiasm for life-sciences stocks may be at an all-time high, but it's easy to lose your shirt when dealing with companies on the cutting edge like Calyxt (CLXT) and Zymergen (ZY).
Both of these companies have huge potential for growth, but investors probably want to watch them from a safe distance for now. After discussing what to avoid, I'll also show you why Thermo Fisher Scientific (TMO) is one of the best life-sciences stocks you can buy now.
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1. Calyxt: Soybean sorrow
This is a majority-owned subsidiary of a French biopharmaceutical company called Cellectis (CLLS). Cellectis has been developing new drugs for people since 2000, but still doesn't have any products to sell. The parent company is trying to develop human immune cells engineered to detect and fight cancer, but progress has been extremely slow.
To keep slow-moving drug development programs separate from a plant-based technology, Cellectis spun Calyxt off into a separate company in 2017. With the use of Cellectis' proprietary gene-editing technology, Calyxt can rapidly edit living plant cells to produce desirable traits.
It took Calyxt nine years to launch its first product, soybean seeds that can produce cooking oil that doesn't degrade as fast as regular soybean oil. Since launching in February 2019, though, Calyxt hasn't been able to sell its seeds at a viable price point. The cost of goods sold in 2020 reached $35 million in 2020, but the company only recorded $24 million in top-line revenue.
While Calyxt has shown us it can launch an agricultural product, it's still a long way from earning any money for its investors. There are more genetically modified agricultural products in Calyxt's pipeline, but investors want to wait for proof that the company can sell at least one at a profit.
2. Zymergen: Halfway there
This company made its stock-market debut in April, despite having no trouble raising capital to market Hyaline, a clear polyimide film for electronics. Zymergen's lead product is similar to DuPont de Nemours' Kapton, but it isn't produced by heating and compressing hydrocarbons.
Hyaline is made by genetically modified microbes housed in giant fermentation vats -- or at least this is the goal. You probably want to avoid Zymergen's stock for now, because we still don't know whether the company can produce Hyaline, or any future products, at scale.
Zymergen has already burned through over $740 million of its investors' money since getting started in 2018, but it still relies on a third party to produce Hyaline in small, sample-sized batches. Despite the lack of progress on the manufacturing side of its business, Zymergen's market cap is around $3.7 billion at recent prices.
The company's ability to breed microbes that can produce Hyaline and other useful products is remarkable, but it's probably best to wait until it shows us that its still-hypothetical operation can produce a gross profit.
Thermo Fischer Scientific: Always a winner
This is the world's largest life-sciences company, which means it doesn't have the explosive growth potential of Calyxt or Zymergen. With its tentacles wrapped around every facet of the life-sciences industry, though, investors who buy this stock now can reasonably expect positive returns over the long run.
In 2020, COVID-19 made it hard for scientists to work together in laboratories full of Thermo Fisher Scientific equipment. This was a nightmare for lots of life-sciences businesses, but explosive demand for COVID-19 diagnostics made up the difference and more. Total revenue surged 26% year over year in 2020, and adjusted earnings came in 58% higher.
Thermo Fisher Scientific expects demand for COVID-19 testing to drop off by the end of 2021, but a rebounding base business will allow total revenue and earnings to climb again this year.
Strong cash flow generation from a well-managed operation will give Thermo Fisher a chance to tighten its grip on the life-sciences industry. In April, the company offered $17.4 billion in cash to buy PPD, Inc. (PPD), one of the world's largest contract research organizations.
Giving it back
For the next several years, Calyxt and Zymergen will most likely continue burning through cash raised from investors, while Thermo Fisher Scientific rewards its shareholders with share buybacks and dividend raises. Thermo Fisher earmarked $1.5 billion for share buybacks in 2021 after returning $1.8 billion to shareholders in 2020.
There are no guarantees that Thermo Fisher Scientific will continue generating enormous profits to share with investors. Given all the right pieces in place, though, it sure seems likely.
