Zymergen (ZY) stock recently collapsed, after the synthetic-biology start-up reminded investors that raising money for a new synthetic biology, or synbio, business is a lot easier than making money in this topsy-turvy industry. In a nutshell, the company's founder and CEO, Josh Hoffman, is leaving the company after overpromising and underdelivering.
Grizzled synbio investors who understand the ins and outs of this burgeoning industry weren't at all surprised by Zymergen's devastating update. It was simply an admission of issues that synbio industry pioneer Amyris (AMRS -6.43%) figured out years ago.
Zymergen's recent implosion wasn't the end of the synbio revolution, but this business is tougher than it seems. Here's a closer look at what happened to the flashy start-up to see why Amyris is the best synbio stock to buy right now.
A not-so-stunning admission
Engineering microorganisms that produce high-value ingredients is an enormous challenge, but it's the easiest part of the synbio business. Manufacturing viable products at scale is the challenge facing synbio start-ups and Amyris employs more experts with valuable experience in this field than all of its competitors combined.
Hoffman and a couple of ex-Amyris employees began raising millions for Zymergen all the way back in 2015. Despite plenty of capital, Zymergen went public last year before it had actually produced its first intended product, Hyaline.
Zymergen was touting Hyaline as a tough translucent film to be used in flexible touchscreen devices. Unfortunately, such devices are still just a fun concept smartphone manufacturers don't seem terribly interested in developing fully.
Amyris is already generating revenue from 13 commercial-stage products and there are 24 more in the company's development pipeline. Most of Amyris' intermediary chemicals aren't as interesting as Hyaline, but the cash flows they generate should get investors' blood pumping.
On March 31, Amyris sold its European partner, Royal DSM (RDSMY 3.30%), rights to its flavor and fragrance portfolio for $150 million up front. Excluding this one-time exchange, Amyris still reported record-high underlying revenue in the second quarter that soared 41% year over year to $42.3 million.
Amyris learned the hard way that clients can't be relied upon for steadily growing sales. To solve this problem, Amyris markets its own consumer brands like the Biossance brand of high-squalene-content skin moisturizers for adults and the Pipette brand of baby skincare products.
Before Amyris came along, squalene for skincare products was traditionally sourced from sharks a few ounces at a time. A consumer base increasingly aware of the environmental impact their purchases make are big fans of Amyris' products. Instead of killing sharks, Amyris just feeds sugarcane to a proprietary strain of yeast that produces squalene in big fermentation vats.
Margin expansion ahead
Amyris expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to remain positive this year, but only because a recent $150 million intellectual property sale will bridge a gap between revenue and expenses. In 2022, though, this life-science company will probably be able to report positive earnings without selling off any assets.
Amyris currently relies on Royal DSM and other partners for manufacturing, but not for much longer. The company's invested heavily into a new ingredient plant in Brazil. The COVID-19 pandemic isn't helping with timelines, but Amyris thinks it can get its first fully owned manufacturing facility up and running before the end of the year.
The company's bottom line will benefit from expanding gross margins and significantly lower interest expenses. Amyris started 2021 with $171 million in debt that it knocked down to $105 million at the end of June.
Zymergen's recent implosion doesn't necessarily mean it can't begin producing profits for investors, but it's going to be at least a few years before the company can tell you when. Amyris is already on the cusp of sustainable profitability with success from the Biossance brand alone. With a handful of younger brands with Biossance-sized potential launching now, it's just a matter of time before this stock starts getting the attention it deserves.