WTF Happened to Synthetic Biology Stocks?
When we’re asked to describe what Nanalyze is about, we often use the following example. Your dad is sitting on the couch watching a 60-minute special on gene editing. When the show concludes, he believes that gene editing is the most amazing thing he’s ever heard of and he wants to invest in it. He types in “investing in gene editing” into Google and that’s where we come into the picture.
That’s kind of how we felt when we first read about synthetic biology, which essentially describes how to use tools like gene editing to create artificial life forms that do things. It’s really no different from the notion of nanobots, molecular machines that do things like “sweat” ethanol when exposed to the sun. Entrepreneur turned VC, Bryan Johnson, describes how someday we will literally “grow space ships” using synthetic biology. How amazing is that? The prediction is partially based on the fact that nature’s own molecular machines are the most efficient users of energy we know today, by orders of magnitude. He who figures out how to master life itself will be no different than God, and investing in God will produce heavenly returns. Right?
Not necessarily. We’ve gotten off to an extremely rocky start so far. Let’s set the gene editing stocks aside for a moment and focus on the 7 Synthetic Biology Companies to Invest In that we first wrote about just over 2 years ago. How have those fared? Not so good. A simple investment in an S&P500 ETF would have produced low-risk returns of +29.66% since that article. On the other hand, a diversified basket of all 7 synthetic biology stocks would have lost -63% over the same time frame. Here are the 7 stocks in the portfolio (returns as of Nov 17th):
- Intrexon (NYSE:XON) -66%
The synthetic biology darling with a founder who has had several successful exits
- TerraVia Holdings (OTCMKTS:TVIAQ) -99%
Formerly known as Solazyme and now TerraVie, pivoted from biofuels to algae ingredients then went bankrupt
- Amyris (NASDAQ:AMRS) -56%
Engineering yeast for applications in health, personal care, and industrial
- Bioamber (NYSE:BIOA) -84%
Engineering substitutes for petrochemicals
- Codexis (NASDAQ:CDXS) +106%
Protein engineering and enzymes for pharmaceuticals and food & beverage
- Yield10 Bioscience (NASDAQ:YTEN) -86%
Advancing several yield traits it has developed in crops
- Gevo (NASDAQ:GEVO) -65%
Developing bio-based alternatives to petroleum-based products
This just goes to show that no matter how exciting a particular technology sounds, there’s no guarantee that you’ll make any money investing in it. That’s why the majority of our investment funds sit safely in a well-diversified portfolio of dividend growth stocks that pay us a consistently growing, yearly dividend which we use to pay our MBAs and buy the occasional spliff with. With the exception of Codexis, all these synthetic biology stocks had horrible returns. The only one we’ve actually been holding is Intrexon, so we’re really interested in an update on what they’ve been up to, especially considering that Intrexon is the biggest of the lot by far. (In our original market cap weighted basket of all 7 stocks, Intrexon accounted for 84% of the portfolio value.) Initially we thought Intrexon as a synthetic biology investment was a no-brainer for a number of reasons:
- An “Intel inside” business model with exclusive channel collaborations (ECCs) that remove a great deal of R&D costs/risks and provide diversified revenues streams
- Founder Randall Kirk with several very successful exits under his belt and significant personal investments made in Intrexon
- A vast number of potential applications across many industries
If you bought shares the first day Intrexon began trading in August of 2013, you would be down -55% on your investment as of late last week.
If you’re like us and you invest for the long term, you have to be questioning if you should double down on your investment or cut your losses before the whole thing implodes. According to a firm called Spotlight Research, you should be short XON based on a scathing report published in April of last year. If you’re interested in trying to figure out what’s wrong with Intrexon, the report is probably a good place to start. Here were the key points:
- Zika virus hype is nonsensical
- Revenues overstated by 50% through transactions with related parties
- Biofuels are a pipe dream
- Only non-related party business sells cattle
- Self-proclaimed “Google of life sciences” technology platform is an overhyped, undifferentiated collection of commodity and failed products
They sure didn’t sugarcoat anything. We’re not going to get into any of those points since you can read about them in Part 1 of the report and then the subsequent parts which can be found within an article on Seeking Alpha. One would assume that any problems that might exist within Intrexon would be covered within all this research, but we’re going to ignore all of that and try to look at this incredibly complex business simply. Intrexon’s recent -23% drop in share price was the result of a “miss” which Seeking Alpha described as follows:
Revenue was down 6% from a year ago and missed consensus by almost 17%. The company says collaboration and licensing revenues decreased $2.4M due to a decrease in R&D services from some of its partners. Product revenues slipped $1.6M (17%) due to lower demand for cows and live calves.
We took a look at the entire transcript from the earnings call and came across the below statement which was very telling about where their money is coming from:
Collaboration and licensing revenues were 61% of total revenue versus 62.5% a year ago. Product and service revenues which primarily reflect our Trans Ova business, decreased by 1.8% versus last year’s third quarter.
So all those ECC collaborations account for 61% of revenues and the remaining revenues come from selling cows. Let’s first talk about this whole “selling cows” thing. It’s contrary to what we were expecting from an “Intel inside” business model which represents the “collaboration and licensing revenues” they talked about. It gets even stranger when they talk about their plans to sell bags of sliced apples. Remember the apple they engineered that doesn’t brown? They want to literally start selling bags of those apples to end customers.
As previously detailed, we expect our sales from just apple slices alone to reach 20 million in 2020, 100 million in 2022 and $500 hundred million in 2026 representing a CAGR of 70% during that time frame.
They’re literally planting apple trees, picking the apples, and selling little bags of them directly to customers instead of just selling their apples to large corporate customers. In the call, an analyst expressed curiosity as to why they would want to get into the business of selling apple slices and the answer was because of the high margins (estimated to be upwards of 50%). One would think they should focus on their core competency which is synthetic biology as opposed to selling cows and apple slices.
Getting back to their collaboration revenues, let’s look at what those diversified revenue streams from the ECC collaborations look like today:
Diversified revenues streams in any business are looked upon favorably because you are not overly dependent on any single customer. In this case, we see about 34% of their collaboration revenues coming from Ziopharm, a company that’s burning cash and not making any meaningful revenues yet. We see an additional 18% of revenues coming from Intrexon joint ventures which are supposed to be selling industrial chemicals but are still working through technical hurdles. Any entity seen above with the name “Intrexon” could be seen as the company paying itself (thus the concern expressed by Spotlight Research) but Intrexon says these are joint ventures with “external investors”, so presumably that’s where the money is coming from.
The problem is that all of these entities can only continue to pay for these milestone payments and R&D services if they start to generate meaningful revenues from the sale of products. We need to see Intrexon start generating some meaningful revenues from all these irons they have in the fire. It’s been three years now, and they’re still losing money hand over fist waiting for that big breakthrough that will move them out of the red. We didn’t even read the report and came away from the whole thing with a bad taste in our mouths. This isn’t panning out as we would have expected, so what’s a synthetic biology investor to do?
An obvious play on synbio would be to invest in some or all of the publicly traded CRISPR gene editing stocks seen below (along with their returns to date since IPO):
- Editas Medicine (NASDAQ:EDIT) +45%
- Crispr Therapeutics (NASDAQ:CRSP) +38%
- Intellia Therapeutics (NASDAQ:NTLA) -9%
At the moment there is a big lawsuit and lots of drama surrounding these 3 stocks, so be sure to do your own due diligence before pulling the trigger on any of them. Of course you could just buy all 3 stocks, but nothing says that CRISPR is the way forward. There are other ways to do gene editing.
In addition to placing a few small bets on these 3 stocks, we also want to do some digging and see what are the latest and greatest synbio startups getting funding. That will give us an idea of what’s coming up. In the meantime, let’s hope Intrexon starts to show investors that the promise of synbio is more than just elite cows and apples that don’t brown.