Zymergen Stock is About Manufacturing with Nature

People often ask why we cover startups when our primary mandate is to cover publicly traded technology stocks. That’s because we want to know about promising companies that may soon offer shares to the public. When that happens, we’re one step ahead of the game. Today’s announcement of an IPO by Zymergen is a good example of how this helps us better understand initial public offerings in advance.

We first came across Zymergen back in 2016, then covered them more recently late last year in a piece titled Solving the World’s Problems With Biomanufacturing. Simply put, nature is the single most powerful and efficient technology known to man. Using the powers of synthetic biology, Zymergen is using nature – microbes – to manufacture advanced materials. Their stated goal is to launch products in about half the time and 1/10^th of the cost of what traditional chemicals and materials companies can deliver. And it’s all made possible through the miracle of fermentation.

About the Zymergen Stock Offering

Since we’re already up to speed on what Zymergen does, we simply need to decide if this is an investment we’d be interested in based on our risk- averse approach to investing in tech stocks. We’ve always had a keen interest in one of their competitors, Gingko Bioworks, so, ideally, we’d like to be invested in at least one company that’s dabbling in the “bio manufacturing” space, or biofacturing as it’s called. Since Zymergen didn’t make the poor choice of going public using a special purpose acquisition company (SPAC), we’re fortunate to have a proper S-1 filing to pore over. Turns out their business model isn’t what we had hoped for.

Zymergen’s Product Pipeline

Zymergen talks about how they will manufacture products and sell them directly to other businesses that use them as inputs. So, not the software-as-a–service (SaaS)-type business model we had hoped for. They’ve built one product so far that is ready to sell, and 11 products that are in various stages of development – three in electronics, four with consumer care applications, and three in agriculture. Below, you can see the entire pipeline of products, three of which have target release dates.

Each of these products are in various stages of development, but the one we’d like to focus on is the one available now – Hyaline – for which they’ve yet to capture product revenues from.

Hyaline Revenues

Zymergen launched their first product Hyaline in December 2020, beginning the “typical 6-18 month product qualification process.” That means we may have to wait until June of 2022 before Hyaline sees some sales at the latest. An optimist would say that sales could happen as soon as June of this year. Truth is, we don’t know when product revenues will start happening. In the meantime, Zymergen generates modest amounts of revenues from collaboration and R&D projects with various customers.

In the past several years, they’ve brought in less than $30 million while burning through nearly half a billion dollars. Sure, we’ve all taken it on the chin from “The Rona,” so it’s no surprise that R&D budgets got cut. That’s especially why it’s so important for us to see some meaningful product revenues which will help validate their biofacturing platform which raises some of its own questions.

Biofacturing Hyaline

We were surprised to see that Zymergen does not have their own commercial-scale manufacturing capability. Instead, they outsource the work to other contract manufacturing firms. When those Hyaline revenues do start flowing in, don’t expect them to contribute much to the bottom line. From the Zymergen S-1 under the “Risk Factors” section:

We expect fermentation-produced molecules will drive better economics or improved margins. For example, we have used Launch Acceleration successfully on our first product, Hyaline, which we have launched with a non-fermentation produced biomolecule sourced from a third party and are executing on a process to convert to a fermentation-produced molecule, which we expect to occur in 2022.

Credit: Zymergen S-1

In other words, they’re not producing Hyaline at scale using their biofacturing platform. Zymergen says that in order to get products to market faster, they will sell the molecule using traditional manufacturing methods – even if they are more expensive than biofacturing. Says the company, “We plan to do this only where we believe we will be able to replace these non-fermentation produced biomolecules or components with fermentation-produced versions in 12-24 months.” So, there’s another thing investors will need to keep track of, because if they can’t master the biofacturing part, they’ve really got eff all. Here’s the latest update from the company regarding biofacturing Hyaline:

We are currently developing commercial scale processes so we can produce the molecule through fermentation at sufficient volumes and costs to support commercial manufacturing. We expect this process to be complete in 2022.

Credit: Zymergen S-1

Would-be investors should pay close attention to messaging leading up to 2022 that confirms they’re using biofacturing methods at scale. In a perfect world, their biofacturing volume comes online when the first purchase order comes in and the entire vision comes together perfectly. But as the company readily admits, “scaling production is the biggest challenge of all.” 

To Buy or Not to Buy

We don’t like that Zymergen is currently in the process of facing the biggest challenge of them all which will no doubt require a lot of capital, even if it doesn’t succeed. Getting product sales is equally as important. The “build it and they will come” thesis can be disastrous, something graphene producers have come to realize. We believe Zymergen’s business model is risky. They rely on third parties to do the manufacturing, they haven’t mastered their own manufacturing process at scale, and they’re trying to address a broad set of industry verticals which may stretch them too thin.

Zymergen smells a bit like another synthetic biology stock, Intrexon, and we all know how bad that cookie crumbled. If a “biofacturing as a service” business model would command a premium, then Zymergen’s business model deserves a discount, especially when their platform has yet to be proven at scale, a problem that’s plagued many synthetic biology stocks before it.

Conclusion

We always talk about double-digit revenue growth being important above all else. You can burn through 3/4 of a billion dollars like Zymergen has, and we’re just fine with that, but you have to show revenue growth. To date, Zymergen has only shown revenues from R&D and collaborations with product sales 3-15 months away.

What’s even more disconcerting is that microbes aren’t even producing Hyaline at scale – yet. Props to the company for disclosing this important piece of information and choosing an IPO instead of a SPAC. For now, we’ll be sitting on the sidelines rooting them on. We’ll take another look once they start to realize some meaningful product revenues that are coming from a biofactured product.

Should the IPO proceed as planned, Zymergen will be listed on the Nasdaq under the symbol ZY. 

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