Synthetic Biology as an Investment
Synthetic Biology Part 2
In Part 1 of this article, we dived into the world of Synthetic Biology and asked, Can We Engineer Life Itself? The conclusion: Yes, well sort off, we are still making very basic biology structures but the field is experiencing significant progress and in the future, the seemingly unthinkable will become possible. Now we want to find out if there are any good investment opportunities in this sector?
As exciting as this technology sounds the industry has not been very successful.
The biotech landscape is scattered with bodies of companies that couldn't scale or didn't think about the economics, says Chris Guske, a chemical engineer who has worked on some of the world's largest biorefining products. Just because you have a bug that produces a gram per liter in a flask doesn't mean you are ready to be commercial.
Eventually, in order to survive, every company needs to make more money than what they spend and this seems notoriously difficult in industrial biology. Producing bioengineered products that have comparable unit costs to chemical products seems to be the biggest challenge. Let's have a look at how our three picks in our Biotech Longshot portfolio are addressing this issue.
Summary: The Horizontal Platform Provider - Ginkgo is generating the most intrigue in synbio but they have a controvertible business model and very complex finances.
Ginkgo is basically running a very important and very expensive experiment that might change the course of history forever. Ginkgo is attempting to make biology easier to engineer by building a horizontal platform that they believe will eventually make biology programmable in the same way we are programming the bits on computers today. This platform will create an abstraction layer which will allow anyone, with little knowledge, to synthesize a protein of their choice.  Here we have another company trying to be the Amazon of their industry and their charismatic CEO has even claimed that they are creating the AWS or app store of biology.
These extremely ambitious pursuits have translated into a company with a relatively large market cap before they have really achieved anything notably significant. This has led to strongly polarised opinions about this company and its stock.
Today, Ginkgo's platform is being used to engineer microbes that can be used to grow valuable chemicals, make agriculture more sustainable and deliver therapeutics in a targeted manner. Their platform gets smarter and more efficient with every use and if they are successful in building meaningful partnerships they might become a genomic knowledge compounding machine.
Ginkgo generates money by charging fees for the use of their platform or capturing downstream value by forming partnerships and collecting royalties or equity stakes. They were also a covid beneficiary by selling end-to-end diagnostic tests.
Summary: The Vertical Integrator - Showing early signs of commercial success, but still burning cash and not the greatest balance sheet.
Unlike Gingko, who is trying to monetise their platform by forming partnerships and taking royalties or equity, Amyris is all about commercialisation and scale. Amyris develops their own products which they market under different brands. These are two completely different business models and right now it is difficult to tell which will be the most successful. For now, both companies' success relies on the ability to produce in-demand molecules, at scale, and cost-effectively compared to existing production alternatives.
Amyris's most prestigious molecule to date is Squalane. A very popular moisturising ingredient in face creams. Traditionally this is quite an expensive ingredient, but even worse is that it requires the killing of sharks since it is extracted from shark liver. Biossance is their squalene skincare line and is currently one of the fastest growing brands on Sephora.
Summary: The Enabler - Generating consistent growth but also no sight to profitability, at least they have a healthy balance sheet.
Twist Biosciences is more of a pick-and-shovel provider for synthetic DNA, which enables other companies like Gingko to develop bioengineered products. This probably makes them the least risky in this very risky sector. Twist has developed technology that automates the process of writing synthetic DNA at scale. Their platform gives them massive future optionality. From enabling researchers to find cures for deadly diseases to digital DNA data storage. It is estimated that the entire internet's data can be stored in a shoebox of DNA. Although this technology is still in its infancy, we find this remarkable.
Twist has a phenomenal management team and they are executing superbly but we would like to see a clearer path to profitability.
The future of Synthetic Biology is both exciting and terrifying. The potential to transform industries and products with synthetic biology is massive. But these companies need to show that synthetic biology can be used for commercial-scale products. Despite some early-stage successes in the production of a few chemicals and drugs, the common perception is that synthetic biology is still not yet delivering on its promise.
We hope our picks have learned from the failures of previous companies and can finally harness the power of synthetic biology in the near future. We want to emphasise the word hope because that is not really an investment strategy. It is also why this portfolio is called Biotech Longshots. Yes, we do our research to identify the best opportunities but the risk remains extremely high due to its early-stage nature, limited data and unknown future. We still want some exposure to this enticing field so we took a basket approach and kept our positions small, only using money we can afford to lose.
As stated in a previous article, we are waiting to see in which direction the US market pivots. At the moment the Fed is still hawkish and trying to stop inflation by destroying demand. When this bear market does finally come to an end, we expect tech and biotech to lead the rally as demonstrated in the past week. These were the first stocks to fall and they will most likely be the first to bottom.
Portfolio Update Summary
We are fully aware of the extreme volatility our Biotech Longshot portfolio will endure. That is also why it is our smallest capital allocation. We expect some of these companies to go bust, but we do believe that some might be multi-baggers in a decade. We have fully allocated our $2000 in this portfolio based on attractive valuations in the past month. We will not make any more contributions but we might exchange some if more promising technology comes along.
This is not financial advice and only the opinions of the author. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. Investing in biotech is extremely risky. The $2K is not real money and only a demonstration of a typical portfolio.