Why Next-Gen Biofuels Look Attractive for Biotech Investors

 |  Includes: AMRS, CDXS
by: The Burrill Report
By John Hamer
It’s interesting that biotech publications focused on healthcare have reported the news of the Amyris (NASDAQ:AMRS) IPO, a next-generation biofuel company. Biotech investors will probably look seriously at this area. Much of the underlying technology, such as genomics and synthetic biology, is shared with traditional biotechs. The first two companies out of the chute, Amyris and Codexis (NASDAQ:CDXS), also have healthcare-related projects.

What do next-generation biofuel companies offer the biotech investor?

Well known products
Biofuel companies make well known products: chemicals and intermediates that have long been known in the industry. Biotechs make high risk products, and while some become blockbusters, the vast majority fail in development or fail to pass muster with an ever stringent U.S. Food and Drug Administration. The recent woes at Arena Pharmaceuticals (NASDAQ:ARNA) and other companies developing obesity drugs are a good example.

Early revenue and earlier profits
Biofuel companies will hopefully use IPO proceeds to fund commercial development and will reach profitably in a more predictable manner then most biotechs. In contrast, biotech drug development is a long process with uncertainty sometimes looming right up to the final regulatory approval.

Less Dilution
Once a commercial plant is built and risk is reduced, other forms of financing become available through partnerships, joint ventures, and project financing. Biotechs almost never raise enough capital to complete commercialization and IPO investors face many rounds of subsequent secondary financings.

Multiple Shots on Goal
The next-generation biofuel companies, like Amyris and Gevo (in registration), have a broad product strategy that focuses first on high value chemical products or intermediates that can be produced at much lower volumes than fuels. The portfolio approach allows risk reduction, technology improvements, and earlier revenues before taking on the larger fuel markets. Most biotechs base their future on the success of a single product and their stock price will rise and fall on its success.

Global Opportunity
Most of the world’s nations are content to let U.S. and Northern European biotech and pharmas develop their drugs. However, all countries need an energy solution for financial security and to meet demands to reduce carbon emissions. Next generation biofuel companies are finding a ready partner in foreign governments and corporate entities such as Amyris in Brazil, Codexis in Singapore, BioArchitecture Labs in Chile, and many others.

Positive Long-term Trends
Healthcare costs are facing increasing pressure in the United States and Northern Europe and new efficacy guidelines may limit the use of drugs even after they are approved. While global spending on healthcare will still increase, biotech innovation will face increased scrutiny and premium drug pricing will ultimately suffer. In contrast, global energy and material needs are anticipated to rise dramatically over the next decades with the added constraints of reducing fossil fuel use and reducing carbon emissions. The next-generation biofuel companies are unlikely to see these major trends reverse anytime soon.

Time will tell whether traditional biotech investors will move into these next-generation biofuel companies. Biotechs will continue to enjoy a research pipeline funded by the National Institutes of Health and Pharma R&D spending (~$90B per year), as well as an ever creative and productive partnering process.

In contrast, real R&D spending in energy is just beginning and all but a few energy companies are cautiously dabbling with partnering. Biofuels companies will have to prove they can generate a mega success story like a Genentech (Private:DNA) or Amgen (NASDAQ:AMGN). In addition, some level of technology risk must still be overcome. Finally, the onus will really be on next-generation biofuel backers and bankers to insure institutional investors that only high quality companies will be brought to the IPO market to insure this industry’s success.

Disclosure: John Hamer is a managing director of Burrill & Company. Burrill & Company is an investor in Codexis.