While the words biotech and biopharma are often used interchangeably, they aren't the same thing -- not even close, in fact. Biotechnology is using biology as technology -- and that extends far beyond the realm of healthcare and therapeutics. We live in a world with biotech crops and plants, genetically engineered microbes that churn out industrially relevant chemicals, biotech animals, living environmental sensors, and much more. Collectively, these products' contributions to national GDP comprise the bioeconomy.
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Individual investors are still in the early stages of being able to reap the potential rewards of biotech (there's vastly more excitement with private start-ups at the moment), but that doesn't mean there aren't opportunities to build wealth by owning great companies for the long term. Investors should consider the bioeconomy stocks of Codexis (NASDAQ: CDXS), Green Plains (NASDAQ: GPRE), and Repligen (NASDAQ: RGEN) for their killer advantages in their respective subsectors.
Enzymes for pharma, biopharma, food, and more
Codexis is an enzyme engineering company. Its products reduce the cost of chemical manufacturing for customers, who've historically been concentrated in the pharma industry. While that will remain the case for the foreseeable future, the small-cap biotech stock has begun to diversify its growth opportunities. That includes a robust enzyme portfolio in food ingredient manufacturing, biopharmaceutical production, industrial enzymes, diagnostics, and even its own biotherapeutic candidate slated to enter clinical trials in 2018.
Similar to the company's pharma-focused enzymes, all of the growth opportunities mentioned above undoubtedly will come with comfortably high margins. How can investors be so sure? Well, the business of engineering high-quality enzymes comes with high barriers to entry. Any company wishing to compete in the space needs an engineering platform that spans the digital and physical, experience using that platform, and the ability to deploy that knowledge at high throughput for commercial customers. That gives Codexis a killer advantage as it works to expand its platform through the end of the decade.
Investors should see this demonstrated by consistent -- and hopefully, accelerating -- growth rates for both the top and bottom lines. While the high end of full-year 2017 total revenue guidance calls for just an 8.5% improvement compared to last year, that's mostly due to the timing of lumpy collaboration revenue. Product revenue -- the most important item for long-term growth -- increased 74% in the first nine months of 2017 compared to the year-ago period.
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One important consideration: The fast pace of advancements in synthetic biology promises to lower the barriers to entry for enzyme engineering over time, but Codexis' technology platform (which has evolved with past advances to some degree) should remain relevant for the foreseeable future.
A diversified ethanol leader
For much of this year I've been telling investors that Green Plains stock was a steal as it dipped below $20 per share...except it just kept heading lower, even setting new 52-week lows in recent weeks below $16 per share. I'm not too concerned with my inability to time the market, especially considering the killer advantages the world's second-largest ethanol producer has been sharpening.
Shares still bounce around with the volatility common to biofuels stocks, but Green Plains is no longer "just" an ethanol company. Sure, the bread-and-butter business is still ethanol production, but management has diversified upstream and downstream of the ethanol manufacturing process to more fully leverage its assets and build new high-margin product portfolios.
Green Plains is now the fourth-largest cattle feedlot owner in the United States (cows eat corn byproducts leftover from ethanol production), the world's largest food-grade vinegar producer and marketer (vinegar is made from ethanol), owns a majority of a highly profitable master limited partnership that handles transportation and logistics for its overall business, and is investing in export terminals (the U.S. will export a record volume of ethanol in 2017).
The diversification strategy has done wonders to insulate investors against the volatility of ethanol markets. Through the first nine months of 2017, nearly 73% of EBITDA came from non-ethanol business segments. Total EBITDA has increased 30% in that span, even though total revenue has increased just 8%. Diversification is a killer advantage for Green Plains -- the market just hasn't caught on yet.
Supplying the biopharma industry
Most investors have probably never heard of Repligen, but it has a killer advantage in bioprocess technologies. That is, the company's products are absolutely critical to the production and purification of biological drugs for the biopharma industry.
Repligen has long been a global leader in Protein A ligands, which are formulated into resins and used to purify monoclonal antibodies, which are used for diagnostic tests and theraputic treatments for cancer and inflammation. At last count they were deployed in the biomanufacturing of over 70 monoclonal antibodies on the market and over 300 in clinical development. It's a formidable business that continues to grow at impressive clips with incredible margins, but in recent years management has begun diversifying into other bioprocess products with similar success.
Consider that product revenue for the first nine months of 2017 registered at $99.5 million, compared to just $47.5 million for all of 2013. It's about to get a whole lot better. Repligen just acquired Spectrum -- a former supplier of certain filtration products -- to expand its bioprocess leadership into manufacturing processes for vaccines, recombinant proteins, and gene therapies. Spectrum is expected to contribute up to $50 million in product revenue in 2018 at gross margins that exceeds 55%.
Simply put, Repligen is a fast-growing bioprocess leader that's succeeding in making itself essential to global biopharma manufacturing.
What does it mean for investors?
While much of the excitement of the bioeconomy lies in private markets or even academic pipedreams, individual investors still have opportunities to build long-term wealth -- if they know where to look. Enzyme leader Codexis, ethanol producer Green Plains, and bioprocess powerhouse Repligen all have killer advantages in their respective niches. Additionally, each company's strategy revolves around high-margin diversification to expand its leadership position, and each boasts a management team with a proven track record of execution. Investors should give each a closer look.
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