Although most of the market cap awarded to synthetic-biology conglomerate Intrexon (NYSE: XON) is derived from its potential in healthcare, analysts are beginning to eye the potential for perhaps its leading non-pharma development-stage technology platform: gas fermentation.
The idea is simple: Feed genetically engineered microbes methane from cheap American natural gas, which they'll convert into various commodity chemicals and fuels. Intrexon thinks it will be much more economically competitive than using traditional fermentation technologies, which rely on costly agricultural sugars, and better than conventional petrochemical processes.
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Yet although the conglomerate and analysts are expecting gas fermentation to be huge, they seem to be overlooking some fundamental realities. Here's why bullish analysts are wrong.
Easy, (paper) tiger
To win over investors and analysts, Intrexon has often compared its development-stage gas fermentation technology platform to two other chemical manufacturing processes: traditional fermentation and conventional petrochemical processes. Here's how the company presents its gas fermentation platform within the technology landscape:
In investor presentations, at least, gas fermentation compares quite favorably. Intrexon wants investors to know that methane from natural gas is a much cheaper source of carbon than sugars from agricultural biomass. Although it's not an apples-to-apples comparison, the company is essentially correct.
In fact, economics is the main argument for attempting to develop a gas fermentation platform. Traditional fermentation starts with agricultural sugars, which are currently too expensive to allow these processes to compete for most commodity chemicals and fuels. Gas fermentation can start with cheap (or even free) methane from natural gas, wiping away the single largest cost of traditional fermentation in one fell swoop.
But there's no such thing as a free lunch. Mitigating economic risk comes at the expense of taking on additional technical hurdles. Traditional fermentation works good enough at industrial scale and has been used at commercial levels for over a century. The same cannot be said for gas fermentation.
Intrexon has to develop completely new tools to work with its microbes in the lab, study their performance in the pilot facility, and eventually scale the process to industrial levels. Bubbling gases through a reactor is a relatively new idea -- and thermodynamics may have the final word.
Nonetheless, the company thinks exchanging these risks is a bet worth making (more on that below). But why stop there? Intrexon thinks gas fermentation is better than petrochemical routes, too.
Unfortunately, these comparisons make even less sense than those to traditional fermentation. How so? Consider that the gas fermentation section of both quarterly investor presentations in the first half of 2017 open with the following statement: "Intrexon has developed disruptive [gas fermentation] technology that enables the profitable use of low-cost natural gas to replace oil as the feedstock for several high-value industrial products."
The line "replace oil as the feedstock" is likely a reference to naphtha, one of the most common chemical feedstocks in the petrochemical industry. Not a problem.
However, the graphic below the opening statement begins by then referring to the "high CapEx and high OpEx" of gas-to-liquids technologies. Those processes are in fact expensive and inefficient, but they're completely different from petrochemical processes using naphtha.
Investors who don't know any better may be led to believe that this comparison is between two processes: gas fermentation and one petrochemical process. But the company is throwing multiple independent petrochemical processes together as if they were one, calling attention to specific downfalls of each and then positioning gas fermentation as the clear winner.
It's misleading, especially considering that Third Security, the investment fund owned by Intrexon CEO R.J. Kirk, has historically only invested in two areas: biotech and oil and gas. The company clearly knows the difference, so why present it this way?
Let's be diplomatic and assume Intrexon, like many biotech companies, is just awful at messaging. That alone doesn't make management and Wall Street analysts wrong about gas fermentation -- but economics does.
The technology platform is projected to enable double-digit margins on various commodity chemicals, which has been a key selling point to date. Here's the thing: Many traditional petrochemical processes do that already. In fact, the bioprocess leader Genomatica has produced a couple of Intrexon's targets using traditional fermentation -- and has even partnered (and in some cases, already moved to commercial-scale production) with leaders such as BASF, Eni, Novamont, and Braskem. That makes the argument that gas fermentation is always a superior fermentation technology a little less effective.
Intrexon has publicly acknowledged making six unique chemicals with its gas fermentation platform in the lab (only four are being developed today), but there aren't many advantages to producing these specific chemicals in this way.
What does it mean for investors?
If you take a step back and evaluate each claim Intrexon has made about its gas fermentation platform, the promised game-changing status of the technology begins to lose its luster. The company makes poor comparisons to existing technologies and doesn't seem to have any real advantage for making at least three of the four chemicals it's currently developing.
By the time the company is at production scale for 1,4-BDO and 2,3-BDO -- years from now -- it's likely that existing processes using traditional fermentation will have already gained significant market share and driven down their process costs below that of conventional petrochemical processes. Other chemicals in the crosshairs are already mass produced at healthy margins and don't come with the technical risk of a novel gas fermentation process. So although Intrexon's vision sounds great on paper, there are quite a few obstacles investors, management, and Wall Street analysts seem to be overlooking.
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