How Synthetic Biology's "Window of Innovation" Is Disrupting the Chemical Industry

You're likely already familiar with the specialty chemical industry. Pretty much every product we buy -- shampoos, cosmetics, and just about everything made of plastic -- is based upon intermediary chemicals that serve as the building blocks of the consumer products world. The chemical industry is dominated by a handful of very large companies. BASF (NASDAQOTH: BASFY), DowDupont (NYSE: DWDP), and LyondellBasell (NYSE: LYB) are the three largest. Together, they churned out $138 billion worth of stuff last year.

From an investing perspective, these companies look to achieve economies of scale by spreading their very high fixed costs across an ever-increasing number of units. They've increased manufacturing plant output for decades, and are renowned for being aggressive in mergers and acquisitions. The DowDupont merger in 2017 was of epic proportions. Amounting to a whopping $130 billion, it remains America's second-largest merger of all time (only AOL/Time Warner's $165 billion at the dot-com peak ranks higher in absolute terms).

Making it sustainable

But demand for consumer products has also changed in recent years. One change worth noting is the emergence of the bio-based economy. Consumers are asking for companies to replace their hydrocarbon-based products with ones that are more environmentally friendly and sustainable.

As expected, the companies have responded. In one example, Coca-Cola (NYSE: KO) now uses plant-based material for 30% of its entire North American bottle packaging volume (and 8% globally). In another, Amyris uses sugar cane juice to produce everything from cosmetics and fragrances to renewable jet fuel.

Making it disruptive

The change in consumer preference also inadvertently provided an opportunity for chemical companies.

Unlike hydrocarbons, plants are living things that are based upon DNA that can be modified. By genetically engineering the input feedstocks or the enzymes used to govern their reactions, companies realized that they could optimize the output or the properties of their plant-based products.

This new era of bio-based chemical engineering has come to be known as synthetic biology.

For years, synthetic biology has been limited to projects in research and development labs. As my colleague Maxx Chatsko explains it, the space was high on hype and low on execution.

But things are changing very quickly.

A lot of money -- some $1.8 billion in 2017 and another $3 billion pledged in 2018 -- has recently flooded into the field. Venture capitalists have noticed that there are now digital tools, such as Illumina's (NASDAQ: ILMN) affordable DNA sequencing, that could help to quickly optimize those feedstocks and enzymes. Quickly optimized inputs would reduce the time to market for the finished products, which could lead to handsome returns for those early investors.

Joel Stone, the chief technology officer at Fermentum, is even saying we are currently in the "window of innovation" for the emerging synthetic biology industry.

I spoke to Stone at last month's World Congress on Industrial Biotechnology. In the following video, he explains how synthetic biology is disrupting the chemical industry (disruption is a topic I'm personally quite fond of), describes the importance of toll manufacturing to keep up with demand, and lays out a few things investors should be watching.

A full transcript is provided below.

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Simon Erickson: Hi, everyone! Motley Fool Explorer lead advisor Simon Erickson here. I'm at the Industrial Biotechnology conference in Philadelphia, Pennsylvania. I'm joined this afternoon by Joel Stone. Joel is the chief technology officer at Fermentum. Joel, thanks very much for joining me this afternoon!

Joel Stone: Thanks for inviting me. This is a thrilling moment to talk about my space.

Erickson: It sure is an interesting space right now. And actually you're giving a presentation tomorrow about disruptive innovation in industrial biotechnology. That is quite a topic. Can you tell us a little bit about what that means? And also specifically where the disruption in this space is?

Stone: Well, first off, really one of my favorite books by Clayton Christensen is about disruptive innovation and how it's impacted society and how it's impacted products. Not just technology, but really the products. That's really the whole premise.

But what I'm really excited about and a lot of the subject matter here at the Bio Congress, which I've been coming to since forever, is about synthetic biology and how it's going to be disrupting and already is disrupting, the branded products industry and how we live. I call it the reinvention of the chemical industry, because we're seeing more aggressive moves worldwide in how we use biology and chemistry in material science to create high performance materials that can be used in branded products.

Which consumers need to start paying attention to that. Because disruptive technology -- when you look at the rate of change – it's just accelerating, is not decelerating. It's accelerating at unimaginable growth rates.

Erickson: And the disruptive part of this truly is we're building from the ground up, right? The way that synthetic biology works is that you're building from the DNA level to create these higher and higher value products. That's different than how this has traditionally worked for the industry, right?

Stone: Absolutely. Really the key thing with synthetic biology for laypeople -- people that aren't really familiar with it to the degree that I am -- it's actually gene editing. It means that we're going into an existing organism and redefining how the genes interact with each other. And it's not inserting a foreign gene from another organism into that. It's basically creating an organism at a much faster rate than it would naturally evolve due to Mother Nature -- whether UV, radiation, or chemicals – it's how life has evolved to where we are today.

Erickson: And the value of that is much faster time to market, also much more cost efficient than the natural way of doing things.

Stone: Oh, absolutely. If you looked at how we would do industrial microbiology just 10 years ago, you'd be spending 6 to 10 years to get a microbe to do what you want it to do from a making a protein or chemical. That can now be done in less than nine months. And for cents as opposed to millions of dollars.

That is incredible. That's the game changing event that we're seeing today.

Erickson: Hugely important, too, when you consider that this is a $300 billion industry for biotechnology all across the world.

To make it a little bit more concrete though, you are now the chief technology officer of Fermentum. Can you tell us, I guess just a little bit more concrete terms, what you're working on? What are some of the goal for the company here, and what are you guys trying to accomplish?

Stone: Great. Fermentum, what we're moving to go forward with is a disruptive business model and that one of the major hurdle or hurdles for industrial biotechnology through the years has been the level of capital investment that's required and finding ways to finance projects for individual companies.

Historically what's happened in the food industry, what's happened in the IT industry, the chemical industry through the years is something called contract manufacturing or toll manufacturing. Which basically is a maker's space. It's a facility that's multifunctional that can produce products for multiple companies. So it's shared. It's shared capital as opposed to, as an example, if you would typically be an industrial biotech company, a start-up company, and want to build a plant to ultimately have a commercial plant, it would probably be a minimum of $100 million. Well, rather than spend $100 million in capital or what I call building a monument for your company, it's you go into a contract manufacturer like Fermentum, which we're developing here in North America. Which will be the largest and one of the only contract manufacturing facilities in North America, specific for this space.

We'll be able to do it with hardly any capital investment by the company. They'll have a higher variable cost, but basically none of that up-front capital cost. The other big piece of that is rather than having to wait a couple of years to build a facility, they'll be able to move into our facility very quickly. Which matches in with the synthetic biology methods that have been able to accelerate the rate that new molecules can be produced by a microbe will also be able to accelerate in a collaborative manner: how quickly they can get a branded product to market.

And our forte at Fermentum is we know the markets and we know how to move the products into the market. So we're not just helping a company produce a particular chemical or a molecule. We're helping that company move it into the market space and get approval by a branded product company.

Erickson: Sounds like a lot of expectation for demand for synthetic biology in this space.

Stone: Oh absolutely. Absolutely. And for myself as well as Tim Staub (our CEO), what's really fun for us is helping these companies be successful. That may sound a little bit crazy, but when you've been in the industry as long as I have and being able to now give back to it and help young people that have never built a plant before, help them get a plant built and be successful. It's just like watching my own kids grow up and graduate and get a nice job. It's multiple kids that I could help have a nice job and be successful.

Erickson: Well, Joel, our audience here is mostly individual investors. Might not be experts in synthetic biology, but definitely interested in this space. It sounds very disruptive and something we should be keeping an eye on.

But what are a few things that you would recommend individual investors watch? What's something we should be keeping an eye on in this space?

Stone: Great question. I think the really key trend to watch is the same thing that I watch when I evaluate technology and I do a lot of my own investing. Is watch the companies that aren't just talking about sustainability and talking about using biotechnology to make high performance and better performing products.

But keep an eye on those companies. And it's easy, read their annual reports and read their press releases, look on the store shelves. An easy place to look, on the store shelves. Method is a great example that's making the biodegradable soaps and detergents that people are using in their homes every day.

Companies like that are the ones to keep an eye out for. And it's easy as an investor to look for those because those are the companies that I think when we look five years out are growing beyond a typical branded product company.

Erickson: Consumers at the end of the day will still vote with their wallets.

Stone: They vote with their wallets. Absolutely.

Erickson: Well, Joel Stone, again, the chief technology officer at Fermentum. Here we are at the industrial biotechnology conference in Philadelphia, Pennsylvania.

Joel, thanks again for the time. Thanks for tuning in, until next time.

Simon Erickson owns shares of Illumina. The Motley Fool owns shares of and recommends Illumina. The Motley Fool has a disclosure policy.