Palm Springs

Grab a 12 pack of beer and a pool float

My investments into index funds are heavily weighted into what we can think of as “growth or tech stocks.” If you haven’t noticed over the last few months these stocks have seen their valuations get drastically cut. Recently, Amazon made a big move by buying One Medical, a membership only primary healthcare practice. Scott Galloway made a great point about why Amazon made this acquisition in his newsletter No Mercy/No Malice:

I predicted Amazon would get into healthcare several years ago. Why? For the same reason Apple is getting into auto: not because it wants to, but because it has to. Amazon stock’s price-to-earnings ratio is 56 — more than double Walmart’s. For the company to maintain its share price, it needs to add a quarter of a trillion dollars in topline revenue over the next five years. It won’t find this kind of revenue in white-label fashion or smart home sales. It has to enter a gargantuan market that lacks scale, operational expertise, and facility with data.

To me, this is a bet by the Amazon board that their management teams will somehow figure something out that One Medical’s management team couldn’t. Perhaps there is a play to be made with respect to shared back-end services, data storage innovation, or just something I’m not aware of, but I suspect Amazon might have bitten off more than they can chew on this one. Maybe I’m wrong, but I have a feeling this acquisition could fall flat on its face.

Maybe I’m just turning into an old grumpy person, but I’m not sure what technology companies can do to disrupt heavily regulated legacy business areas such as healthcare, chemicals, and insurance. A recent experience with ordering a gyro and fries from Pita Cambridge ended up being the wrong order because a Grub Hub driver grabbed the wrong bag and there was no recourse except a call service guy somewhere in India. This experience made me question everything. Is being able to order something online really that much more innovative than 20 years ago when you called it in?

Come On In. The Water is Fine.

In the chemical world synthetic biology and more recently technology have been sniffing around for decades in an attempt to disrupt.

I get it.

I think something like insulin is a fantastic biomanufacturing product, but if biomanufacturing wants to come for industrial chemicals they better get ready to hang out in the water for a long time. Biologically manufacturing complex chemical structures where stereochemistry is critical might be the best path forward because of the value of those target molecules.

Everything makes sense when it comes to biological manufacturing except when it involves industrial chemicals and it’s commercialization time. The crude oil supply chain has had 100+ years of chemical engineering efficiency. The price of oil tanking helped destroy Solazyme’s value proposition. If only they could have held on 10+ more years until oil prices skyrocketed again.

Despite all of that efficiency the professional chemists that are reading this can probably recall a time they got a call from on of their plants asking what they should do because they messed something up and there are 20 tons of off-spec product sitting in a reactor. Maybe it’s 3:00 AM and the production team wants to get it fixed before the next shift shows up so they don’t fall behind on the schedule. There is only so much a process engineer can do until they gotta call the chemist.

The chemical industry hasn’t had any huge breakthrough innovations since maybe the 1970s. A recent innovation that was pretty good was Solvay figured out how to make epichlorohydrin from waste glycerol coming from bio-diesel. TechnipFMC acquired the technology in 2018. “Breakthrough innovation” in the chemical industry right now looks like enabling your customers to do more with less or claim recycled/biobased feedstock provenance.

About a year ago I wrote about how Zymergen was delusional when they went public and then saw their stock price get decimated. They were a combination of both machine learning and synthetic biology. Recently, Gingko Bioworks bought Zymergen for $300 million. It’s not like Gingko’s stock price has been doing all that well either in the last year, but I’m rooting for them to turn it around. I ultimately believe that biomanufaturing has a role in our future, but I don’t think they should be the only game in town.

I suspect there are plenty of synthetic biology companies out there talking to investors and customers about why they are better than the current status quo of the chemical industry, but they are competing against a very lean marathon runner in their 100s (the chemical industry) who still manages to stay just out of reach.

We Are Gonna Need A Bigger Boat

I think the reason why most synthetic biology companies are destined for failure is multifaceted. Here are some thoughts on it. The short term way out is to have enough money to survive the time it takes to build out the manufacturing capacity while also figuring out how to make money. If you want to copy someone just look at the current Amyris product line. It’s all high end, high margin and low volume product aimed at a market where people will spend $50 on a 4oz bottle of face moisturizer because Kylie Jenner put it on her Instagram.

For those who want to do good for the world while also doing well with synthetic biology you’ve got your work cut out for you and you need a big ass boat full of money to get there. Here are some of the headwinds you might face:

Regular people just don’t give a shit that their Nike’s are made out of crude oil and put together in a factory in Vietnam where a very young looking 18 year old kid takes a post lunch nap beneath a polyurethane injection machine. The production and supply chain is so long and complex that it’s even giving me a headache thinking about it. Why should a regular consumer (not someone obsessed with rare Nikes) care to pay more because the material comes from a microorganism? Air Jordans already cost $120.

Not having immediate scale-up during raw material qualification at a customer is a big problem. If I qualify a synthetic biology company’s material in the lab to go into a new or existing product there is a good chance I’m on a deadline to scale-up and get it out to the field. If a synthetic biology company can’t give me a truckload of material in a few weeks or a month then the project is a zombie. As a supplier you are dead to me because you have wasted my time. If you have to tell me that you need to go build a 30,000 gallon reactor or wait for the EPA to give you clearance (I’d even find low volume exemption to be ok) then you have likely been wasting everyone’s time.

Nothing moves fast in chemicals and whatever timeline you have projected just think about doubling it. Even when you technically know the answer things take months to a year to move forward. Let’s say you just secured a massive new account at 5 million pounds of your new to the world product that is X% better than the crude oil alternative and it’s got Y% more margin. Just one little, tiny, problem. Your customer needs to build a few tanks to hold your stuff and it might take them 2 years to get it fully permitted and installed provided they have the CAPEX budgeted and the engineering resources to put on it. Success takes time and a pushy VC trying to return money to their investors might not have time.

Like I said, you are gonna need a bigger boat and it should in theory be full of money. I think about 80-90% of the synbio companies out there that are hoping to change the material world with their products are going to be in a rough spot in 3-5 years, but the 10% who do make it might just pave the way for the companies in the next cycle and those companies might be the ones to figure out the unlock.

If Apple, Amazon, or Google want to get in on the inefficiencies of the chemical industry and set a few million dollars on fire please send a few hundred thousand my way first to be a consultant. I’m not sure when the current synbio cycle is going to end, but I can’t wait for the next one.

Tony