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Zymergen (NASDAQ:ZY) listed in April 2021 and after recently launching their Hyaline product, were supposedly preparing to rapidly scale up production and revenue. In August they indicated that there was an issue integrating Hyaline into the manufacturing process of customers, which would temporarily delay rollout of the product. The CEO was replaced at the same time though and Zymergen appeared to freeze hiring, indicating that the problems were far larger than the company was letting on. In November Zymergen announced that they were abandoning their two main products, rationalizing their product portfolio and dramatically cutting headcount to reduce cash burn. Zymergen no longer has a clear path to profitability and rather than focusing on growth, the company is clearly positioning to avoid bankruptcy. Zymergen does not have the narrative of Ginkgo Bioworks (NYSE:DNA) or the revenue growth of Amyris (NASDAQ:AMRS) and there is a real risk of high caliber employees abandoning the company for better opportunities. While Zymergen’s intellectual property is likely worth a significant amount and the company may be able turn itself around, I consider the company uninvestable given the way management has failed to provide investors with clarity over the last 6 months.
Synthetic biology aims to use genetically engineered microorganisms to produce high-performance materials from sugar, with less waste than traditional synthesis approaches. Most synthetic biology companies have struggled to manufacture novel molecules at industrial scales though, raising doubts about the viability of the industry.
Many materials are currently made by cracking hydrocarbons, but cracking a hydrocarbon only gives a relatively small number of components. Biology provides orders of magnitude more diversity and differentiated chemicals. Cells naturally make tens of thousands of different molecules and can be reprogrammed, allowing the production of a diverse array of biomolecules with potentially unique properties.
Another problem with traditional chemical synthesis is that the pace of innovation has slowed to a crawl and development costs continue to rise. In the middle of the twentieth century approximately 4 new polymers were developed per decade, but this has slowed to approximately one new polymer per decade and only six major polymers have been commercially launched since around 1980. Many widely used materials were invented decades ago:
Zymergen estimate that it takes incumbents over a decade and hundreds of millions of dollars to develop and commercialize a novel polymer. This estimate appears to be based primarily on Kevlar, which DuPont spend over 10 years and approximately 500 million USD developing in the late 1960s and early 1970s. Kolon took from 2006 to 2016 to develop colorless polyimides and Sirrus took from 2009 to 2020 to commercialize methylene malonate.
While information on chemical development costs is scarce, there is data on construction costs for commercial-scale polymer manufacturing plants:
Synthetic biology largely avoids the large capital costs of specialized manufacturing plants as standard fermentation reactors are used, possibly with some downstream processing.
Biosynthesis is also a potentially more sustainable production method that will likely have regulatory tailwinds in coming decades. Regulations regarding products that are harmful to the environment are increasing and consumers are beginning to demand more environmentally friendly alternatives.
While synthetic biology presents a possible solution to the problems of new product development, it is not without its own issues:
Advances in life sciences tools and machine learning present a solution to these problems though, particularly when coupled with a focus on high-value products rather than bulk commodities.
According to Zymergen, chemical and material companies are currently valued at a combined global market capitalization of approximately 3 trillion USD. If synthetic biology can capture even a small slice of these markets it could potentially create a huge amount of value for shareholders. Zymergen estimate that they have 1.2 trillion USD market opportunity based on a bottom-up analysis of 20 industries. Prior to rationalizing their portfolio they were focused on electronics, consumer care and agriculture, which are worth approximately 150 billion USD.
Figure 1: Market Opportunities for Zymergen's Products
While the market opportunity is clearly massive, these types of estimates are highly uncertain. Investors must consider the ability to biosynthesize products that meet a real need in the market at a competitive price point. As examples:
Zymergen is focused on optical films (25 billion USD opportunity in 2019), with other applications including adhesives (3 billion USD opportunity in electronics assembly), coatings, substrates for printed electronics, wearables, transparent heaters and sensors. Given the issues with Hyaline, Zymergen's ability to deliver on the promise of this segment is not clear.
Hyaline is a colorless film that is used to make electronics like smartphones, allowing a greater density of printed flexible circuits, better touchscreens and more resilient products. Hyaline is the film, and the film is based on a proprietary monomer. Only half a million foldable devices were sold in 2019, but projections are for sales to reach 80 million units annually by 2025.
MicroLEDs are another potential growth area for Zymergen in electronics. microLEDs produce better image quality with 3-4x greater power efficiency compared to OLED. New film products that can withstand high temperatures and be used as substrates in their manufacture could increase the adoption of microLEDs.
Figure 2: Potential Applications of Zymergen's Products
The consumer care market is fragmented across a range of product categories spanning personal care, such as skin care, hair care and hygiene (over 400 billion USD in 2019) and home care, which includes laundry detergent and softener, dish soap and household cleaners (over 150 billion USD in 2019). Consumer demand in the category is shifting towards products that are natural, non-toxic, environmentally sustainable and provide superior performance. Zymergen recently abandoned this segment due to concerns over the cost of acquiring customers. This again highlights the difficulty that most synthetic biology companies have transitioning from the lab to commercial production and distribution.
Over 400 billion USD is spent on agricultural inputs each year, half of which is for fertilizers and crop protectants. Zymergen estimate that their market opportunity in agricultural products is over 45 billion USD across nutrient use efficiency enhancers and crop protection. They are currently developing a product to improve crop nutrient uptake, helping to reduce reliance on synthetic nitrogen. This represents a large opportunity as approximately 50% of crops globally are reliant on synthetic nitrogen.
Zymergen was founded in 2013 with a vision of using synthetic biology to reduce the environmental impact of manufacturing. Zymergen design, develop and commercialize products using their “biofacturing” platform which they believe is faster, cheaper, more sustainable and results in better products. Their focus is on breakthrough products where there is demand for new materials and where bio-based products have an advantage that can be quickly realized. This approach stands in contrast to Amyris, who are only developing biosynthesis processes for existing natural molecules.
Zymergen’s past RD service contracts have validated their biofacturing platform to some extent, with these programs having resulted in over 1 billion USD worth of product sales. This also highlights the weakness of the partnership business model, where synbio companies can generally only capture a fraction of the value they create. These programs have contributed to proprietary data sets though, which power Zymergen’s algorithms and provide a foundation for ongoing improvement. Zymergen’s first revenue-generating RD service contract was with DARPA in 2014. They participated in DARPA’s Living Foundries 1000 Molecules program, which aimed to develop next-generation tools and technologies for engineering biological systems.
In 2014, Zymergen also entered into an RD service contract with a multinational food processing company that focused on improving a commercial production microbe used in the processing of an animal feed component. Zymergen’s Products group was established in 2016 and their initial efforts focused on products for electronics, consumer care and agriculture. Zymergen entered into a collaboration agreement with Sumitomo Chemical in 2019 to develop materials of strategic interest to Sumitomo.
Zymergen believe their approach will yield differentiated products with lower capital expenditure requirements that can disrupt the chemical and material industries. Zymergen aim to launch their products in about half the time and at 10% of the cost of what traditional chemical and material companies can deliver. A significant proportion of this reduction in expenses is driven by the ability to replace custom-built chemical plants with standard fermentation vessels. Given the late-stage failure of Hyaline and their insect repellant, achieving this goal appears shaky though. They estimate the timeline and costs of launching a new product to be roughly five years and 50 million USD.
The development of a product proceeds in three steps, with product design estimated to take 1-2 years and at a typical cost of approximately 5 million USD. Amyris is focused on existing products and hence does not need to perform this step, saving a significant amount of time. The second step can be completed in roughly one year and at a typical cost of approximately 5 million USD and the third step in roughly three years and at a typical cost of approximately 40 million USD. Given that Amyris and Ginkgo have both demonstrated the ability to commercialize products in under 12 months, Zymergen’s timelines appear excessive. Even Willow Biosciences was able to commercialize their first cannabinoid within 2 years of founding the company. It is not clear whether these are simply conservative estimates, are the result of Zymergen’s focus on novel molecules or point towards problems with Zymergen’s approach.
Figure 3: Biofacturing Lifecycle
Zymergen first identify a chemical solution that meets the needs of potential customers. Business development personnel typically work with customers to define the desired material properties, helping ensure the product meets a genuine need. This highlights the fact that Zymergen has chosen to develop products for very specific use cases and in the case of their electronics products, is selling to a concentrated customer base. To some extent Hyaline's failure is not surprising given these facts.
The potential design space for even simple single-celled organisms is far too large to be effectively explored using traditional experimentation alone. There are approximately 150,000 known metabolic reactions and approximately 200 million known proteins capable of catalyzing these reactions. The total number of potential organic small molecules is estimated at 10^60. Many of these molecules have properties that are difficult to obtain with synthetic chemistry (like chirality). Zymergen selects biomolecules using a combination of machine learning and simulation to predict material performance. The top candidates are then experimentally validated. In-silico design and lab automation dramatically expand how much of the design space can be explored though. Still, biology is complex and is not always amenable to engineering approaches.
The biofacturing platform is then used to:
The platform integrates techniques in molecular biology, chemistry and materials science with lab automation systems, data and machine learning.
Figure 4: Zymergen's Biofacturing Platform
Like most synthetic biology companies, Zymergen points toward data as both a source of competitive advantage and a reason to expect improving performance over time. Zymergen hope that as their database grows and their algorithms improve, they will be able to launch products faster and cheaper. Data is generated during the iterative optimization process and as such could contribute to economies of scale.
Zymergen believe they have the world's largest metagenomics library, which is applicable across agriculture, healthcare and consumer care. The veracity and importance of these types of claims is difficult to assess though. Ginkgo also tout the size of their databases, which also consist of large volumes of long-read sequencing data. Long-read sequencing data is likely to be more useful than short-read sequencing data as it provides greater insight into structural variations in DNA. The amount of data these companies can leverage ultimately does not matter, what does is their ability to reliably bring cost competitive products to market. Given the relatively small number of successful projects of each company so far, it will likely be several years before the real difference in capabilities becomes apparent.
Zymergen acquired Radiant Genomics in 2017 to gain access to their metagenomics library, the Unified Metagenomics Database (UMDB). UMDB is a digital and physical collection of DNA with more than 200 million genes. The database incorporates both publicly available enzyme information as well as enzymes discovered by Radiant and Zymergen. This library enables Zymergen to isolate novel enzymes, helping to reduce costs and develop new products.
Once a molecule is selected, machine learning is used to recommend pathways to be installed into host microbes for evaluation. Zymergen has a database of approximately 75,000 biomolecules. The database is a combination of public and proprietary data, and the data unique to Zymergen is growing all the time. Zymergen know the structure and pathway of 10,000 of these biomolecules. They also know the structure of the other 65,000 but the pathway is currently not complete. If required, they believe they can complete the pathway with additional molecular biology work. There are another million complex molecules where the pathway is complete, but Zymergen do not know the molecular structure.
Zymergen has experience engineering for all major classes of microbes, including:
The understanding of most microbes is still relatively poor though.
Figure 5: Understanding of Common Microbes
Zymergen’s machine-learning systems draw on seven years of data and a database containing 200 million proprietary genes to suggest genome variations which are then tested. Automation and a range of multipart and multisite gene editing tools are used to test biochemical pathway in panels of hosts. Zymergen pay particular attention to the dark region of the genome during optimization as they believe that past RD work has shown this region to be critical to commercial success.
A library of microbes with multiple genomic edits and inbuilt biosensors is created so that the best performing cells fluoresce, allowing them to be identified for further testing. This process is enabled by Zymergen’s acquisition of EnEvolv alongside other technologies and appears to be similar to the functionality offered by Berkeley Lights (NASDAQ:BLI). Zymergen acquired EnEvolv in 2020 for their ultra-high throughput testing techniques.
Figure 6: Integrated End-to-End Platform
Standard high throughput assays do not resemble performance at scale because the physical environment is extremely different. Computational methods are used to predict gene functions in industrial hosts but the performance is generally poor, meaning that microbes cannot be reliably engineered to perform at scale. With their biofacturing platform, Zymergen believe they can reliably improve traits like yield, titer, rate, tolerance to high concentrations of product or co-products, avoidance of co-product production and thermal tolerance.
Scaling production is one of the biggest synthetic biology challenges and is clearly more difficult than most companies expect. Until a company has shown that they can reliably transfer projects from the lab to industrial scale, investors should be skeptical. While Zymergen has developed microbes that are being used for commercial production by customers, they are yet to demonstrate an ability to consistently scale-up their own products.
Zymergen does not have their own manufacturing capabilities, rather choosing to use Contract Manufacturing Organizations. While this is an asset light way to enter the market, there are questions around production costs and CMO capacity, as a number of companies are planning to scale production at around the same time. At the time of Zymergen’s IPO they did not have committed supply in the US for 2022, unusual given that at the time they were expecting to begin commercial production of Hyaline in the near future. Zymergen and Ginkgo are both choosing to outsource downstream activities, likely driven by a belief that these are low-value add activities and that they are better served focusing on developing products and engineering strains. Scaling may in fact be a high value activity though given the difficulties most companies have had so far.
While Zymergen is a synthetic biology company, they plan to launch some products with non-fermentation methods in order to reach market faster. This potentially raises doubts about Zymergen’s ability to smoothly transfer projects from the lab to commercial production. Zymergen refer to this as Launch Acceleration and expect it shave 12-24 months off the development timeline, albeit with higher costs. Based on Zymergen’s statements, it appears they plan to use Launch Acceleration after they have developed a biomolecule but before they can cost effectively manufacture it at scale using fermentation. Hyaline was initially launched with non-fermentation production sourced from a third party while Zymergen continued to work on fermentation production. This raises the question of whether production or product issues forced Zymergen to abandon Hyaline rather than just a reassessment of the market opportunity. Launch Acceleration is expected to be used frequently for the electronics vertical but rarely in consumer care or agriculture.
Historically most of Zymergen’s revenue has come from RD services. Zymergen continue to focus on developing their own products though, as they believe the economic value captured will be significantly greater. The experience of Zymergen and companies like Amyris support this belief, with microbe engineering revenue being small relative to downstream product sales. As a result, they expect RD services to become a relatively small contributor over time.
Zymergen generally target high-value products with a market greater than 150 million USD and aim to launch multiple breakthrough products every year. In the medium term Zymergen are planning one product launch per year, increasing to 3 plus products per year in the long run. Zymergen were initially targeting the electronics, consumer care and agriculture markets, although this has now been cut back to electronics, healthcare and agriculture.
Electronics - Abandoned products include Hyaline, ZYM0107 (optical film) and ZYM0103 (adhesive product). While Zymergen continues to develop ZYM0101 (optical film), the future of their Electronics products is now more doubtful.
Consumer Care - Zymergen had four consumer care programs which have been abandoned. ZYM0201 (insect repellant) was the most advanced program. Zymergen was also developing a naturally derived UV protectant (ZYM0205), a bio-based sustainable film former (ZYM0206) and another undisclosed program (ZYM0207).
Agriculture – Zymergen is developing a microbe that improves crop nutrient uptake. In the past they have also explored crop protection opportunities in areas like pesticides and herbicides.
Figure 7: Zymergen's Product Pipeline
Hyaline was designed for display touch sensors in personal devices and was supposed to enable robust foldable touchscreens and high density flexible printed circuits. The design of a durable, rollable display is a difficult technical challenge which cannot be met with petrochemical-based materials. Hyaline is a film that can roll without deforming, resists scratches and is clear.
Chemically, Hyaline is a novel optical film with a combination of strong optical properties, including transparency, low birefringence and haze and mechanical properties conferring folding endurance and tensile strength. Rather than having outstanding performance in any one area, it appears to have a unique combination of properties.
Figure 8: Properties of Hyaline
Hyaline was launched in December 2020 to customers in the electronics industry, beginning the typical 6-18 month product qualification process with customers. In August 2021 Zymergen initially reported that some customers had encountered technical issues when implementing Hyaline into their manufacturing processes. The problems were downplayed at the time but Hyaline was completely abandoned soon after. Management stated that they had misjudged the growth rate of the market and the degree of differentiation of the segments they were targeting. At the time Zymergen were also in the process of converting to a fermentation-produced molecule for Hyaline by using a microbe that had a demonstrated ability to produce the molecule through fermentation and there may have been difficulties scaling fermentation.
Zymergen reiterated that Hyaline worked as designed though, and that the technical issues that had caused delays were quickly resolved. Zymergen continue to explore and develop bio-based polyimides in several different form factors, which they expect to add value to potential future products.
Within the electronics segment Zymergen continues to pursue ZYM0101, a breakthrough film for flexible electronics, which is designed to be used to build foldable and rollable phones and personal devices, as insulation for antennas to deliver data speeds and as a coating for transparent monitors. ZYM0101 supposedly has broader applicability than Hyaline, which may be why Zymergen continues to pursue it.
Figure 9: Zymergen's Z-Film Franchise
After a portfolio review, Zymergen also abandoned the consumer care segment due to a belief that customer acquisition costs with a direct-to-consumer model would be prohibitive. In the case of ZYM0201, Zymergen also believed that it could not be produced and distributed at a competitive cost. Blaming customer acquisition costs seems unreasonable given that Zymergen could have utilized ecommerce. This all seems to point towards scaling being crucial to the success of synthetic biology companies. Zymergen believe they have valuable IP and technology around bioactives and remain open to potential future partnerships in clean consumer care.
Zymergen also promoted two programs for the healthcare market, one for the development of key enzymes used in vaccine production and a second in drug discovery. It seems likely that this is the vaccinia capping enzyme that Ginkgo has had success with recently and this is likely an attempt to capitalize on the rollout of COVID vaccines. The drug discovery program will leverage Zymergen’s metagenomic library to discover molecules that can modulate validated targets. There are a number of companies with similar approaches to drug discovery that are extremely sophisticated though and it is not clear that Zymergen can add value in this area without committing significant time and resources.
Zymergen is working with Synlogic (NASDAQ:SYBX) to improve synthetic biotic medicines using their biosensor enabled enzyme engineering. This relationship is interesting given the Synlogic in a Ginkgo portfolio company and may indicate that Zymergen has an advantage in enzyme engineering.
Within the agriculture segment, Zymergen continues to work on nitrogen fixation and expect to have data later this year on the performance of their microbes in both corn and wheat field trials. They are developing a microbial alternative to synthetic nitrogen fertilizer and as the delivered product is a microbe, there would be no scale up issues. Zymergen is working with a partner on distribution and field testing, who they refer to as very prominent in the space. Preliminary field trials have reportedly been positive so far. Ginkgo is also developing a nitrogen fixing microbe and so Zymergen could find themselves competing on price in this market.
Given the failure of Hyaline, Zymergen do not expect product revenue in 2021 or material revenue in 2022. In fact, Zymergen’s path to revenue and profitability is no longer clear and with the recent rationalization of their product portfolio, the risk of the stock has increased significantly. While Zymergen have stated they are focusing on a smaller number of programs with more certain commercial opportunities, it is difficult to have confidence after the last-minute failure of Hyaline.
Rather than rapidly scaling, Zymergen now appears focused on reducing cash burn to give themselves time before having to raise capital. Hiring contracted dramatically in September along with a headcount reduction in September and October. Zymergen eliminated approximately 220 positions across a variety of levels and functions. Anyone who has been through this type of dramatic downsizing will realize how bad it is for the company’s culture and employee morale and this will likely be exacerbated by the CEO and co-founder stepping down at the same time. Zymergen’s team includes biologists, biochemists, material scientists, chemists, automation engineers, software engineers and data scientists. At the end of 2020 approximately 25% of Zymergen’s employees were in engineering roles and approximately 30% had PhDs. This highlights the highly technical nature of synthetic biology and the importance of attracting and retaining quality personnel. The ability of the current management team to keep employees focused and prevent employees jumping ship could be crucial to Zymergen’s future.
Zymergen believe they have sufficient cash to fund operations until mid-2023 but if they do not make significant progress before this time they may be forced to raise funds on extremely unfavorable terms, particularly if there is a market downturn at this time. Zymergen will not be out the woods when they begin launching products either as gross margins are expected to be negative during the ramp up of new products, particularly when Launch Acceleration is used. Gross margins should improve over time, but will ultimately depend on the volume and mix of products sold. Without any of their own products on the market it is currently difficult to assess Zymergen’s ability to generate sustainable profits. These are all issues that Amyris has had to work through, barely avoiding bankruptcy and dealing with a toxic balance sheet which limited their options.
Zymergen's hiring slowed prior to the announcement of issues with Hyaline, which highlights the importance of alternative data. Hiring has bounced back modestly in recent weeks, but still don’t reflect a company with a large market opportunity trying to create future growth.
Figure 10: Zymergen Hiring Data
Zymergen’s change in focus occurred after a deep dive into the product development process with consultants used to prioritize market opportunities. While I can understand why this was done, shifting from being a founder led company to being led by professional managers and consultants is concerning and is the type of move that might be expected if the company was positioning itself to be acquired. Without a source of revenue and successful programs to support their valuation, Zymergen obviously needed to reduce costs, but the argument for synthetic biology companies is that they are supposed to be able to rapidly scale a large number of programs in parallel.
Regardless of how companies are positioning themselves, synthetic biology companies are not software companies or pharmaceutical companies. Zymergen’s recent failures highlight the fact that developing a product is only a small part of the formula for success. Production must be scaled and the product must be successfully marketed to generate revenue, areas that most synthetic biology companies are yet to prove themselves in. While Zymergen can generate a nominal amount of revenue from RD services and likely has IP with significant value, I find it difficult to attribute much value to the stock at this point in time.
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