Category Archives: Finance

Send troops to the Fed?

Pardon me for wading into Twitter Drama, but Rohan Grey is a remarkably unserious “intellectual” and I couldn’t help myself.

Before I start, let me share a tiny story from “Zen and the Art of Motorcycle Maintenance.” This book was a thoroughly unenjoyable read for teenaged me, but it has one anecdote that still sticks with me. If memory serves, there is a university that is being threatened with losing its accreditation due to repeated failures and the students are naturally protesting as this would make their degrees worthless. One student talks to the narrator and claims that the University in fact can’t lose its accreditation, because if someone tried to take it “the Governor would send the national guard to protect us!”

I shouldn’t have to spell out the ridiculousness, but I want to hit word count so I will. Accreditation isn’t held in a vault, it isn’t something you can protect with guns and soldiers. Accreditation is the trust that other institutions have in you, and while some of it is legally codified most of its power is in the uncodified trust that a society is built on. You can’t protect accreditation with and soldiers any more than you can protect trust or friendship.

And so it was with bewilderment that I read an Assistant Law Professor on Twitter making the same mistakes as the nameless student from a book. Rohan Grey wants to do an end-run around the debt ceiling by having the Treasury mint a one trillion dollar platinum coin and deposit it in the Federal Reserve. This coin would then pay for the USA’s financial obligations without the need to borrow money. A big (and usually ignored) problem is that the Fed would have to accept the coin, and as Josh Barro writes, the Fed has expressed the opinion that this chicanery is illegal and undermines Fed independence. (Read Barro’s article, it goes into great detail as to why this idea probably wouldn’t work). Undeterred, Grey thinks the Fed’s opinion doesn’t matter, and that if they refuse to accept the coin then Biden should send troops to the Federal Reserve and force them to accept it.

Grey’s mistake is thinking that guns can be used to enforce trust. The Federal Reserve has the trust of the markets, and its power to move markets is based on that trust as much as anything else. The Federal Reserve trades bonds and sets rates, but those bonds and rates have value because people trust the Fed to keep its word, Jerome Powell’s speeches about the Fed’s plans have as much or more power as any action taken by the Fed. Now imagine a scenario where troops are instructed to besiege and occupy the Federal Reserve, where Powell is held at gunpoint and forced to accept a one trillion dollar deposit from the Treasury which he and the Fed have gone on record as saying is illegal. Trust in the Fed would be shattered, nothing Powell says or does matters anymore because the troops (and by extension the President) are running the show. Investors would flee from US government bonds, causing yields (and thus America’s cost of borrowing) to skyrocket, because America’s currency will have been debased against the will of its central banks, and will now be at the whims of the President.

And you may say “that’s fine, I like Biden as President” but do you like DeSantis? Do you trust that DeSantis wouldn’t be willing to send his own troops to force his will on the Fed? Would you buy a 10-year government bond if there’s a chance that DeSantis or Trump will be controlling it 2 years? And furthermore, Powell’s remarks on inflation will become worthless. Maybe Biden doesn’t like the rate rising that Powell needs to do, or maybe when the election comes he wants to juice the economy. So what’s to stop him from leaning over and reminding Powell who’s boss? What’s to stop Trump or DeSantis from doing the same? People like Grey once griped that Trump’s complaining caused the Fed to pause rate rises in 2019 (ignoring of course that inflation went under the Fed’s 2% target, which should cause them to pause rate hikes all on its own). Now Grey wants to make the Fed wholly subsumed by the President, so Trump would be able to do whatever he wanted.

Once you’ve sent troops to the Fed, you can’t unring that bell. Investors invest in American Dollars and American bonds in large part because they trust the Federal Reserve to do its duty with regards to the currency. Shattering that trust with soldiers would shatter investor confidence in the American economy as a whole. You’d have a trillion shiny dollars, but they wouldn’t be worth a pence.

Beam Therapeutics: what’s so special about prime editing?

Beam Therapeutics is another biotech company often mentioned in the same vein as Ginkgo Bioworks, Amyris, and Twist Bioscience, and since I’ve blogged about all three of those I might as well blog about Beam. Unlike Ginkgo and Twist, Beam isn’t a shovel salesman in a gold rush, they’re actually trying to create drugs and sell them, in this case they’re trying to break into or perhaps even create the cutting edge industry of medical genetics, changing people’s genes for the better. I’ll briefly discuss the science of their technology, but I feel like the science surrounding their technology deserves the most focus.

Beam has a novel form of CRISPR/Cas gene editing called prime editing. In both normal CRISPR/Cas and prime editing, genetic information is inserted into a living organism by way of novel DNA, guide-nucleotides and a DNA cutting enzyme. The guide-nucleotides direct the information to the specific part of the genome where it is needed, the DNA cutting enzyme excises a specific segment of host DNA, and hopefully DNA repair mechanisms allow the novel DNA to be inserted in its place. These techniques always rely in part of the host’s own DNA repair mechanisms, you have to cut DNA to insert novel DNA and that cut must then be stitched back up. Most CRISPR/Cas systems create double-stranded breaks while prime editing creates just single stranded breaks, and this greatly eases the burden of the host DNA repair mechanisms allowing inserts to go in smoothly and with far less likelihood of catastrophic effects. Double stranded breaks can introduce mutations, cancers, or cause a cell to commit cell-suicide to save the rest of the body from its own mutations and cancers. Because Beam is using prime editing, their DNA editing should have less off-target effects and far less chances to go wrong.

So the upside for Beam is that they’re doing gene editing in what could be the safest, most effective way possible. The downside is that gene editing itself is still just half the battle.

When I look at a lot of gene editing companies, I quickly find all kinds of data on the safety of their edits, the amount of DNA they can insert or delete, and impressive diagrams about how their editing molecules work. I rarely see much info about delivery systems, and that’s because delivering an edit is still somewhat of an Achilles’s heel of this technology. In a lab setting you can grow any cell you want in any conditions you want, so delivering the editing machinery (the DNA, the guide-nucleotides, the enzymes) is child’s play. But actual humans are not so easy, our cells are not readily accessible and our body has a number of defense mechanisms that have evolved to keep things out and that includes gene editors. To give you an idea of what these defenses are like, biology has its own gene editors in the form of retroviruses which insert their DNA into organisms like us in order to force our body to produce more viral progeny, a process which often kills the host. Retroviruses package their edit machinery in a protein capsid which sometimes sits inside a lipid (aka fatty) envelope, and so the human body has a lot of tools to recognize foreign capsids and envelopes and destroy them on sight. These same processes can be used to recognize and destroy a lot of the delivery systems that could otherwise be harnessed for gene editing.

Some companies side-step delivery entirely, if it’s hard to bring gene editing to cells why not just bring the cells to gene editing. This was the approach Vertex Pharmaceuticals used in its sickle cell anemia drug, blood stems cells were extracted from patients and edited in a test tube, before being reinserted into the patients in order to grow, divide, and start producing non-sickled red blood cells. This approach works great if you’re working on blood-based illnesses, since blood cells and blood stem cells are by far the easiest to extract and reinsert into the human body. But for other illnesses you need a delivery method which, like a virus, is able to enter the organism and change its cells’ DNA from within.

So if Beam Therapeutics wants to deliver a genetic payload using their prime editing technology, they’re going to need a delivery system which obeys the following rules

  • It must be able to evade the immune system and any other systems which would degrade it before it finds its target cells
  • It must be able to be targeted towards certain cells so that it doesn’t have off target effects
  • It must be able to enter targeted cells and deliver its genetic package

So let’s look at the options.

Viruses have already been mentioned, and they can be engineered in such a way as to deliver a genetic package without causing any disease. However as mentioned they are quickly recognized and dispatched by the immune system whenever their are found, their protein shells being easy targets for our bodies’ adaptive immune system. Normal viruses get around this by reproducing enough to outcompete the immune system that is targeting them, but we don’t want to infect patients we just want to cure them, so using viruses that reproduce is off the table for gene editing.

A variety of purely lipid-based structures exist which can ferry a genetic package through the body. Our cell membranes are made of phospholipids, and phospholipids will naturally form compartments whenever they are immersed in water. Phospholipids also have the propensity to fuse with each other, allowing their internal compartments to be shared and anything inside them to move from one to the other. Packaging a gene editor inside phospholipids would be less likely to trigger the immune system, and they can be created in such a way that they target a particular cell type to deliver their genetic package. However random phospholipids can be easily degraded by the body, limiting how long they can circulate to find their target cell. Furthermore their propensity to fuse is both a blessing and a curse, allowing them to easily deliver their genetic package to targets but also making them just as likely to deliver it to any random cell they bump into instead. This means a lot of off-target delivery and the possibility for plenty of off-target effects

At the other end of the scale are nanoparticles made of metals or other compounds. Many methods exist to attach drugs to the outside of a nanoparticle and target that nanoparticle to a cell, however this in turn leaves the drug free to be interacted with and targeted by the immune system. For many drugs this is fine, but prime editing uses foreign proteins, DNA and free nucleotides and the body is downright paranoid about finding those things hanging around since that usually means the body has either a cancer or an infection. To that end, the body destroys them on site and triggers an immune response, which would severely curtain any use of nanoparticles to deliver a genetic package. Nanoparticles can also be designed hollow to allow for the prime editing machinery to fit snugly inside them, but this can lead to the machinery just falling out of the nanoparticle in transit and being destroyed anyway. You might say “well not a hollow sphere that fully surrounds the machinery so it can’t fall out?” But it does need to get out eventually if it wants to edit the cell, and if it’s encased in a solid sphere of metal it can’t do that. Enzymes to breach the metal would be cool but are impractical in this case.

Between these two extremes we have a number of structures made of lipids, proteins, polymers or metals, and they all struggle with one of these points. They can’t encase the machinery, or they can’t easily deliver the machinery, or they trigger an immune response, or they degrade easily, or they often cause off-target delivery. Delivery to the target is Step 0 of both prime editing and gene editing in general, and for the most part this step is still unsolved. I’ve visited several seminars where viral packages for delivering CRISPR/Cas systems were discussed, and while these seem some of the most promising vectors for gene editing they still have the problem of triggering the body’s immune system and being destroyed by it. The seminars I’ve watched all discussed mitigating that problem, but none could sidestep it entirely.

I do believe that Beam therapeutics has technology that works, their prime editing is clearly a thing of beauty. Beam is currently working on treatments for sickle cell anemia, as is Vertex Pharmaceutical, and as are most gene editing companies because it’s a blood-based disease that is amenable to bringing the cells to the gene editing machinery instead of having to go vice versa. But for anything where you can’t bring the cells to the editing, Beam isn’t quite master of it’s own fate because for prime editing to reach the cells of the body it will need to be delivered in some way and currently that’s an unsolved problem. Even a system that works to deliver some packages won’t necessarily work for all of them as size and immunity considerations change with the specific nature of the genetic package you’re delivering. I would also be worried about Beam’s cash burn, they are essentially pre-revenue and will need to do a lot of research before any of their drugs get to market or can be sold to a bigger player. I think they can survive for a long while by selling stock since their price has held up a lot better than other biotechs I’ve blogged about, but that’s good for them and not for a shareholder. As long as interest rates keep going up, I’ll treat pre-revenue companies with a wary eye.

People buy stocks instead of ETFs because their values are different

I enjoy talking stocks, and whenever you hang around on the finance parts of the internet, you’ll inevitably run into the following sentiment:

Why are you even buying individual stocks? You should just buy a broad-market ETF. You’ll never beat the market so ETFs are the best and most reliable way to grow your money.

Bogleheads et al

I’ve written about the Efficient Market Hypothesis before and about the difficulties of stock picking. I understand and to an extent agree with the arguments that people in general cannot beat the market reliably over any significant length of time. Any good runs are transitory, purely luck based, and eventually fall back to earth (see $ARKK 2016-2021 and then 2021-today). But that isn’t the primary value most stick pickers are going for, they’re going for potential return not expected return.

When you buy a broad market ETF, what is your expected return? Well the ETF tracks the whole market and the market goes up 5-10% every year, so that’s the return you can expect. Some years you’re down 20% (like 2021), some years you’re up 30% (like 2019), but on average you get a 5-10% yearly return that will slowly grow your money. Slowly is the key word: investing in the stock market probably won’t make you rich, for the average American it won’t even make you a millionaire over the course of your entirely life, but it will give you a small leg up in the long run with very little risk to yourself.

So what’s the expected return for stock picking instead? Well, definitely less than 5-10%. The efficient market hypothesis and significant amounts of experimental data show that stock pickers broadly lose to the market over any significant timescale. They might be up 100% one year but are equally likely to lose it all the next. But the key here is that the expected return is not everyone’s return. The expected return is just the average of everyone’s return, and while on average people lose to the market there are always a lucky few that beat the market and some of them win big. There is at least one person out there who went all in on Tesla stock in 2013, sold in 2021 when Musk started acting weird, and made a truly life changing amount of money, and everyone who stock picks hopes to be like that person. Is it likely? Of course not, but it’s possible and that’s what keeps people going.

This may sound illogical to a bogglehead, and they may scoff and say the stock picker is no different that the casino gambler, but let’s try another example. What is the expected return of starting a small restaurant? Well, it takes a lot of capital investment to start a restaurant and 80% of them fail within the first 5 years of operation, so it’s safe to say that the expected return of a restaurants is actually negative. On average a person starting a restaurant will end up losing money, so are an restauranteurs as illogical as stock pickers? I’d argue no, the expected return isn’t as important to them as the potential return. A restaurant is an opportunity to make a life-changing amount of money, and while it’s clearly very uncommon, it happens often enough to continue enticing people to try it. The bogglehead could just as easily state that it’s more efficient for restauranteurs to not open up restaurants at all and they should instead invest in broad market ETFs, but if no one ever took risks like that then we’d never have new businesses at all.

Big gains require big risk, and I’d argue being content with your lot and investing like a bogglehead is no more “logical” than going all in on smart but high-risk plays, it’s simply a questions of values.

Amazon and PE

Conventional business indicators such as the price-earnings ratio, the price-to-book ratio, and discounted cash flows belong in the Bronze Age – so say the new economists. But if the old metrics don’t capture the potential of today’s fast-growth companies, some new formulas can.

PERManent Upside, WIRED Staff, February 2000

I think about the above quote a lot these day. At about the absolute peak of the dotcom bubble, there were writers and (supposedly) economists claiming that the foundation of the stock market had changed, and that what appeared to be overvalued tech stocks driven by computer-illiterate investors FOMO-ing into anything with a website were in fact some of the greatest stocks to own since sliced bread. PE, PB, DCF were useless in evaluating these stocks, they stood on their own through a new metric created just for them, PERM. No one knows, cares, or remembers what PERM stood for (you can read the linked article if you really want to), but it was supposed to prove that earnings weren’t important and that high PE stocks were still good deals. I think about this a lot because this is the same argument many have used on me regarding Amazon.

Amazon had a bad 2022, over the year it’s stock price cratered around 50% and it lost 1 trillion dollars in market cap. The old adage that “Amazon’s PE doesn’t matter” has seemed less and less true as it’s PE has gotten closer and closer to “normal.” Sure it’s still well above value stocks, even well above most tech stocks, but it’s not to far off from Walmart these days which would have been unthinkable just a few years ago. It may be that economic gravity is catching up to Amazon, and if so I’d like to share my theory as to why. Full disclosure, I did buy 10 shares of Amazon right after their latest stock split and have held them ever since. I’m down rather a lot on the investment and if what I’m about to say is accurate I’m soon to be down even more, so you can consider that data point as a hedge against my thesis and read on.

The conventional theory for why Amazon’s PE never mattered was that it invested almost every dollar of profit back into the business. By re-investing their profits rather than claiming them as earnings, Amazon avoided a lot of corporate taxes. And if Amazon’s reinvestments were wise, then the stockholders gained value tax-free rather than through taxable dividends. There’s also an argument that Amazon’s reinvestments were more efficient even outside of tax implications. Every dollar Amazon reinvested could create so much growth that it was better for an investor to let Amazon keep their money and grow than for an investor to demand Amazon hand money back to shareholders. When you look at what Amazon was investing in: cloud computing, content delivery, and an every increasing share of online shopping; this certainly seems to have been the case for the last decade or so, an investor gained more value by parking their money with Amazon than they would have parking their money with a company that handed earnings back to investors.

But perhaps something has changed, and changed drastically enough that Amazon’s PE lows won’t be temporary. Amazon’s revenue and earnings continue to grow year after year, but if its stock price continues to sink it’s PE may eventually reach downright normal levels. If that is the case then I think the reason why would be clear: investors no longer believe that a dollar re-invested by Amazon is worth quite so much more as it used to be. Amazon may be approaching the limits of its momentous growth, and may now start evolving into a “mature” company like Microsoft and Apple before it. In those cases a moderately high PE is still justified, I mean these are trillion-dollar tech companies, but they can’t be expected to continue their meteoric growth and so PEs in the 100s are no longer sensible. Amazon is famous for how much it re-invests, but the dollar amount of investment is less important that the future dollars that investment generates. In the past, Amazon’s future returns of ever re-invested dollar were great enough to justify a sky-high PE but that won’t last forever. Many companies that aren’t valued like Amazon re-invest a lot of their profits, the Red Queen Hypothesis makes as much sense in biology as it does in Economics “you have to run as fast as you can just to stand still.” Companies which re-invest a lot to maintain their dominance don’t necessarily get a premium over those that hand money back to shareholders but maintain dominance. And if Amazon reinvests a greater percent of its earnings vs Apple or Microsoft but doesn’t grow significantly faster than them, then it’s stock price shouldn’t command a premium either.

I think it’s possible that Amazon is indeed maturing into a company that will be valued by it’s PE just like all the other tech companies. That doesn’t mean it’s time to dump the stock, the revenue and earnings continue to grow and will probably catch up to the PE, or at least that’s just as likely as the PE falling to meet the revenue. Regardless of the mechanics, economic gravity will eventually catch up to Amazon just like it caught up to Tech stocks of the 2000s. Nothing is ever truly new.

“Market Capitulation” is a circular argument

Will the market recover in the new year? Or do we still have a ways to go? Bears online have been going on and on about “capitulation” as in “nothing will change until we finally have capitulation.” Capitulation in normal terms means surrender, so in financial terms it means the point where investors finally give up holding and sell their shares at a loss. According to Investopedia capitulation is also the point where the investment hits its bottom. Prima facia this is a circular argument, “we won’t hit the bottom until we’ve reached the bottom” is another way to phrase it. But even dumber, this is a backwards looking argument that cannot be used for predictions. Over the year of 2022, $SPY (a popular ETF that tracks the performance of the S&P 500) hit it’s 52 week low in November at 348$ per share (it currently trades at 382$). Who’s to say that that wasn’t the capitulation, and it won’t go below that? When the S&P500 hit 666 in 2009, that was the bottom of the bear market, yet many people still didn’t believe it, expecting that there was still more pain to endure. It wasn’t until a while later that we realized no, that really was the bottom, there’s no more “capitulation” after that. So I don’t put any stock in people talking about “market capitulation.”

Short post today: green hydrogen isn’t always

“Green” hydrogen power has become something of a minor meme industry. Hydrogen power (or “fuel cells”) is used to burn elemental hydrogen with elemental oxygen producing only water as a waste product. This industry has long been the fantasy of those who want to reduce our reliance on fossil fuels and prevent the accumulation of carbon in our atmosphere, the problem is that the most economical way of producing elemental hydrogen does neither. Hydrogen is usually produced from natural gas, but “green hydrogen,” could theoretically be created by splitting water into hydrogen and oxygen. Recently I read a story of a company seeking out tax breaks to produce green hydrogen from water, but the company isn’t interested in installing solar or wind power and using that for their purposes, they want to simply buy power from the grid and use it directly. The problem is that most of America’s grid isn’t actually powered by green power but by fossil fuels. This so called “green hydrogen” would simply use the electricity from fossil fuels to produce hydrogen, with no analysis done as to whether this would produce more or less greenhouse gases than producing hydrogen from natural gas instead. In this case then, green hydrogen may not be so green.

The stock market doesn’t care about your cost basis

When someone is down 50% or more in a stock, they’ll often take to social media to complain and casually ask “what should I do next”? No one wants to sell for a loss, people almost act like it’s admitting failure. And people’s perceptions are often colored by the price at which they bought the stock. “Oh I bought 10 shares at 100$ and now they’re each worth 50$, when can I expect to break even again?” I can’t predict the market but I can say one thing: the price you paid for the stock DOES NOT MATTER. It doesn’t matter if you’re up or down, you should look at any stock you own and as yourself “do I think this stock will perform as well or better than the market in the near future?” A lot of people get stuck in a mental narrative, they start to think trends will either continue indefinitely or definitely reverse soon, depending on what would make them feel better. But a stock that is way down could still be overvalued just like a stock that is way up. A few months ago Carvana ($CVNA) stock was down 50% year to date. What did it do after that? It dropped another 50%, and another 50% from there, and just for good measure another 50% from there. Dropping 50% 4 times in a row meant it had lost about 94% of its starting value from January 1st. And Carvana still had a ways to go as it’s currently down 98%. If you had bought $CVNA on January 1st, then by April 1st you would have seen it lose 50% of it’s value. Your friend may have been tempted to think “it can’t go much lower, can it?” and bought the dip while you held your shares. You would then see your shares go on to lose 98% of their value while your friend’s shares lost 97% of their value. Your friend lost relatively less than you did, but still lost nearly everything.

Your cost basis on a stock is only relevant for tax purposes, it should have no bearing on your investment decisions. The only thing you should care about is the current price and the expected future price.

Synthetic biology: why it still might be a miracle industry

I’ve spent most of the last 2 weeks ragging on a few of the hottest SynBio startups. I’ve pointed out that these synbio startups have a very difficult path to profitability, and some might not even have a working business model. But from the scientific side, there’s still a revolution out there for synthetic biology, and I want to explain it.

To start with, the insulin and drug products revolution is a definite win for synthetic biology. The ability to take any gene, clone it into a bacteria or yeast cell, and then express it and collect the product is what has made many drugs so much cheaper than they were decades ago when we had to extract the drugs from animal carcasses or massive amounts of plant matter. It has also allowed revolutions in the types of drugs we can study and offer to patients, just about any protein you can think of could be turned into a drug that is usable for patients. Antibodies are a special type of protein which can also be produced through synthetic biology, and many antibody products have hit the drug market to treat all kinds of diseases. Aducanumab is one such antibody, a much hyped drug for treating (or rather slowing the progress of) Alzheimer’s disease. Quick note: you can tell if a drug contains an antibody by it’s name: aducanumab’s name ends in “mab” which stands for “monoclonal antibody.” Gemtuzumab (AML drug), Tezepelumab (severe asthma), pretty much any drug who’s name ends in “mab” is an antibody drug, and almost always they are produced through synthetic biology.

Biology can also catalyze certain reactions that chemistry can’t easily do. The classic example of this is creating molecules with specific stereochemistry. This will be a bit technical, but consider your left and right hand: they both have 4 fingers and a thumb but they are mirror images of each other, you can’t put your left hand in a right-handed glove and vice versa. In chemistry we would call left and right hands “stereoisomers” of each other, and just as with hands and gloves you can’t put left-handed molecules into places that require right-handed molecules. But chemically stereoisomers are identical, they have almost the exact same chemical properties and so a reaction which produces one stereoisomer will usually produce all possible stereoisomers in equal amounts. Image you wanted to produce only right hands, your starting material is the assembled 4-finger-plus-palm, now you just have to add the thumb in the correct place. Ignoring that the 4 fingers are of unequal length, if you put the thumb on one side of the fingers you get a right hand, while if you put the thumb on the other side of the fingers you get a left hand. A chemical reaction will make an equal number of right hands and left hands because it will add the thumb randomly to both sides. A reaction catalyzed by an enzyme however will only put the thumb on one side, the side you picked, and thus using an enzyme you can ensure you only make right hands and not left hands. This is another place where synthetic biology can be critical, there are many stereoisomers where one isomer is a useful drug and the other isomer may be a harmful chemical, we need to have some process to create only one of them and for that engineering enzymes with synthetic biology can yield good results.

Finally biology can greatly catalyze reactions in a way that greatly reduces the amount of energy we have to put into the system. Make no mistake, catalysis doesn’t yield free energy, but it does lower the energy barrier for a reaction. To turn carbon dioxide into some non-harmful form of carbon, we would chemically have to pump in a lot of energy to break the carbon-oxygen bonds which hold it together. That energy would require a high temperature and high pressure, which would then require containment, meaning scrubbing carbon from the atmosphere chemically is a very difficult process. However plants remove carbon dioxide every day, and do so at the modest temperatures and pressure that we find anywhere on Earth. They can do this because they use enzymes to catalyze the reaction, which lowers to energy barrier for the reaction to proceed forward. IF carbon capture technology ever becomes economically viable, mark my words it will have to be done using enzymes.

So synthetic biology allows us to tap into biological processes to perform jobs that are difficult to do chemically. The tools we have to do so, the genetic code of living organisms, also provide us with a vast array of starting tools to choose from to make things easier since we aren’t starting from scratch. And finally the fact that living organisms will grow and develop from things as simple as sugar instead of requiring oil or rare earth metals means that synthetic biology can be done just about anywhere and isn’t as limited by commodity costs like most other industries. In short, I DO believe synthetic biology may be the future, but I’m just not sure the current crop of biotech upstarts have what it takes

Amyris: might they be profitable?

Amyris ($AMRS) is another small-cap biotech that alongside Ginkgo ($DNA) and Twist ($TWST) has lost over 50% of its value year-to-date. With a stock price of ~2$ and a market cap of less than a billion, I think they technically qualify as a “penny stock” so all the usual caveats about volatility and such apply here. With that said, Amyris might be the better positioned company out of the 3. While Ginkgo wants to be the Apple App Store and take a cut out of everyone else’s money, Amyris is content to make money themselves by making and selling biosynthetic products. In the first 3 quarters of 2022, they made 194 million dollars a year in revenue, and spent 610 million dollars (GAAP) in order to do so. They had 483 million dollars of cash in December of 2021, but only 18 million in cash was left at the end of 2022 Q3. It all seems rather unsustainable and what’s worst is that only 81 million dollars of their expenses come from R&D ie most of the expenses are just running the business. Cost of products was 170 million, Sales+Admin was 358 million, and revenue remember was 194 million.. But if you fired all the salesmen, administrators, and R&D people they might theoretically be making a profit, whereas Ginkgo expects to make a profit from licenses that may never materialize and Twist is being accused of selling products for less than their cost.

That does not mean Amyris is a good investment, even in this theoretical world where they made 26 million dollars in earnings they would have a P/E north of 200, and not even Amazon trades that highly these days. Still revenue has been growing close to 100% year on year, and there is perhaps a profitable company somewhere inside Amyris that could be worth your money.

Amyris is interesting to me because they appear to be the most “pure play” of the synthetic biology micro-caps that I see talked about. Ginkgo and Twist both operate on the “shovel salesman” business model, the old chestnut that in a gold rush you’d rather be a shovel salesman than a miner. Ginkgo wants to license the GMOs that would produce synthetic biology products, Twist wants to sell the DNA that goes into those GMOs, but Amyris is actually doing the work of making biosynthetic products and selling them on. And what are they producing? Well beauty products, mostly.

Most of Amyris’ products are a good window into the synthetic biology world. There was some chemical discovered ages ago that was useful to humans, but it only came from a rare plant or animal, so we humans would harvest these plants and animals by the billions to extract the chemical and put it in whatever product we needed. Then synthetic biology comes along and finds a way to produce the chemical in a microorganism instead. The benefits in cost for this should be massive, but they don’t seem to be showing up in Amyris’ balance sheet. Instead the biggest benefits appear to be in Amyris’ branding and product ethics. There’s been a years long push to make products be “less cruel” depending on one’s definition. For some consumers this means products should not be made using animals, for others they should not be extracted from conflict zones, still others demand the products be made with only unionized or at least well-paid labor. Everyone has their own definition of ethical consumption, and their own boundaries that they will not cross. Importantly our boundaries usually depend on how necessary we find that product for our daily lives, some folks will only drink Fair Trade coffee but some will take any cup of joe served by an underpaid Starbucks employee because they need their caffeine and need it now. Beauty products sit right at the top of Mazlow’s hierarchy of needs and so the consumers of these products can demand as much ethics as they want because the consumer doesn’t really “need’ them and the producer knows it. There’s also the fact that beauty products are already sold to us as an avenue of self-expression, and for some folks moral/ethical self-expression is the most important type of all. To this end, beauty products have recently tried to show themselves as world leaders in ethical consumption, advertising that they have no animal cruelty, don’t contain products from combat zones, aren’t produced by underpaid laborers, and all sorts of ethical guarantees. This is a place where Amyris and other synthetic biology companies should have the greatest benefit because there are very few ethical concerns to making a product in a Silicon Valley lab using micro-organisms. To that end, it’s not surprising to me that beauty products are so far Amyris’ strong suit.

But beauty isn’t the end all be all, there are stories floating around on social media that Amyris only pivoted to beauty in a desperate attempt to get cashflow and save the company. It still might not work because they’re burning cash and have little of it left on hand. But if it works, the higher ups (it is claimed) still want to make all the other synthetic biology products you can think of, plastic substitutes, green hydrogen, novel drugs those kinds of things. It’s a lofty goal and if Amyris can do it and make a profit then I’d invest. But right now they’re still burning cash and their fate is likely tied to how far and fast the Fed tightens the money supply. Only time will tell.

Twist Bioscience, do they have it?

When reading up on Ginkgo Bioscience ($DNA), another biotech mini-cap was brought to my attention. Twist Bioscience ($TWST) claims to be another company of the future, disrupting the DNA industry by being able to synthesize massive amounts of DNA on a large scale for low cost. Synthesis of DNA is the first step in creating GMOs to produce biosynthetic products, as I described when talking about Ginkgo Bioscience. Because GMOs are supposed to fuel the incoming biotech revolution, the company that gets to synthesize the DNA going into those GMOs should make a lot of money, and sure enough Ginkgo and Twist recently partnered so Twist could sell Ginkgo DNA.

Browsing the price options, Twist does seem to offer DNA for a bit cheaper than it’s nearest competitor, GeneScript. These modest savings are supposedly thanks to Twist’s silicon-based DNA synthesis platform, a technology that is namedropped in every Twist press release but which I am unsure of it’s full scope nor how much it’s used in their actual manufacturing. The technology appears to be old-fashioned DNA synthesis coupled to a microarray that allows the process to be controlled by a computer. I’m sure name-dropping silicon is supposed to make people think of Silicon Valley, semiconductors, and the computer/tech revolution, but the novelty seems surprisingly modest and I’m not sold on how it is supposed to lead to the huge magnitude of savings claimed by Twist. Because while their prices are a bit cheaper than their competitors, it is worrying that Twist has been accused of selling their products below cost which is not a sustainable way to run a business. Twist’s publicly available earnings reports do show that they’re spending 2$ for every 1$ they make in revenue, so the shorts may be right on this one. Burning investors’ money to gain market share may work when interest rates are low and money is cheap, but in the currently constricted environment it doesn’t seem sustainable which is probably why Twist’s stock is down 70% year to date.

Twist has also tried to generate hype by claiming that DNA is the next information-storage medium, and that they have the patents to make this happen. I honestly think this sounds a lot like Elon Musk’s claims that Tesla will produce Robotaxis or build a robot, it’s hype for hype’s sake with no path to a profitable product. DNA does store information, but information is only as good as our ability to write and retrieve it. Silicon is a great store of information because photons can be used to change the electron states of the atoms and thus to read and write information at the speed of light. On the other hand DNA does not easily read/write. Writing information to DNA means changing a DNA base, which is a very difficult process requiring very precise biochemistry (like CRISPR or other enzymes), and it fails as often as it success. Reading DNA information means extracting it into some usable form, and while photons from silicon are easily converted into electric impulses which can drive some process (the movement of a robot arm or the display of a pixel on a screen), DNA codes for RNA which codes for proteins and none of those are easily converted into an electric impulse or anything else that could drive a process. At best, you could do some kind of X-ray crystallography and hit the DNA with photons to read out its sequence, but doing so damages the DNA to the point that you’re better off just using silicon, and you still haven’t solved the problem of writing new information to the DNA.

So does Twist have it? They are currently selling DNA for cheaper than anyone else I could find, but they’re also burning investors’ money to do so meaning I’d rather be a customer than a shareholder. They had a net loss of 218.9 million dollars and 505 million dollars in cash, so they can keep this up for at least 2 years without taking loans or selling more stock. In that time, it’s possible that they could gain market share and economies of scale to the point that they become profitable, but I kind of doubt their silicon-based hype will be the key driver of of those profits. I also am highly skeptical of their DNA-as-information-storage hype, and don’t think it will contribute much more than Elon Musk’s robotaxis. If they can profitably sell DNA for less than their competitors they’ll be a buy, but until I see evidence of it I won’t touch their stock myself.