3 Companies That Don't Seem Like Synthetic Biology Stocks, but Actually Are

Venture capitalists sniffing around opportunities in the field of synthetic biology have a strange obsession with decades. That is, they're trying to determine if the early days of the field are analogous to the early goings of the information technology space in the 1960s. Or maybe it's the 1970s? I don't think it matters one way or the other, but if asked to play the game I would argue it's closer to the 1950s -- and a lack of sustainable technologies and business models tends to back me up.

Unfortunately, individual investors that have owned one of the first synthetic biology stocks would reluctantly agree. The field has been high on hype and low on execution, suffers from chronic overpromising, and leans a little too heavily on misleading analogies. But there could be a better way to go about owning a piece of the action: focus on the mature companies partnering with, investing in, and in some cases developing the early-stage technologies in the field.

That would lead investors to companies such as Autodesk (NASDAQ: ADSK), International Flavors & Fragrances (NYSE: IFF), and DowDuPont (NYSE: DWDP).

Design software for organisms (and viruses)

As if the decade debate noted above wasn't bad enough, many venture capitalists also get a little too carried away with the idea that DNA is the software of life, and that we can program it as we wish. It's a little more complex than that, but the gist is right. The point is, in order to engineer better living systems and products, we'll need better design tools -- and no company is better suited to provide that than Autodesk.

The effort may not be common knowledge among investors, but the computer-aided design (CAD) pioneer offers one of the most integrated software platforms available for designing and simulating DNA. The cloud-based software allows scientists to piece together genetic sequences on a computer before synthesizing them and putting them into an organism, or to visualize engineered proteins with its molecule viewer. While similar software tools exist, Autodesk Life Sciences is one of the first to put them all together in a single place.

Autodesk is wisely sizing up the long-term opportunity in synthetic biology even as it transforms its business model. The software stock is up 140% in the last three years despite falling sales and earnings. Why? Investors think the business's transition to a subscription revenue model could enable long-term sales growth, higher profits, and provide a stickier business in smaller niche markets with better growth prospects -- such as those hacking DNA at a small start-up, university, or even a bootstrapped community lab.

Synthetic biology won't get very far without robust digital tools that make it easier to design, test, and simulate new DNA constructs. Autodesk is one company leading the charge for this critical aspect of the fledgling field.

Busting through the innovation ceiling

The flavor and fragrance industry is one of the most important industries to modern life that most people have never heard of. Yet you own dozens of products that have been enhanced with the help of natural and synthetic scents and tastes created by the likes of International Flavors & Fragrances, from candles to laundry detergents to ice creams.

Problem is, the industry has been bumping up against an innovation ceiling in the last decade or so after pretty much exhausting all of the neat tricks synthetic chemistry has to offer. The good news is natural ingredients (extracted from exotic plants and animals) offers plenty more complex tastes and scents to explore. The bad news is they're prohibitively expensive to obtain. That explains why the flavor and fragrance industry has gone all-in on the promise of synthetic biology: Engineered microbes might be able to mass produce complex natural products at lower costs than plants.

International Flavors & Fragrances is among those providing much-needed capital to synthetic biology start-ups. It could prove crucial to enabling the technology. That's because flavors and fragrances are incredibly valuable -- thousands of dollars (or more) per kilogram -- which provides a great financial cushion against the inefficient manufacturing processes of the day. In other words, finding successful business models with the highest-value ingredients will allow synthetic biology start-ups to walk down the value chain toward higher-volume, lower-margin products.

Shareholders of International Flavors & Fragrances could certainly use some encouraging developments. The business has struggled to grow in recent years without a heavy dose of cost-cutting and headcount reductions, neither of which is sustainable for the long term. That actually prompted the company to announce its intention to acquire similarly sized rival Frutarom (which is also investing in synthetic biology), although the cash-and-stock deal left investors with a sour taste in their mouths.

I'd tend to agree that there are more questions than answers at the moment, so until management provides more clarity (or the first few synthetic biology ingredients prove their worth), investors may want to approach International Flavors & Fragrances stock with caution. But it has managed to trounce the S&P 500 over the long haul, so definitely keep it on your watchlist.

An industrial biotech leader

DuPont has a long history of innovation in the polymer space that spans household brand names such as nylon, Kevlar, Lycra, and Tyvek. It may only be a matter of time before Sorona is added to the list.

The specialty polymer, used in everything from athletic apparel to stain-resistant carpeting, is two parts terephthalic acid (TPA) and one part 1,3 propanediol (PDO). Chemistry aside, the important part is that the PDO is manufactured from living microbes. More important for investors is that the Sorona brand is one of the most valuable -- if not the most valuable -- industrial biotech operations on the planet.

That success has given DuPont the confidence to continue investing in industrial biotech and other renewable chemical processes, including a new polymer that could enable 100% renewable plastic bottles and provide hundreds of millions of dollars in new sales in the next few years. From an investing standpoint, there are some moving parts to consider at the moment since it's part of the behemoth that is DowDuPont. But it's about to get easier to invest in the legacy (and ongoing) industrial biotech efforts.

DowDuPont will soon split into three separate companies, each leveraging a unique core focus that resulted from the recent combination of Dow Chemical and DuPont. There will be a materials science company that will retain the name Dow Chemical, in addition to an agriculture company and a specialty products company. The latter will house the industrial biotech efforts in enzymes and polymers while bringing in an estimated $21 billion in annual revenue and a 25% operating margin -- the highest margin of the spin-offs.

However, it's going to take some time. DowDuPont doesn't expect to complete the spin-off process until June 1, 2019. If you don't want to wait until then, owning the merged company today will provide a piece of all three companies eventually.

More patience is required

The field of synthetic biology is still very much in its infancy. Therefore, investors shouldn't dismiss its potential just because a few lousy companies in years past have overpromised and severely underdelivered. However, the unfortunate reality is unless you're a venture capitalist, individual investors don't have the opportunity to buy a pure-play synthetic biology stock in 2018 that they won't regret owning later.

But perhaps the focus on owning a pure play isn't the point. Successfully commercializing next-gen biotech tools and products will require the blending of many existing disciplines. So why not own the mature companies investing to make that happen in the early goings today? As an added bonus, their diverse businesses will also help to protect against the risk that these early-stage projects fail. That's why investors interested in synthetic biology may want to dig deeper into the efforts being made at Autodesk, International Flavors & Fragrances, and DowDuPont.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.