Fueling Tomorrow: Solazyme
Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Today we will pick up the Fueling Tomorrow series with Solazyme (NASDAQ: SZYM). Although it is one of the most promising companies in the sustainable chemicals industry, Solazyme likes to focus on producing results – not promises.
“That’s delusional. I love it.”
Two dorm mates from Emory University, CEO Jonathan Wolfson and CTO Harrison Dillon, had always discussed starting a biotechnology company. But as college sophomores they were never sure where it would lead them. Then in 1994, Dillon stumbled across the idea of utilizing algae to produce flammable products, which of course might have uses as fuels. Upon hearing his friend’s idea for their company, Wolfson replied “That’s delusional. I love it.” The idea of Solazyme was born. The company was officially founded in 2003 in Dillon’s Palo Alto garage.
Much More Than Fuels
Solazyme’s well publicized renewable oils, which can be refined into 100% microbial-derived fuels, might be fueling tomorrow, but their oils serve three other market areas that will be fueling their growth for years to come. In all, the four business lines that include specialty chemicals, fuels, nutritionals, and health sciences add up to a $3 trillion – and growing – opportunity.
The company’s algae are heterotrophic, which means unlike their photosynthetic cousins they grow in the dark. Although photosynthetic algae grown in open-ponds can potentially produce a very large amount of product, Dillon and Wolfson realized in the late 1990’s that algae-derived oil grown in such a manner would cost nearly $1,000 per gallon. This sobering reality was responsible for their pursuit of a heterotrophic process.
The most important thing to know about Solazyme’s technology platform is that it has the ability to produce oils that mirror or enhance conventional oils used today.. This will help the company break into established markets with much less capital dedicated to answering the question, “Is this safe for consumers?”
Furthermore, the company’s platform can utilize any sugar feedstock. As I have stated approximately one million times before one of the key advantages of sustainably produced chemicals is that sugar prices are much less volatile than oil. Solazyme is currently partnered with Bunge Limited (NYSE: BG), one of Brazil’s largest sugarcane producers and one of the world’s largest natural oil companies, for its feedstock supply.
Digging Deeper: Nutritionals
Perhaps the company’s largest overlooked opportunity lies in nutritionals. I get it. Fuels are sexy. Oil makes the world go ‘round. But until Solazyme can acquire or build new production facilities their bottom-line will be propped up by their nutritional and health sciences businesses. In fact, their future ability to increase production capacity of fuels would be enhanced by successful development of products in these areas. As Fools and prudent investors, it would be wise to familiarize yourself with these opportunities.
Solazyme and Roquette formed a joint-venture in 2010 to produce and market their nutritional products, which they claim bridge the “tastes good” and “good for you” stigma. Although you may never realize it, Solazyme Roquette Nutritionals products could one day be incorporated into everyday foods ranging from ice creams to salad dressings.
As consumers and food suppliers such as HJ Heinz Co. (NYSE: HNZ) become increasingly more aware about where their ingredients come from, Solazyme’s new, novel food products stand to benefit. You can view their planned products here.
Digging Deeper: Health Sciences
The $323 billion health sciences market welcomed Solazyme aboard in 2011 with successful agreements with QVC and Sephora. In fact, the company’s Algenist™ skin-care product sold out within its first 8 minutes on QVC.
The first tests for alguronic acid®, which would become a staple of Algenist™, began in 2007. Discovered by Solazyme application scientists, alguronic acid® is a molecule produced by algae that protects them from harmful UV rays. Turns out it does the same thing for human skin. The original tests were enough to convince Sephora, which now markets the Algenist™ product in their stores worldwide.
Digging Deeper: Chemicals
Oils produced for the chemicals industry using Solazyme’s platform can be “tailored” to specific needs. That means the company can chemically manipulate their oils to be identical to existing products – or produce new oils entirely. This is key for a seamless transition into crowded markets, since the products can utilize existing infrastructure and be called upon in identical scenarios. For example, an airport wouldn’t need to supplement de-icing fluid provided by Solazyme with other chemicals or only use it at temperatures between such and such. Rather important if you want to keep airplanes in the sky and reduce headaches for your customers.
The sustainability of the company’s products has not been overlooked. In 2010 Solazyme announced a partnership with Unilever (NYSE: UN) to develop algae-derived oils for soaps and other personal care products. The recent popularity of palm-oil and coconut-oil products has come at the high cost of massive deforestation. Fairly or unfairly, Unilever has been ridiculed as the unofficial anti-rainforest representative over recent years. Solazyme is uniquely positioned to replace these products in a much more sustainable manner and help Unilever reverse course.
Strangely enough, this is not publicized on the company’s website or by any financial websites. As in previous articles, I like to remind investors of the social consequences and benefits of their profits. Maybe Solazyme can bring attention to this cause by adopting an orangutan as their unofficial mascot? Ok, at the very least they should update their website to include this information.
In 2011 Solazyme partnered with Dow Chemicals (NYSE: DOW) to develop microbial-derived dielectric fluids for transformers. Finally, it seems, the world is waking up to the amazing potential of bioprocess engineering.
Digging Deeper: Fuels
I purposely saved fuels for last to demonstrate the full potential of Solazyme’s business and growth strategy (If you skipped to this section, go back three spaces. Do not collect $200.) Once again, the fact that the company can produce chemically identical products will pay enormous dividends for its fuel business. Many sustainable chemical producers, such as isobutanol producer Gevo, can only speculate on whether their product will be officially assimilated into the fuel supply. Of course, and rather unfortunately, that decision will entail much more political baggage than scientific fact.
The company has several algae-derived fuels that have uses ranging from aviation to marine activities and are currently refined by Honeywell UOP and Dynamic Fuels. Oh, and perhaps you have heard of this entity called the U.S. Navy? Yeah, well they are working with Solazyme to develop a Green Strike Group by 2016. The company’s fuels have been successfully demonstrated in Navy ships and helicopters, United Airlines commercial airplanes, and in a 300 meter Maersk Kalmar commercial tanker (also with the Navy). Solazyme’s fuels meet critical U.S. Navy and ASTM standards, which is absolutely necessary if you are going to produce fuels and also plan on selling them.
The U.S. Navy has an initiative to provide 50% of its energy from renewable sources by 2020. The figure for renewable energy production in the military branch currently stands at 1%, but the Navy will include the 16% of its energy produced by nuclear power. Still, this brings the total renewable figure to 17%, which is still 33% away from their hefty goal.
Solazyme can certainly help them reach this figure, but they will need a large production boost over the next decade to make it happen. Perhaps a new DOE grant or Navy contract can ease the costs of adding new capacity. Given the overall success of the company’s fuels in tests and demonstrations so far this seems likely, but is all speculation at this point.
Bumpy Road Ahead?
The company is targeting 500,000 metric tons of oil production by 2015 and will soon have a capacity of 100,000 metric tons in Brazil. It was stated in Solazyme’s S-1 filing that the company can produce 0.3 g of oil from 1.0 g of sugar. Presumably, their yields have been improved since the originally disclosed figure above.
The future is definitely bright for Solazyme, but as with any new company cranking up production and supply lines there is a lot of work to be done. Solazyme owns one semi-commercial facility in Peoria, IL. After that? The Bunge facility currently being retrofitted, which will serve the Brazilian market, is their only plant. As of September 30th, 2011 the company had $113 million in cash and cash equivalents. Pretty healthy, but it can disappear quickly for a rapidly expanding company. This may be enough for one new facility.
How will the company finance its future? Will their nutritionals and health sciences products be enough to carry them in the meantime?
Solazyme appears to be the favorite in the sustainable chemicals industry – and they have earned it. I would say their next closest competitor, in terms of getting to commercial scale, is Amyris (NASDAQ: AMRS). The race may not be two-legged, but it may be closer than you think. The two companies are scaling two uniquely different processes to produce sustainable products. However, this is an excellent thing for the industry. As they say, “competition breeds excellence”. There will not be a single silver bullet to producing sustainable fuels, but rather a combination of successful technologies. This will further shield consumers from price volatility – something petroleum products do not offer.
With the company trading at about half of its IPO price, it may be worth looking into for a long-term investment. Catalysts to look forward to include the performance of their Algenist™ product line in their next conference call, completion of the Bunge facility retrofit, and further updates from their demonstrations with the U.S. Navy.
Up next: Codexis
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