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As an industrial biotechnology company most heavily associated with the production of renewable fuels, Solazyme (SZYM) has often been thought of as retreating away from its primary industry. The company was initially formed with the intention of producing renewable fuels. Yet as the company refined its capabilities, it soon became clear that the technology can make a significant impact in the food industry. Solazyme now finds itself addressing the lucrative markets of nutritionals as the company adjusts to where its technology has led them. Now poised to commercialize its nutritional products on a large scale, these next two articles are intentioned to take a look at the impact that Solazyme can have on the food industry.

Escaping The GMO Label

According to a recent article from the Scientific American found here, Solazyme's algal oils aren't likely to qualify as genetically modified. This is despite the fact that the company "blasts DNA into the algae's genome" in order to generate highly productive yields of unique oil profiles, some of which the world has never seen before. The article goes on to quote co-founder Harrison Dillon with the following explanation:

"There is nothing GMO about the actual product," Dillon argues, comparing the oil to French cheeses made with genetically-optimized enzymes that are also not considered genetically modified. Such algal oils or cheeses are exempt from GMO status because none of the modified genetics or proteins end up in the final product.

If so proven to be the case, this stands as yet another unheralded accomplishment for the stakeholders of this small biotechnology company. At least for the company's tailored oils, the lack of a GMO status may allow for their rapid assimilation into the broad food chain. This is especially the case for the oils which may be considered substantially equivalent to their non-GMO counterparts. This may also help deflect the public unrest now brewing against genetically engineered foods and companies that design them such as Monsanto (MON) or DuPont (DD).

Filling The Gap Of A Missing Solution

The potential easing of market acceptance is especially useful given the degree to which Solazyme's tailored oils may be able to improve the overall health profile of the food we eat. The company's oils can be made to significantly reduce the amount of saturated fat and eliminate the presence of trans fats while still tasting good and retaining the desired functionalities of other modified oils. Above all, the company's oils can be used in a wide variety of products ranging from salad dressings, to refrigerated dough products, to beverages, and even ice cream.

Ultimately, Solazyme has the ability to modify its oils in such a way that it sidesteps existing processes and the correlated dangers attached to them. Let us consider hydrogenation for instance. The hydrogenation of vegetable oils often involves the intense heating of the oil under substantial pressure along with the introduction of a nickel catalyst. Hydrogenation is used in order to convert liquid vegetable oils into solid or semi-solid fats, such as those present in margarine.

By changing important characteristics of the oils, hydrogenation increases the oil's stability. The process increases the shelf life of the oil and improves the texture of the food to which the oil is added. But apart from being another costly step in itself, hydrogenation also results in the creation of trans fats. The health implications of such trans fats are well known. According to the article found here, the Nurse's Health Study of 80,000 women found that a 2% increase in trans fat consumption increased a woman's risk of heart disease by 93%.

Fractionation is another commonly used process often used to produce products such as fractionated palm kernel oil or fractionated coconut oil. More simplistic than hydrogenation, this process involves the heating and cooling of the oil in order to separate out a fraction of that oil. Typically, this is done in order to gain a higher concentration of saturated fat. In doing so, the process gains much of the same benefits of hydrogenation apart from the creation of trans fats.

As a result, fractionated oil is more stable than the initial oil. This allows for longer shelf life and other important properties. However, these oils are also far from healthy as it results in a higher concentration of saturated fat. Saturated fat has been proven to increase the level of cholesterol, which has been linked to numerous health risks.

Controlling The Outcome From The Beginning

A significant advantage for Solazyme appears to be the ability to control a wide spectrum of oil design. The company's tailoring capability can control carbon chain length, saturation, and positioning. Such capabilities dictate the type, function, and attributes of the oil designed. This allows for the company to reduce the levels of saturated fatty acids in an oil or change the melting point of the oil by designing such an oil to begin with.

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It is particularly in 'positioning' that the company could have a significant competitive advantage when it comes to oils used in nutrition, industry, or personal care markets. This advantage stems from the understanding that no such positional control has ever been substantially demonstrated before. By structuring oils, Solazyme is capable of achieving the desired benefits of the prior two processes mentioned while limiting or eliminating their unintended consequences. CEO Jonathan Wolfson had this to say in the Q1 2013 earnings call found here:

The reason this positioning capability is so important, is that the resulting structure cause have multiple and valuable uses in markets from Nutritionals to industrials and personal care. In foods that require body or shape at room temperature, such as pastries, the choice for producers has typically been to use partially hydrogenated vegetable oils that result in trans fats, or heavily saturated oils or blends with the well known disadvantages of saturates. Our structuring capability opens up a new toolkit that is likely to result in significantly healthier profiles without compromising on functionality. This capability applies equally to the industrial and personal care markets where our restructuring oils will improve product formulations, particularly where texture, melting and pour point properties are important.

Considering the Financial Picture

Solazyme now trades with a market capitalization of $697 million as of July 26. By the end of March, the company had cash and short-term investments totaling $239 million suggesting the market was roughly valuing the company's technology at $458 million. Solazyme now awaits the completion of its first large scale commercial facility being built in Moema with its joint venture partner Bunge (BG). The facility, which is expected to begin commercial operations in Q4 2013, will carry a nameplate capacity of 100,000 metric tons.

It is unlikely that the Moema facility will be entirely dedicated to the production of food and food oils. After all, the original intention for the facility was for the production of chemicals and fuels. However, it does remain important to consider just how fast Solazyme may be able to ramp up its revenues.

Prior to the dissolution of the Solazyme Roquette Nutritionals joint venture, CFO Tyler Painter reaffirmed that the company expected to sell food products with prices north of $5,000 per metric ton in the conference found here. Were the Moema facility to be entirely dedicated to such product, one might rationally conclude that this one plant could generate in excess of $500 million annually in product revenues.

Conclusion

One of the remaining barriers still left to be toppled by Solazyme is its ability to execute upon its business plan. The company now awaits the completed construction of its first meaningful facility on which investors have pinned much hope. It is at Moema that the question will be answered whether Solazyme will be able to achieve its margins and produce at scale.

However, the unlocked value of the technology continues to remain underappreciated considering the vast implications it can have on multiple industries. No greater can this be seen than in the food industry. The company is capable of introducing a new sustainable food source that can replace more expensive ingredients while still providing the same taste and consistency. Above all, the health profile of these foods are significantly improved.

Solazyme can not only create sustainable tailored oils that replicate the profiles of existing oils, but it may even allow for the introduction of new types of oils with valuable properties. In due time, the company may even make obsolete the need for expensive and unhealthy manufacturing techniques such as hydrogenation and fractionation. All said, investors should not be quick in discounting the impact Solazyme can have when it comes to addressing nutrition.

Source: Why Solazyme Will Impact The Food Industry