(On Friday, January 10, 2014, I returned to Solazyme's research headquarters in San Francisco to converse with key staff members in a follow-up session nearly 2 years after my last visit found here. The articles of this series are based on my own conclusions as an individual investor in the company.)
"People are worried about all kinds of things. The only thing they really need to worry about is if we are systematically going to keep our heads down and execute. Because there is no "flaw". In fact, the ability to tailor the fourth largest liquid by volume on the planet is going to disrupt markets. The question is are we going to deliver on the timeline that people expect without major hiccups? And that is how we're spending our time and our blood right now."
-Jonathan Wolfson, CEO of Solazyme
With the ability to tailor oils by controlling microscopic algae in dark fermentation vessels, Solazyme (SZYM) has now reached the point of commercializing a proprietary technology platform that has spent a decade in development. The company is capable of significantly altering the supply chains of established industries by introducing oils with unique properties. Solazyme can control the production of designed microalgae and its resulting oil. Yet on the eve of a manufacturing capacity roll-out, investors continue to be flush with uncertainty.
A Look At Two Years Gone By
Nearly two years have passed since my last visit to Solazyme on March 9, 2012. At that time, the company had not yet passed its first anniversary since it went public in a $227 million IPO. Although performing on a commercial scale through toll manufacturing, the company had yet to own a commercial facility to call its own. More so, the company had yet formalized its joint venture relationship with key partner and agribusiness giant, Bunge (BG).
Two years have since passed, and little appears to have changed when it comes to Wall Street's view of the company. Even now, media publications continue to errantly tag Solazyme as a mere biofuel play or solar stock in stark contrast to its position as a growing industrial biotechnology leader specializing in customized oil design. Further compounded by the industry's poor performance, and Solazyme continues to harvest its share of technology skeptics. The declining share prices of the supposed peers in the industry have only reinforced the drag on the Solazyme's price as well.
SZYM data by YCharts
It appears as if Wall Street is comfortable in pinning Solazyme with a fictional "flaw" based on association. Criticizing its reliance on partners and labeling the technology as unproven, Solazyme now trades with a market capitalization of $650 million. At $9.54 as of January 13, the company now trades with a 47% discount to its IPO price of $18/share. This is despite the fact that Solazyme will be increasing its manufacturing capacity this year to more than 120,000 metric tons of oil per year through two facilities expected to come online in early 2014.
Yet operationally, there has been no technology or business model flaw worthy of flagging. Since its IPO, Solazyme has continued to enhance its market opportunities with an increasing array of novel oil profiles. Its upstream and downstream relationships have improved in quality. The company's balance sheet has been fortified with enough capital to become cash flow positive. The technology has even scaled in a linear fashion to the 500,000-liter level, representing a more than 70,000-fold increase from the 7-liter tanks used in the laboratory.
Progress In Technology
Understandably it was for this reason that I was glad to speak with Solazyme's CTO, Peter Licari. As the man overseeing the company's technology platform development, Licari's own confidence was abundantly clear. He had the following to say upon introducing himself:
"Far and away, this is the most exciting platform that I've ever worked on. I feel fortunate because I've always been associated with new technologies - the first completely monoclonal human antibody, and other things ... but just the power of this platform is impressive. It's almost weekly or every other week where we're looking at the data saying: 'Did you ever believe we'd be at this point' ..."
I took the opportunity to explore further how the company's algae-to-oil platform had been developing over the years. Upon inquiring how successful the company was in scaling the platform to the large production plants in terms of timing and matching profiles, the technology officer had the following to say:
"So [we've had] very good results in those regards. Because when you look back at what we've done, we have probably close to 150 runs at [anywhere between] 75,000-liter to 500,000-liter. That spans probably 6-8 different oils, at least 12 different strains. So we know what we're doing in regards to scale up now. So what we run at the 7-liter, we can see reproducible results, whether it's in the pilot plant or at the 500,000-liter scale. It has come through iteration. So everything we run now in the lab we're running at conditions that we know we can mimic at full commercial scale."
Expanding further on a particular example to show the relative speed at which the company has been able to roughly accomplish this objective, Licari illustrated this with a recent scenario:
"We have an example recently where we went from passing [a strain] out of molecular biology (so no fermentation work) through the fermentation lab, to the pilot plant, and to the 500,000-liter level in about 3-months. In our biotech world and in biochemical engineering, that is extremely fast. But that's an accelerated [case]. We wanted a quantity of this oil to go to one of our partners, so we really pushed hard to do that."
Such progress on the scaling front remains an ongoing accomplishment that has yet to receive its fair share of recognition. While the last example may have been an accelerated case of the company's speed in scaling, it nevertheless emphasizes Solazyme's potential in bringing novel oils to the market in a rapid manner. As shown below in a company presentation slide, Solazyme expects that the technology can introduce transformative products with a fraction of the time needed by the seed-modifying competition.
Outlook On Economic Viability
I took the opportunity to ask the following question out of respect for my readers. One broad thought needed to be bluntly answered given the level of skepticism embraced by investors across the industry. Particularly, it continues to be one of the most frequently asked questions that I continue to face when readers first learn of the company's use of sugar. So there it was: "For Solazyme, is the company's technology economically viable?"
"Very economically viable," Solazyme's CEO Jonathan Wolfson acknowledged, clearly addressing the question like it had been asked many times before. "We're not talking about on-the-margin economically viable stuff. It is not a close question on the margins on whether this makes economic sense. Now again we haven't told you that we are trying to compete with tallow at $700/ton, have we? You can start to draw conclusions then. We ultimately have to put sugar in, but to be clear, the sugar cost is well over half of the total cost."
Wolfson jokingly referred me back to Licari after hearing that I just wanted to hear it from the horse's mouth. Upon asking him the same, Licari had the following response to add:
"Absolutely. Jonathan mentioned ADM, Bunge, etc. - we have had a lot of external folks look at this from a viability perspective. We're very confident that it is viable. And it continues to get better every day. I mean we have a lot of people working on this. In addition to the new oils, all of [the processing] operations continue to improve."
At this point, CFO Tyler Painter contributed with his own thoughts on the underlying concern. After all, this was a conversation about margins. Tying together the company's strengths with a financially-relevant outlook, he had the following to say in regards to margin expectations:
"You know, Kevin, here's one of the things I usually look at. If you look at some of these industries where you have a high volume product that coming to the marketplace. What will usually happen is that with more and more volume you'll see your average selling prices coming down. We have this interesting ability with the platform and the ability to tailor the oils in that our expectation is that you will have higher valued oils coming in. So you'll have your average selling price continuing to go up over time. But at the same time, as we continue to gain efficiencies and we start to move into second generation feedstocks as well, those all impact your costs and start to move in an opposite direction. So over time we'll actually see our margins improve."
On a very basic level, it all comes down to this: In the last two years, Solazyme has focused increasingly on its technology and execution. The company's platform has been able to scale with ease while perceived peers have struggled to do the same. The company's future margins continue to remain promising in light of the existing technology's capabilities. Looking further out, these opportunities even appear to even expand rather than constrict like one would expect in traditional commodity markets.
In my future articles, I plan to provide further insight on the technology based on my visit with Solazyme's management team. Solazyme's platform operates as a robust technology capable of increasing value while performing under multiple conditions. After a decade of development, it appears that such technology will finally have the chance to deliver on its promises through the large scale facilities now coming online.
Disclosure: I am long BG, SZYM, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.