Renewable oils and bioproducts producer, Solazyme (SZYM), is a small company largely known for its production of algae-based biofuels for the U.S. Navy and for the development of a high-end cosmetic line called Algenist. The company has also begun to sell its oils for use in functional fluid applications, and has recently entered into the promising field of drilling lubricants. Yet, despite the seemingly industrial context that is inherently associated with the thought of an "oil producer," Solazyme is also preparing to make a disruptive impact in the closer-to-home market of healthy foods and nutrition. A look at new information relevant to the company's pursuits in food applications shows that Solazyme's technology could hold much promise.
In a prior article shown here, I illustrated the vegetable oil industry's lengthy pursuit to develop high-oleic oils. Due to the limitations of plant seed growth, the development process for traditional agriscience companies can be slow and costly, while yielding limited improvements to the ultimate product. However, Solazyme's use of rapidly-growing algae enabled it to develop a top-tier suite of high-oleic oils in a fraction of the time needed by the much larger competition. Solazyme has now begun to produce its high-oleic oils in its newly commissioned facilities. More recently, the company also completed a self-affirmed GRAS process with the U.S. FDA which enables it to also sell its high-stability, high-oleic oil for food-based applications.
A Longer-Lasting Frying Oil?
It has been a little over a year since Solazyme first introduced the concept of using algae to produce a next-generation frying oil. Despite releasing limited information over the development of these oils, the first details of their performance are now beginning to emerge for the public. In a June 2014 cover story for Inform (a magazine for the American Oil Chemists' Society), three of Solazyme's oils are compared against the industry gold standard found in high-oleic/low-linolenic canola oil. An online version of the cover story can be found here. With a 100-year history, AOCS is a well-respected trade organization for the oil & fats industry.
The AOCS cover story highlights the functional flexibility of Solazyme's unique algal oils. In particular, the article highlights the high-stability algal oil, which is only obtainable through Solazyme's technology. High-stability algal oil contains virtually no polyunsaturated fatty acids, while boasting more than 86% oleic acid. Oxidative stability index [OSI] values of fresh oil at 110 degrees (Celsius) proved to be 62.7 hours for high-stability algal oil, compared to 18.4 hours for the high-oleic canola oil. After 10 days of frying potatoes, high-stability algal oil still had an OSI value of 25 hours, whereas each of the other oils had less than 6 hours remaining. As a result, high-stability algal oil had more frying life left at the end of the trial than high-oleic canola oil had at the beginning of the test.
Another metric used in the study was the p-Anisidine value [p-AV], which measures the secondary oxidation breakdown components. In this instance, a lower value is indicative of longer-lasting oil. High-stability algal oil, once again, performed much better than the incumbent oil. In this instance, high-oleic canola oil carried more than 6 times the p-AV value of high-stability algal oil after 10 days of frying.
The tangible implication of these results is that Solazyme's high-stability algal oil could lead to significant cost savings for restaurant owners. While standard high-oleic canola oil may get replaced every couple of days, Solazyme's algal oil can last well over 10 days, based on the fact that it would still have more frying life left at that point than canola oil did on day 1. This would also limit the amount of waste oil that needs to be disposed of by the facility. Taking the article found here into consideration, an owner of just four McDonald's stores averages 2,500 gallons of waste oil per store on an annual basis. Reducing the amount of oil used could help to improve the environmental impact of the restaurant chain.
Most importantly, the AOCS cover story also indicates the undertaking of a taste and sensory evaluation. Based on a panel of evaluators over the same 10-day test, the results suggest that algal oils do not significantly differ from the control vegetable oil's taste profile. This achievement is likely to assist in the adoption of algal frying oils. With the ability to reduce cost inputs and improve environmental impact without jeopardizing underlying taste, Solazyme's high-stability, high-oleic oil may play an interesting role in the commercial food business in the coming years.
On June 22, Solazyme's high-stability, high-oleic oil was also honored at the IFT Annual Meeting and Food Expo 2014. The Institute of Food Technologists is a premiere trade organization with a 75-year history in the industry. Shown in the article found here, the company received the prestigious 2014 IFT Food Expo Innovation award. The following details highlight why the company's product was chosen:
"Solazyme's high-stability high-oleic oil delivers superior performance and healthful attributes for a wide variety of foods without compromising on critical taste metrics. It has the lowest level of polyunsaturated fatty acids compared to any oil on the market and provides excellent stability with zero trans fats. Additionally, it is rich in healthy omega-9 fatty acids, low in saturated fats, and high in monounsaturated fats (~90%)."
Healthier Food Profiles With AlgaVia
While Solazyme's frying oil may address a particular aspect of the food industry, a new ingredient altogether is now being prepared for commercialization. Solazyme's brand of AlgaVia currently consists of microalgae flours. These flours are natural strains of microalgae, which can be controlled through the fermentation process to reflect a specific protein or lipid profile. In June 2014, Solazyme released a white paper detailing the benefits of AlgaVia Whole Algal Flour, a healthy lipid which can be used to replace dairy fats, egg yolks, and oil. The white paper can be found here.
What is most fascinating about this new ingredient is the versatility of its use and its ability to dramatically improve nutrition profiles. For instance, algal flour can be used in sauces, frozen desserts, soups, baked goods, pastries, beverages, etc. More importantly, by removing eggs, oil, and dairy products, Solazyme's new ingredient can significantly reduce fat, calories, and cholesterol. A look at the graphic below shows how challah bread could be dramatically improved with a mere 5% increase of whole algal flour. By reducing food inputs or using less valuable inputs (i.e. skim milk vs. whole milk), whole algal flour can help product manufacturers reduce the cost of their products, while improving upon their health profiles.
(Source: Food Navigator)
One thing that stands out about whole algal flour is its high lipid profile, which aids in overcoming the taste barrier that hinders other healthy products. In addition to a high lipid profile, whole algal flour contains other properties in high demand, such as fiber and micronutrients. Such micronutrients include Vitamin C, calcium, and antioxidants, such as lutein and zeaxanthin. The addition of these benefits stand in stark contrast to animal-derived products, such as dairy and eggs.
(Source: Food Navigator)
A core advantage to Solazyme's whole algal flour is its ability to align with current favorable trends in the food industry. Whole algal flour is free from allergens, contains no animal-derived products, and is gluten-free. The flour is made from a natural strain, and can qualify as a whole food ingredient. Additionally, it preserves taste and texture, while having a minimal impact on color (slightly yellow in most cases). It is also possible that these whole algal flours can have the hidden benefit of being used as a treatment for impaired glucose metabolism, as I wrote in my last article found here.
Where Does Solazyme Stand Now?
In January 2014, Solazyme opened its Clinton facility with 20,000 MT of annual capacity. In May 2014, it opened another 100,000 MT of annual capacity in its Moema facility based in Brazil. Both of these construction projects have taken approximately 2 years to complete, and it is expected that another 12 to 18 months will be needed to ramp up to full capacity. Altogether, Solazyme now has approximately 122,000 MT of capacity at its disposal, when also accounting for the much smaller facility in Peoria.
As a result of these most recent increases to manufacturing capability, the majority of Solazyme's revenue to-date has been dedicated to its high-margin skincare product line, which requires limited capacity. For example, the company's Q1 2014 results revealed that $5 million of the quarter's $7.4 million in product revenue came from Solazyme's cosmetic business. However, with the addition of the new capacity, Solazyme is now beginning to expand into markets requiring larger volumes. This includes venturing into food applications. Currently, the small 2,000 MT Peoria plant has been retrofitted to accommodate the AlgaVia product line. High-stability, high-oleic oil is also being manufactured at the Clinton facility.
Solazyme now carries a market capitalization of $898 million, based on the last price of $11.82 as of June 20. Despite its limited capacity to-date, Solazyme brought in $39.75 million in revenue for the year 2013. Quarter-over-quarter, the company has begun to steadily ramp up its revenue. In Q1 2014, Solazyme brought in $12.39 million, compared to $6.68 million in Q1 2013. As the company continues to ramp up its production with its new facilities, this amount is expected to significantly increase over time. With a reported average sales price of $2,600/MT during part of the first quarter, Solazyme may be on track to eventually deliver more than $50 million in annual sales from the Clinton facility alone.
At the same time, Solazyme will now have to prove its ability to reduce its costs, in order to become a profitable enterprise. As Solazyme ramps its production, investors should expect for the economies of scale to reduce the company's current cost of manufacturing product. At the time of its S-1 filing before its IPO in 2011, Solazyme stated that it believed it would be able to produce oils for the fuels and chemicals business at a cost lower than $1000/MT with the use of a built-for-purpose facility. While it is reasonable to expect for Solazyme to now be producing at a loss, this fact should change over the coming 18 months. It is also worth reminding that Solazyme's cosmetic division has already become a profitable business.
My Take On Solazyme Now
Over the last month, Solazyme has seen its price appreciate nearly 31% on little-to-no news. Much of this increase was in part due to a reaction to the opening of the Moema facility at the end of May. This significant de-risking event closed one of the company's largest uncertainties found in a pushed back timeline due to construction delays. With Moema's opening, Solazyme has now truly unlocked its ability to produce product on a large commercial scale.
Considering the rapid pace of the latest stock rally, investors might want to expect volatility in the coming weeks. However, Solazyme remains a stock to own for its long-term potential. The company already has a profitable cosmetic business, and is now ramping up sales for functional fluids and personal care products. At the same time, Solazyme is also pursuing two promising channels found in its proprietary brands of Encapso (drilling lubricant) and AlgaVia. In both of these markets, the company's entrance offers a very large opportunity, while utilizing a whole algal product rather than the extracted oil. Whole algal products help to reduce Solazyme's cost of production by limiting the amount of processing steps required.
Depending on product mix, capacity utilization, and average selling prices, Solazyme appears to be on track for triple-digit revenue growth over the coming 2 years. The broader move into food-based applications may also begin to associate Solazyme with higher premiums related to rapidly growing food companies. For example, the WhiteWave Food Company (WWAV) now trades with a trailing price-to-earnings ratio of 53.72 and a price-to-book ratio of 5.6. WhiteWave made a name for itself as it provided dairy alternatives through plant-based foods and beverages. In many ways, Solazyme's food products could provide competition to the very markets addressed by WhiteWave. This is especially the case when one considers Solazyme's introduction of a new vegan ingredient as a substitute to dairy products.
All things considered, Solazyme is now properly positioned for operational growth. The manufacturing capacity is in place to accommodate a ramp in sales, and the market development has matured into specific product pathways and brands. It remains to be seen how long it will take for Solazyme to achieve its economies of scale, but prior projections should provide optimism for long-term investors. Above all, the advancements the company brings to the food industry appear to be a promising sign of the things to come. It seems that Solazyme has come a long way in its ambition to disrupt multiple markets through the use of a single technology platform.
Disclosure: The author is long SZYM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.