The following is a private company pre-IPO report discussing Solazyme (proposed Nasdaq ticker: SZYM).
- Solazyme is a 21st century oil company that has developed an innovative technology platform that has the ability to create a wide array of specifically and genetically engineered oils from microalgae. The company looks more like a biotechnology company than a traditional oil company.
- Solazyme has a unique approach to producing oil from microalgae called “indirect photosynthesis” that has the potential to bring large volumes of high value oil to the market profitably. Unlike conventional processes that rely on direct sunlight in open ponds, Solazyme grows microalgae in the dark by feeding them sugar directly in large steel tanks. The company’s technology platform is feedstock flexible and uses standard fermentation equipment to produce oil.
- Solazyme’s technology platform enables a new paradigm that allows for the production of tailored oils containing fatty acid profiles that are not found in natural plant oils or animal fats and cannot be achieved through blending alone. The company has a large patent portfolio with 125 patents issued or pending.
- Through refinements of its production process, Solazyme has reduced the estimated production cost of producing oil 10-fold over the past three years to $1,000 per metric ton versus estimated average selling prices in its three initial target markets ranging from $1,000 to $4 million per metric ton. Solazyme is not making money today and likely will not for several years as it builds out capacity. We expect the company to achieve profitability by 2013.
- Solazyme is targeting three initial target markets – fuels and chemicals, nutritionals, and skin and personal care – which collectively represent a $1.5 trillion market opportunity. It has established joint ventures and partnerships with prominent companies such as Roquette, Honeywell UOP, Chevron, Qantas Airways, Ecopetrol, Unilever, and Bunge.
- Solazyme is well along the commercialization path, having launched its Algenist line of skin and personal care products with Sephora USA, Sephora International and QVC along with its Golden Chlorella® nutritional products with Whole Foods and GNC stores. The company will be ramping up capacity in the months ahead to produce high value oils targeted at the fuels and chemicals and other target markets.
- Solazyme has filed for an initial public offering that is expected to price the week of May 23rd. The deal is being led by Goldman Sachs and Morgan Stanley. Our base case intrinsic valuation (IV) model puts the value of Solazyme’s shares at $21.50 this year and $26.25 in 2012 versus the proposed filing range of $15-$17 share. The operating margin in our base case IV model is more conservative than the company’s 25% target as we expect some bumps along the way as the company aggressively ramps up production capacity in the years ahead. We note there is considerable scope for additional value creation beyond our base case IV estimates if Solazyme can demonstrate an ability to achieve its targeted 25% operating margin.
- The age of Synthetic Nanobiology is dawning. This is an intriguing time for companies and investors alike. We expect considerable interest in Solazyme’s IPO from both institutional and retail investors.
The ongoing advances in biotechnology and nanotechnology are ushering in a new age of synthetic nanobiology that promises to profoundly alter the global economic landscape in coming years. Scientists have come to recognize that much of biology is executed at the nanoscale level. Exponential increases in computing power and innovations in software are enabling scientists and researchers to scale down to the atomic level to create novel materials and products that heretofore have been the domain of science fiction. We are reaching a stage in the evolution of synthetic nanobiology where we are likely to see an acceleration of product innovation and commercialization in the years ahead. Suffice it to say, this is an intriguing time for companies and investors alike.
Solazyme is an emerging pioneer of synthetic nanobiology in the life sciences. We think of the company as the poster child for Juan Enriquez’s visionary and provocative book, “As the Future Catches You” (Crown Business, 2000, 2001). Led by CEO Jonathan Wolfson and President and CTO Harrison Dillon, both experienced entrepreneurs who have built a top-notch team over the past several years, Solazyme is in the early stages of building out a transformative, nano-enabled life sciences franchise – a 21st century oil company – that is creating fundamentally new ways of producing high value fuels, chemicals, skin and personal care products, and nutritional products that have the potential to change the way people live, work and play.
Producing oil from microalgae is not a new idea. Oleaginous (oil-producing) microalgae have evolved over billions of years to produce large amounts of oil rapidly when grown in the right conditions. Commercial interest in cultivating oil using microalgae rose in the 1970s after the first oil shock. Large research programs in the U.S. and Japan focused on developing microalgal energy productions systems. For nearly two decades beginning in the late 70s, the U.S. Department of Energy’s Office of Fuels Development funded a program to develop renewable transportation fuels from algae.
The main focus of the DOE’s program was the production of biodiesel from high-lipid-content algae grown in open ponds using CO2 from coal-fired power plants. Japan’s research during the 1990s yielded some innovations, including promising lipid production strains of algae, open productions systems called “raceway ponds” and principles for photobioreactor design (the use of fiber optics to bring light inside the system).
Past research has shown that it is possible to produce oil from microalgae. However, what has not been demonstrated is the ability to produce oil from microalgae profitably on a large scale for commercial purposes. That is, up until now.
Solazyme has developed a unique approach to producing oil from microalgae using a process called “indirect photosynthesis” that has the potential to bring large volumes of oil to the market profitably. Using standard fermentation equipment, Solazyme grows mircoalgae in the dark by feeding them sugar directly in large steel tanks, as opposed to conventional processes that rely on direct sunlight in open ponds.
Solazyme’s approach to producing oil from microalgae looks less like a traditional energy company and more like an advanced biotechnology company. Harnessing advances in molecular biology, Solazyme is developing new strains of microalgae for commercial use in a variety of markets, from fuels and chemical to nutrition, skin and personal care. These strains include natural, classically improved, and/or targeted recombinant strains.
Solazyme has developed the ability to identify robust, high-oil-producing natural strains and use these as a foundation for subsequent strain improvement and optimization efforts. The company’s strain screening capabilities allow it to analyze thousands of strains per week, providing a detailed inventory of each strain’s outputs under controlled conditions. Solazyme then improves the performance of the selected strains, alters their outputs or further extends their feedstock flexibility by employing classical strain improvement and/or targeted recombinant strain optimization approaches.
Solazyme’s synthetic nanobiology technology platform allows it to control the precise composition of the oils to suit particular target market needs. Until now, the physical and chemical characteristics of conventional oils have been dictated by oils found in nature or blends derived from them. Solazyme’s innovative platform has created a new paradigm that allows for the production of tailored oils containing fatty acid profiles that are not found in natural plant oils or animal fats and cannot be achieved through blending alone. The production of such oils offers Solazyme great commercial opportunities throughout the food, chemicals, skin and personal care, and renewable fuels industries.
Solazyme’s research and development efforts have laid the foundation for wide-scale commercialization of its innovative, microalgae-produced oil. The company’s revenues have risen rapidly over the past year – up nearly 400% – fueled by the formation of partnerships and joint ventures across a range of sectors and geographies. In the past year, the company has:
- Produced over 400,000 liters (364 metric tons) of algae-based oil for the U.S. Navy.
- Entered into a 50/50 joint venture with Roquette Freses, S.A., one of the world’s largest starch and starch derivatives companies, with the goal of jointly developing, producing and marketing nutrition products worldwide.
- Began the sale of its consumer nutrition products containing Golden Chlorella® in Whole Foods and GNC.
- Entered into arrangements with Sephora International, Sephora USA and QVC for the worldwide launch of its Algenist anti-aging skin care products.
- Partnered with Honeywell UOP, Chevron, Qantas Airways, Ecopetrol, Unilever, and Bunge for the production of oils and chemicals.
- Executed a non-binding letter of intent with one of Brazil’s largest sugar cane processing companies for feedstock.
- Entered into both a joint development agreement and a non-binding off-take letter of intent with Dow Chemical Company in the field of dielectric fluids.
These developments showcase the breadth of Solazyme’s technology platform. There are three primary markets the company is targeting: fuels and chemicals, nutrition, and skin and personal care. These markets collectively represent a $1.5 trillion opportunity. Below we take a closer look at each initial target market, beginning with skin and personal care.
Skin and Personal Care
Solazyme’s skin and personal care business was launched earlier this year. Skin and personal care is a $50 billion market today and an attractive market for Solazyme given its ability to design oils that have specific functionality suited to skin and personal care.
Solazyme created a line of skin and personal care products called Algenist. Algenist contains a special ingredient called alguronic acid, which has anti-aging characteristics. There are more than 100 algae-derived ingredients used in cosmetics worldwide. According to Solazyme’s Vice President of R&D, Tony Day, the alguronic acid in Algenist is a single, purified, highly bioactive compound. Solazyme commissioned independent lab studies of Algenist and they showed increased cell regeneration and the synthesis of elastin which gives skin a more youthful quality. The studies also show that Solazyme’s alguronic acid provides protection again cell damage induced by ultraviolet rays as well as inhibits enzymes that break down elastin.
There are four Algenist products currently on the market. Below is a short description of each product and what they do:
- Regenerative Anti-Aging Moisturizer SPF 20: A fast-absorbing day cream that nourishes the skin, restores its moisture, and rebuilds overall firmness and elasticity. Retails for $90.
- Regenerative Anti-Aging Moisturizer: Provides immediate moisturization while other anti-aging and hydrating ingredients release over time to nourish and regenerate the skin. Moisturizer works to minimize wrinkles, leaving skin looking radiant and noticeably younger. Retails for $90-$135.
- Complete Eye Renewal Balm: A balm that hydrates and soothes the eye area to decrease puffiness and dark circles. Retails for $65.
- Concentrated Reconstructing Serum: An anti-aging serum that minimizes wrinkles, leaving skin looking radiant and noticeably younger looking contains within four weeks of use. Retails for $95.
The Algenist product line is currently being distributed by Sephora International and Sephora USA in over 800 stores as well as through QVC. The initial launch of Algenist on QVC sold out in eight minutes, while Sephora has reported healthy sales with some stores selling out of certain products. Customer reviews for Solazyme’s Algenist products – 70 and counting on Sephora.com – thus far have been favorable. A majority of customers have expressed overall satisfaction with the performance of the products. The most heavily reviewed product to date is the Concentrated Reconstructing Serum. While receiving a relatively good 3.8 out of 5 stars, some of the 37 reviewers have expressed disappointment with the product.
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While the initial launch of the Algenist skin and personal care products with Sephora and QVC has gone well, it remains to be seen how successful Solazyme will be with Algenist in the future. Sephora is an attractive retailer for Solazyme given its cache and presence in the skin and personal care market globally. That said, the Algenist products are pricey, and consumers will undoubtedly expect great results given the retail cost.
From Solazyme’s perspective, the gross margins on the Algenist products are extremely attractive. The company believes it can sell its algae-based skin and personal care products on the market for an average selling price in a range of $20,000 to $4 million per metric ton versus costs of $2,500 per metric ton. A high volume of sales of Algenist products in the months ahead would give a nice boost to Solazyme’s top and bottom lines.
In skin and personal care, Solazyme will be competing against brands such as Kinerase, Perricone MD and StriVectin in retail markets, as well as with Meaningful Beauty and Principal Secret in the direct response marketing segment through its joint venture with Therabotanics. Solazyme’s products are priced competitively in the market relative to competing products. Solazyme will be launching additional products in the skin and personal care market in the future. Next year, the company plans to market a second microalgae-based skin care line through a joint venture with Therabotanics, an affiliate of a leading direct response marketing company.
Although it is early days for Solazyme in the skin and personal care market, the company seems well positioned in a market with attractive margins and growing demand with Sephora International and Sephora USA.
One of the key features of Solazyme’s microalgae oil technology platform is its ability to create and produce high value healthy oils, protein, natural emulsifiers and dietary fiber that are ideally suited to the nutrition market. Nutritionals is a significant potential global market opportunity for Solazyme, with relatively high gross margins. The market for natural healthy/organic foods is over $110 billion today with demand being stimulated by new, innovative products and rising health consciousness among aging baby boomers and health-oriented consumers around the world.
Solazyme has created a line of dietary supplements called Golden Chlorella® which was the company’s first commercial source of revenue. Solazyme’s Golden Chlorella® nutritional line represents a unique source of protein and omega fatty acids. The company commercialized whole algal cell protein (Golden Chlorella® High Protein) and lipid (Golden Chlorella® Omega) formulations. These are sold through various retailers, including Whole Foods and GNC stores.
Solazyme’s technology platform allows the company to create algae-based food ingredients with a number of desirable attributes, including enhancing the nutritional profile (e.g., reduced calories, saturated fat and cholesterol) and functionality (e.g., enhanced taste and texture for low-fat formulations, improved moisture retention for gluten-free recipes) of food products, while reducing handling and processing costs for consumer packaged goods companies. Solazyme’s nutritional products are shelf-stable powdered alternatives to traditional liquid or refrigerated ingredients and therefore have a lower cost profile compared to incumbent products (see table below).
In November 2010, Solazyme announced a major 50/50 joint venture with Roquette Frères, S.A. (Roquette). Roquette is one of the largest starch and starch-derivatives companies in the world and is an ideal partner for Solazyme. The Solazyme/Roquette joint venture allows the companies to collaborate on developing, producing and marketing nutrition products worldwide. Roquette will provide all capital expenditures and working capital required to produce nutrition products for the joint venture. There is also a deal in the works whereby Roquette will fund an approximately 50,000 metric ton per year facility.
Within the Solazyme Roquette Nutritionals joint venture, Solazyme will continue to develop the market for its algal flour, algal oil and Golden Chlorella® products as the JV builds commercial-scale capacity. Algal flours are dry and naturally processed microalgae-based products made through specific fermentation and downstream processing to yield either an oil- or protein-rich powder. Both powder products contain healthy oils, protein, natural emulsifiers and dietary fiber. Algal oil, a virgin oil isolated and clarified from microalgae, contains high concentrations of monounsaturated fatty acids with a profile similar to that of virgin olive oil.
Solazyme has developed and retained the sole rights to designer nutritional oils based on targeted recombinant technology. This allows the company to pursue additional large market opportunities, such as the development of a cocoa butter replacement or extender that can be used in a variety of food applications, such as chocolates and other confections. Cocoa butter was priced at over $4,800 per metric ton at year end 2010; Solazyme believes it could produce a rival substitute product at significantly lower cost.
Solazyme estimates the cost of producing nutritionals at scale in the range of $1,000-$3,000 per metric ton with average selling prices in the market of $2,500 to $20,000. The margins on nutritionals are not as favorable as personal and skin care products, but they are relatively high and attractive – especially compared with Solazyme’s other initial target market, fuels and chemicals. Roquette is an ideal partner for Solazyme in the nutrition market, and we expect the company to develop other key partnerships and JVs to fuel top and bottom line growth in the months and years ahead.
The market for nutritionals and food in general is large and mature. Solazyme expects to compete with established companies such as SALOV North America through its Filippo Berio products, Archer Daniels Midland, and Cargill. Additional potential competitors, who use fermentation based platforms similar to Solazyme’s in the nutrition food space, include DSM Food Specialties and Danisco A/S (who recently agreed to be acquired by E.I. du Pont de Nemours and Company). While Solazyme anticipates competition from large, established companies, they will seek to partner or collaborate with these. The company believes its partnership with Roquette and its development of novel designer oils will allow it to compete effectively in the nutrition market.
Fuels and Chemicals
A growing number of companies, both established and emerging, are harnessing the power of synthetic biology to produce innovative advanced biofuels and chemicals. Many of the major energy companies, including ExxonMobil, Royal Dutch Shell, BP, Chevron and Total, as well as leading consumer products companies such as Proctor and Gamble and Roquette, are exploring synthetic biological processes to create new, innovative forms of fuel, nutritionals, and consumer products.
Fuels and chemicals are a large market opportunity for Solazyme, with the market opportunity estimated at $1.4 trillion today. There is growing demand for alternative sources of energy and cleaner energy technology amid volatile and rising oil prices, climate change concerns and, more recently, the nuclear disaster in Japan. There are over 110 advanced biofuel projects in development currently and the National Alliance for Advanced Biofuels and Bioproducts consortium (NAABB) is studying over 575 strains of algae to determine which is best for lipid production for alternative biofuels.
Earlier this year, President Obama set a goal of cutting U.S. oil imports one-third by 2025 and encouraged support for advanced biofuels as well as other alternative fuel technologies. Exxon, Valero, the U.S. Department of Energy, and others have invested approximately $1 billion into algae biofuels to date. Investment activity is expected to continue to ramp in the years ahead given that algae biofuel has become a key focus of the clean alternative fuels movement.
Solazyme’s entrance into the advanced biofuels market could not be coming at a better time. The outlook for alternative fuels has never been brighter. The U.S. Energy Information Administration (EIA) recently released an outlook for 2011 with projections out to 2035. The EIA is projecting the demand for advanced liquid biofuels will rise as the future global consumption of alternative fuels increases.
World production of liquid fuels from unconventional resources – which includes oil from microalgae – was 4.1 million barrels per day in 2009, or about 5% of total liquids production (which includes conventional petroleum). Based on the baseline projections, production from unconventional sources is expected to rise over threefold to about 13.5 million barrels per day in 2035, accounting for 12% of total liquids production. In a projection where oil prices remain high and continue to rise, production from unconventional sources would increase even further, to around 20 million barrels per day in 2035, and account for 17% percent of total world liquids production.
Among the more promising liquid fuels from unconventional sources is microalgal. The productivity of these photosynthetic microorganisms in converting carbon dioxide into carbon-rich lipids greatly exceeds that of agricultural oleaginous crops, without competing for arable land. Solazyme’s technology platform allows it to produce various types of fuel, including diesel and jet fuel. The company hit an important milestone when it provided the fuel for an automobile powered by the first 100% cellulosic-derived diesel from microalgae. Solazyme’s fuel met ASTM specifications. The company produced over 400,000 liters (364 metric tons) of algae-based oil for the U.S. Navy, which plans to significantly increase its consumption of advanced biofuels in coming years.
Fuels and chemicals are large markets. One of the major competitive advantages of Solazyme’s technology platform is the fact that it is feedstock flexible. A wide variety of renewable plant-based sugars can be utilized, including cellulosics, which the company believes represents an important alternative feedstock in the future. Over the past three years, Solazyme’s researchers have demonstrated that their lead microalgae strains can grow on cellulosic feedstocks. They have optimized some of their lead strains to metabolize xylose, a plant sugar abundant in many cellulosics.
Feedstock flexibility is central to Solazyme’s strategy in fuels and chemicals. The company notes that there are over 1 billion tons of cellulosic feedstock available in the U.S. According to Solazyme’s estimates, this quantity would enable the company to produce oil that could be refined into more diesel and jet fuel than was consumed in the U.S. in 2010 combined.
Through refinements of its production process, Solazyme has been able to reduce the estimated production cost of producing oil targets at the fuels and chemicals market tenfold over the past three years to $1,000 per metric ton. This key achievement allows the company to sell its oil profitably in the high volume markets for fuels and chemicals. The margins on Solazyme’s fuels and chemicals will be considerably lower than its products for the nutrition and skin and personal care markets, but the opportunity for revenue generation is much greater given the size of these markets. Solazyme estimates average selling prices in fuels in the range of $1,000-$2,300 per metric ton. In the chemicals market, higher gross margins are attainable with average selling prices estimated to be in the range of $1,800 to $5,500 per metric ton.
Solazyme notes that it has produced more non-ethanol, microbial-based fuels and oils than any other company in the world. While this is an important accomplishment, the company has major plans to scale up production in the years ahead. Since 2007, the company has been operating in commercially-sized standard industrial fermentation equipment (75,000-liter scale) with multiple contract manufacturing partners.
Earlier this year, Solazyme purchased a production facility in Peoria, Illinois with multiple 128,000-liter fermenters and an annual oil production capacity of over 2,000,000 liters (1,820 metric tons). Additionally, the company completed detailed engineering designs for large commercial plants to service its fuels and chemical markets. The facility in Peoria is the only facility the company owns today that can produce and process products at commercial scale. Any other commercial production capacity Solazyme needs will be accessed through third parties, including strategic partners and contract manufacturers.
Based on the technology milestones already demonstrated, Solazyme believes it can profitably enter the fuels and chemicals markets upon commencing production in larger-scale, built-for-purpose commercial manufacturing facilities utilizing sugarcane feedstock. The company plans to bring a commercial fuels and chemicals facility online in 2013 and additional capacity in 2014 and 2015. It is important to emphasize that Solyazme’s process for producing oil from microalgae is unconventional. More conventional approaches have not proven to yield a path to profitability and there are good reasons to be skeptical about the economic feasibility of conventional oil from algae technology.
Professor James Richardson, an agricultural economics professor at Texas A&M, has evaluated many different types of conventional algae technology using advanced statistical techniques. Dr. Richardson’s research shows that most conventional biofuel technologies have negative investment return profiles and are unlikely to achieve profitability. It is instructive to note that Solazyme reportedly nearly went bust several years ago following a more conventional approach to producing oil from algae.
The market for fuels and chemicals is competitive and Solazyme faces competition in these markets from both established companies such as BP, Royal Dutch Shell and ExxonMobil, and from emerging biofuel companies such as Synthetic Genomics, Ls9 and Virent. While expected to compete against some of the major petroleum companies, Solazyme has stated that it may also seek to partner or collaborate with some of them as they look to expand their activities in renewable energy.
Some of the established fuel and chemicals companies have formed partnerships with Solazyme’s emerging competition. Synthetic Genomics was founded by biotech pioneer Craig Venter and is backed by energy giant ExxonMobil. Venter led the privately financed version of the Human Genome Project and is one of the world’s leading biotech visionaries. Synthetic Genomics appears to be using a more conventional, open sunlit pond approach to producing fuel. It remains to be seen if the company will be able to bring a commercially-viable and competitive biofuel to market. With visionary Venter and a deep pocket partner such as ExxonMobil on board, Synthetic Genomics is a company to watch in the future.
Ls9 is backed by consumer products giant Procter & Gamble. One of LS9’s competitive advantages is it utilizes specially-engineered microbes capable of converting plant-based materials into fuels and chemicals in just one step, compared to the multiple-phase processes seen elsewhere in the market. Meanwhile, Virent is commercializing an innovative biofuel technology that transforms a wide range of plant sugars into hydrocarbon molecules similar to that produced at petroleum refineries. The company is backed by Royal Dutch Shell. Virent’s renewable hydrocarbons can be blended to make gasoline, jet fuel and diesel.
Solazyme plans to navigate the competitive landscape through its ability to quickly produce oils tailored to provide the product features most important to customers in chemical markets. The company will also rely on the flexibility of its manufacturing process that allows switching the output of a production facility between oils. Solazyme views the flexibility of its technology platform as giving it a unique competitive advantage in producing plant oils that are geographically constrained and take months to produce and harvest.
Valuation and Summary
Solazyme has developed an innovative technology platform that combines the most efficient and productive oil-producing organism – microalgae – with scalable and cost-effective industrial fermentation processes with the potential of delivering high value-add, low cost, tailored oils. The company has a visionary and talented management team and a large patent portfolio, with 125 patents issued or pending.
It is early days for Solazyme in terms of commercialization activity. The company appears well positioned for growth in the skin and personal care market as well as in nutritionals in the months ahead. We expect commercialization activity in fuels and chemicals to ramp up in 2012-2013 as additional production capacity comes on stream. Several key partnerships have been announced – Honeywell UOP, Chevron, Qantas Airways, Ecopetrol, Unilever, and Bunge – and we expect Solazyme to announce additional partnerships in fuels and chemicals in the future as production capacity increases.
Given the diversity of its businesses and the factors driving its end target markets, valuing Solazyme is more art than science today. Energy prices are volatile and long range forecasts highly uncertain. It is anybody’s guess what the price of conventional oil will be per barrel next year, let alone in five years. The price of sugar required to feed Solazyme’s microalgae to produce oil has soared in the past few years and is currently trading well above its historical average.
Outside of the Solazyme/Roquette JV, which has provided Solazyme access to feedstock through multi-year supply arrangements with Roquette, the company uses market-priced, commercially available sugar for production. As the chart nearby shows, the price of sugar has risen significantly over the past several years and is currently trading well above its 30-year historical average price of just over $10 per pound.
Given the uncertainty associated with commodity prices such as commercial sugar, Solazyme is currently negotiating with multiple potential feedstock partners in the U.S. and Latin America to lock in multi-year agreements. These agreements would presumably give the company greater ability to produce its oils at lower cost and provide more visibility into future profitability for a given amount of demand for its oil.
In our intrinsic valuation (IV) model, we assume that Solazyme will enter into long-term contracts to lock in supply and prices for the feedstock necessary to produce its products. As those contracts emerge, we will assess and tweak our model as necessary. Our base case valuation model assumes some regression to the mean in the market price of commercial sugar over the next several years. Suffice it to say a sharp decline in sugar prices back toward the historical average would have a favorable impact on Solazyme’s margins and profitability.
Solazyme’s technology platform has the potential to generate positive gross margins in all three target markets. The charts above, which are recreated from an exhibit in the company’s S-1 filing, illustrates the fundamental economics of Solazyme’s technology platform. The left side of the exhibit shows the sharp decline in production costs achieved over the past several years. Production costs fell from $10,000 per metric ton in 2007 to $1,000 in 2010. As illustrated in the right side of the exhibit, Solazyme’s $1,000 per metric ton product cost compares favorably to its estimates of average selling prices in its three initial target markets. The highest gross margin potential is in the skin and personal care and nutrition markets, in which Solazyme is well positioned today. Margins in the fuels and chemicals markets are projected to be considerably lower, but they will be higher volume markets for Solazyme.
In our IV model, Solazyme’s near term profitability is driven primarily by sales of high margin skin and personal care and nutritional products. Gross margins start out at elevated levels and begin to decline as production of higher volume fuels and chemicals ramps up. Our base case model has Solazyme generating over $1 billion in revenue in 2015, with the lion’s share of revenue coming from the sale of lower gross margin oil in the fuels and chemicals markets.
On the cost side, we expect the primary drivers to be R&D and capital spending associated with the expansion of capacity. The production facility in Peoria, Illinois has an annual oil production capacity of over 1,820 metric tons and there are additional plans to add large commercial plants to service its fuels and chemical markets in the future. Solazyme also has the ability to contract out manufacturing as needed to meet demand. Our IV model assumes Solazyme has over 550,000 metric tons of production capacity by 2015, which is in line with the company’s plans.
Our base case intrinsic valuation (IV) model estimates the value of Solazyme’s shares at $21.50 this year and $26.25 in 2012 versus the proposed filing range of $15-$17 share, with a current market value of around $1.2 billion. In our model, Solazyme’s market cap is on a par with the current market value of Amyris (AMRS), a peer that came public last year and whose stock has performed relatively well since its IPO. The operating margin in our base case IV model is conservative relative to the Solayzme’s 25% target as we expect some bumps along the way as the company aggressively ramps up production capacity in the years ahead. We note there is considerable scope for additional value creation beyond our base case IV estimates if Solazyme can demonstrate an ability to achieve its targeted 25% operating margin.
Solazyme has filed for an initial public offering that is expected to price the week of May 23. The deal is being led by Goldman Sachs and Morgan Stanley. We expect considerable interest Solazyme’s IPO from both institutional and retail investors and wouldn’t be surprised to see the shares trading at elevated levels above our base case IV estimate for a period of time – similar to the dynamic we saw with A123 Systems (AONE) after its IPO.
The age of Synthetic Nanobiology is dawning. We think a successful IPO by Solazyme could mark an inflection point and usher in an era of accelerated innovation in the fuels, chemicals, food and consumer product markets. We view this as an intriguing time for companies and investors alike.
 For more on the nanotechnology revolution and its implications, see, “Quantum Investing,” by Stephen R. Waite, Thomson/Texere (2002, 2004).
 There are many different types of algae. The largest and most complex marine forms are called seaweeds. Kelp is a type of multicellular algae. Some forms of algae, like the common blue-green algae, are characterized as bacteria. For additional background, see Wikipedia.
 See, U.S. Energy Information Administration Outlook for 2011, April 2011.
 See, Rene H. Wijffels and Maria J. Barbosa, “An Outlook on Microalgal Biofuels,” Science, Vol 329, August 13, 2010, pp. 796-799.