IPO Pick of the Week: Solazyme

| About: TerraVia Holdings, (TVIA)

Based in South San Francisco, California, Solazyme (SZYM) has scheduled a $160 million IPO with a market capitalization of $912 million at a price range mid-point of $16 for Friday, May 27, 2011. The full IPO calendar includes seven others totaling $3.25 billion.

Summary - SZYM produces different kinds of oil from sugar cane, using microalgae as a biocatalyst. SZYM is a company with big-name strategic partners and has a well thought-out manufacturing capacity scale-up plan.

Commercialization is just beginning. SZYM is a very exciting company.

Valuation - For the time being SZYM is a "story stock" with one of the best stories we have seen in a long time. Near term top line revenue growth is very visible based on strategic partnership commercialization agreements. See strategic partnerships below.

SZYM is priced at 4.3 times booi value, in between Amyris (NASDAQ:AMRS) (4.4 times book) and Gevo (NASDAQ:GEVO) (4.2 times book). AMRS and GEVO are also in the renewable product generation business. SZYM, however, seems closer to near-term big scale top line revenues from first tier strategic partnerships.

SZMY Valuation Metrics

Business - SZYM says "we make oil." The process uses microalgae as a biocatalyst to produce oil from a wide variety of low-cost plant sugar feedstocks. SZYM’s microalgae are grown in the dark and use “indirect photosynthesis,” receiving their energy from the plant sugars fed to them in large steel tanks.

According to SZYM its oils can address the major markets served by conventional oils, which represented an opportunity of over $3.1 trillion in 2010. Initially, SZYM is focused on commercializing products into three target markets: (1) fuels and chemicals, (2) nutrition and (3) skin and personal care.

Revenues - Through December 31, 2010, SZYM generated revenues primarily from research and development programs and license fees. SZYM revenues in 2010 were primarily generated from key contracts with two government agencies and three commercial partners.

Commercial Products Today - SZYM prioritizes its market entry based on unit economics, capital requirements and value chain dynamics.

In 2010, SZYM launched its first products, the Golden Chlorella line of dietary supplements, as a market development initiative, with products incorporating Golden Chlorella currently being sold at retailers including Whole Foods (WFMI) and GNC (NYSE:GNC).

In March 2011, SZYM launched its Algenist brand for the luxury skin care market through marketing and distribution arrangements with Sephora International, Sephora USA and QVC. Distribution of the Algenist line of skin care products is expected to reach more than 850 retail stores worldwide by year end.

Strategic Partnerships (see SZYM's S-1 page 97)

U.S. Department of Energy Award - In December 2009, SZYM was awarded approximately $21.8 million in federal funding from the DOE to partially fund the construction, operation and optimization of an integrated biorefinery to be located at its Peoria Facility.

In September 2010, SZYM entered into a firm fixed price research and development contract with the U.S. government for a research and development project, which includes producing up to 550,000 liters of HRF-76 Renewable Naval Distillate for the U.S. Navy’s testing and certification program. F-76, of which HRF-76 is the renewable version, is the primary shipboard fuel used by the U.S. Navy.

Roquette - In November 2010, SZYM entered into a joint venture and operating agreement for Solazyme Roquette Nutritionals with Roquette. Solazyme Roquette Nutritionals is a Delaware limited liability company 50% of which is owned by SZYM and 50% of which is owned by Roquette. Solazyme Roquette Nutritionals is headquartered at SZYM’s offices in South San Francisco.

Jonathan Wolfson, SZYM’s chief executive officer, has been appointed chief executive officer of the joint venture. Solazyme Roquette Nutritionals is managed and controlled by a board of directors consisting of four directors, two of which were appointed by the company and two of which were appointed by Roquette.

Chevron (CYX) - In November 2010, SZYM entered into a Phase 2 Research and Development Agreement (the Phase 2 Agreement) with Chevron (the fourth agreement with Chevron). Under the Phase 2 Agreement, SZYM is conducting a research program related to algal technology in the fields of diesel fuel, lubes and additives and co-products.

Sephora - In December 2010, SZYM entered into an exclusive distribution relationship with Sephora International, and in January 2011, SZYM entered into a distribution relationship with Sephora USA. Under the arrangements, each of Sephora International and Sephora USA will distribute the Algenist product line in their respective territories.

Dow Chemical (NYSE:DOW) - In February 2011, SZYM entered into a joint development agreement with Dow in connection with the development of microbe-derived oils for use in dielectric insulating fluids. Pursuant to the agreement, SZYM will be working with Dow to develop algal oils for use in dielectric insulating fluids.

Bunge (NYSE:BG) - In May 2011, SZYM entered into a joint development agreement with Bunge Global Innovation, LLC. Pursuant to the agreement, the company will be working with Bunge to develop specific microbe-derived oils and to explore the production of such oils from Brazilian sugarcane feedstock. Bunge will provide SZYM with representative mill feedstocks from its mills to aid in SZYM’s product development.

Intellectual Property - SZYM owns three issued patents and over 125 patent applications as of May 9, 2011, some of which are foreign counterparts that were filed in the United States and in various foreign jurisdictions.

SZYM’s patents expire in 2026 and 2031, and current patent applications, if issued, will expire between 2026 and 2031 (or 20 years from the date of filing). SZYM’s patents and patent applications cover and are directed to compositions such as custom oils, fuel products, chemicals, food products, cosmetics, strains of microbes, and gene sequences; methods of manufacturing finished goods and raw materials; and methods of using SZYM’s raw materials and products.

Manufacturing - Since 2007, SZYM has been operating in commercially-sized standard industrial fermentation equipment (75,000-liter scale) with multiple contract manufacturing partners.

SZYM believes that it has produced more non-ethanol, microbial-based fuels and oils than any other company in the world. From January 2010 through February 2011, SZYM produced well over 500,000 liters (455 metric tons) of oil. To satisfy the testing and certification requirements of the U.S. Navy, SZYM partnered with UOP LLC, a Honeywell (NYSE:HON) company, to refine a portion of this oil into over 200,000 liters (182 metric tons) of military specification marine diesel and jet fuel.

The Navy then blends SZYM’s fuel 50/50 with petroleum derived fuel, and tested it successfully in unmodified engines, including the test performed on SZYM’s HRF-76 marine diesel in the Riverine Command Boat Experimental in November 2010. In December 2009, SZYM was awarded a $22 million “Integrated Bio-Refinery” grant from the U.S. Department of Energy which allows SZYM to develop integrated U.S.-based production capabilities for renewable fuels and chemicals derived from microalgae.

In May 2011, SZYM purchased a development and commercial production facility with multiple 128,000-liter fermenters, and an annual oil production capacity of over 2,000,000 liters (1,820 metric tons) located in Peoria, Illinois (the Peoria Facility).

SZYM’s integrated biorefinery funded by the DOE grant discussed above will be located at the Peoria facility. Additionally, SZYM completed detailed engineering designs for large commercial plants to service fuels and chemical markets, developed in conjunction with Engineering, Procurement and Construction (EPC) firms Jacobs Engineering Group Inc. and Burns & McDonnell Engineering Co., Inc.

Manufacturing Scale-Up - In the nutrition market, SZYM recently entered into a 50/50 joint venture with Roquette Frères, S.A., one of the largest global starch and starch-derivatives companies, with the goal of jointly developing, producing and marketing nutrition products worldwide. Roquette has agreed to provide all capital expenditures and working capital required to produce nutrition products for the joint venture. Subject to approval of the board of directors of the JV, Roquette has also agreed to fund an approximately 50,000 metric ton per year facility that is expected to be sited at a Roquette wet mill and owned by the JV.

In the fuels and chemicals markets, SZYM plans to launch a commercial facility in 2013 and additional commercial capacity in 2014 and 2015. SZYM is currently negotiating with multiple potential feedstock and manufacturing partners in the United States and Latin America. For example, in December 2010, SZYM signed a non-binding letter of intent with Bunge, one of the largest sugarcane processing companies in Brazil, to form a joint venture and co-locate oil production at one or more of its sugarcane mills, which SZYM believes would provide sufficient sugarcane crush to support manufacturing capacity of over 400,000 metric tons of oil per year.

In May 2011, SZYM also signed a joint development agreement with Bunge Global Innovation, LLC to solidify and extend its relationship with them in Brazil. In addition, SZYM signed a development agreement with Ecopetrol, the largest company in Colombia and one of the four major oil companies in Latin America, to evaluate manufacturing options based on Colombian sugarcane feedstock.


Fuels and Chemicals - SZYM competes in the fuels market with large oil and gas companies such as BP (NYSE:BP), Royal Dutch Shell (NYSE:RDS.A) and Exxon Mobil (NYSE:XOM), companies that have resources and name recognition far in excess of SZYM. While SZYM anticipates competition from these large, established companies, SZYM may also partner or collaborate with these types of companies. SZYM anticipates that these companies will more aggressively seek economically viable petroleum alternatives as legislation, such as RFS2, promotes additional renewable fuel demand.

Nutrition - The food industry is large and mature, and SZYM expects to compete with well-established competitors such as SALOV North America Corporation (through its Filippo Berio products), Archer Daniels Midland Company (NYSE:ADM) and Cargill.

Algal flour, as a conventional oil replacement, will compete with a broad array of products such as powdered eggs, dairy alternatives, vegetable cooking and frying oils. Additional potential competitors include DSM Food Specialties and Danisco A/S, which recently agreed to be acquired by E.I. du Pont de Nemours (NYSE:DD), which uses fermentation-based platforms similar to the company's in the nutrition food space.

While SZYM anticipates competition from these large established companies, SZYM may also partner or collaborate with these types of companies. SZYM also believes that its partnership with Roquette and the development of novel designer oils will allow SZYM to compete effectively in the nutrition market.

Skin and Personal Care - The skin and personal care market is highly fragmented and competitive. In addition to the competitive factors that apply to all of the markets in which SZYM competes, advertising, promotion and branding are keys to success and act as potential barriers to entry in the skin and personal care market.

SZYM plans to compete primarily in the luxury skin and personal care market. SZYM will compete with companies with well-known brands such as Kinerase, Perricone MD and StriVectin. These companies have greater sales and marketing resources.

SZYM plans to compete in this market through arrangements in which SZYM’s microalgae-based skin and personal care products will be launched and co-marketed with Sephora International, Sephora USA and QVC. Some of the competitors in this market have well-known brands such as Meaningful Beauty and Principal Secret, and have substantially greater sales and marketing resources.

Use of Proceeds - SZYM shareholders intend to sell 600,000 shares. SZYM intends to sell 9.4 million shares to net $158 million. IPO proceeds are allocated to to fund research and development activities, for working capital and capital expenditures and for other general corporate purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.