On Friday, March 9, 2012, I had the privilege of being able to talk to CEO Jonathan Wolfson on a visit to Solazyme's (SZYM) research headquarters facility in San Francisco, CA. The short articles of this series will focus on our conversation in the hopeful attempt to further align the investment base alongside the true value proposition offered by this growing company.
The following commentary is solely based on my own understanding as an independent investor in the company, and this should be taken into account prior to forming any of the reader's own conclusions.
...the first thing [Solazyme] did was to optimize a really, really, really highly efficient oil-producing strain that could grow. So that was our initial goal, because when we first thought about what we were, it was a fuel company - we just needed to make oil. And then we realized that in order to make these strains even more efficient, we wanted to develop a very good molecular tool kit to optimize the ability to make oil. But once we realized we were building this molecular biology capability, we realized it could be used to really tailor the profiles in ways far beyond what a lot of these [agriculture] companies did...
- Jonathan Wolfson, CEO of Solazyme
For a company that has been so regularly bundled to the realm of biofuels, just a few short minutes is all it really takes to understand that the employees of Solazyme have their eyes on a prize much larger than fuels alone could ever provide. It's for this reason that the company can comfortably assert that its total market opportunity exceeds $3.1 trillion. Though undoubtedly the darling industry whose excitement has spurred the very innovation of the company's technology, the fuels market is one that necessitates high volume production capacity and offers a relatively low-margin return when contrasted against some of Solazyme's other target markets.
It doesn't take an MBA to know that common sense would avoid pursuing a strategy that seeks lower returns and higher capital expenditures, especially for a company that has yet established itself on a firm foundation of profits. Yet this is not to suggest that the company will avoid the fuels market altogether. As Wolfson himself asserted: "Fuels still gets me up in the morning a lot, right? Because this is why we started the company." For a company with many profitable options at its disposal, it would only be limiting to believe that it must stick to a single industry in order to succeed.
Perhaps one of the more telling signs of a well-designed company's larger focus lies in the key use of one particular company's name that was thrown out several times over the course of the day: "Monsanto" (MON). As a giant in the bioengineered seed industry, Monsanto's dominance over the corn and soybean markets is derived from its patented genes. Through the protection of intellectual property over a superior product, Monsanto's seeds have become synonymous to the industry norm. Yet it was their ability to develop their seeds over many years through the use of bioengineering that allowed for Monsanto to corner their markets.
In a similar fashion, Solazyme has been pursuing the development of tailored oil production through the use of optimized micro-algae strains. By developing unique oil profiles and filing patents on them, Solazyme has found itself on an open prairie of untapped intellectual property yet to be discovered. With customized oils that can provide inherent performance enhancements, Solazyme could be poised to capture, for example, the detergent market or dielectric insulating fluids market just as Monsanto captured the corn and soybean markets. By creating a product that is vastly superior to the alternative, Solazyme could follow Monsanto's model in profiting off of the intellectual property.
Yet, there remains one key critical difference that differentiates Solazyme from its agricultural competitors in regards to their genetic tailoring development capability: Research Time Efficiency.
To go from seed-to-seed in an experiment, the lead time is a couple years in most plants ...and our cycle time is a week, you know (laughs), and that is a huge difference.
- Jonathan Wolfson, CEO of Solazyme
Because of their use of a system (micro-algae) that reproduces exponentially faster than their competitors' system (seeds), Solazyme is able to modify, produce, test, and retry at lightning speeds when compared to what Big Agriculture is currently able to do. And this is an advantage that bears repeating and reiterated emphasis for fear of being understated: Solazyme's use of micro-algae is creating a massive development edge over its competition. The introduction of the company's process to this market of tailored products seems akin to the introduction of the machine gun in an age of bolt-action rifles. This comparative research advantage has the possibility to dominate the playing field.
By being able to bring more tailored oil profiles under the protective wings of Solazyme's intellectual property portfolio at process speeds that far outpace the competition's, Solazyme stands at a unique vantage point that appears to be underappreciated by the investing community. Yet this strength is only further fortified by being able to function in a proven channel to commercialization.
The ability to integrate this new research into a commercial process is a link that should not be overlooked. Once an oil profile is discovered, the ability to scale it to a commercialization level has been found to be very easy according to the company's experience over the last 5 years. It appears that from research to commercialization, Solazyme is developing a real edge over the competition in the new genetic tailoring gold rush.
Disclosure: I am long SZYM.