Solazyme's Algae Technology Paves The Way To New Food Innovation

| About: TerraVia Holdings, (TVIA)

When renewable oils company Solazyme (SZYM) first began its pursuit to develop an abundant source of sustainable fuels through the use of algae, surely there was little thought that the company could one day have a meaningful impact on the way that we approach our daily meals.

Indeed it was by accident that the company, which was started in a garage by the ambitions of an MBA graduate (Jonathan Wolfson) and a geneticist/patent lawyer (Harrison Dillon), came to discover that one of their outputted oil profiles resembled the properties of an edible olive oil. Now a publicly traded company with a market capitalization of $774 million as of April 12, Solazyme has dedicated a whole division of its company to the development of food and nutrition.

Solazyme stands on the cusp of building out their first large scale production facility with starch giant Roquette Frères through their joint venture Solazyme Roquette Nutritionals (SRN), the potential of an offshoot technology is beginning to show its face. Indeed, so excited was Roquette over the implications of this technology that they actually assumed 100% of the construction costs and working capital necessary for the 50-50 joint venture.

In itself, this generous gesture is sure to amount in costs to Roquette of tens of millions of dollars as the JV evolves its facility into a site capable of producing 50,000 metric tons of oil per year. But for what is all this money being spent on? The answer lies in whole algalin flour.

The following picture from SRN's website says it all:

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Through whole algalin flour, food products can now be made from a fat source that is healthier for our bodies. The micronutrient composition is 50% healthy lipids with high oleic content. Included in the composition is exposure to healthy fiber and protein. Above all, the product is natural, vegan, gluten-free, and non-allergenic.

Having visited Solazyme's research headquarters in March 2012 and tried several of their flours and products (ice cream and cookies), I can also vouch for the quality of the taste and consistency described in the picture above. Unlike many of the existing "healthy" lines of comparable products, these particular examples appeared to have a richer taste and feel in the mouth that is sure to be a large selling point to willing companies.

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Many of these products are sure to interest the large producers who have already settled into their niche places in the food industry. Kraft Foods (KFT) for example, is likely to be intrigued by the fact that Solazyme Roquette has already demonstrated a healthy mayonnaise and salad dressing. Considering the company is a leader in snack foods, Kraft may also be intrigued by the cookies and brownies SRN has also shown itself capable of producing. Undoubtedly, Kraft and other major food manufacturers will be easily sold on the value propositions offered in a vegan, allergenic-free, and gluten-free resource that is becoming ever more attractive in this current age.

Yet despite the connotation with baked goods, SRN's ambitions could expand much further than just flour. The company's products can already serve as egg replacements, but expanding further into the meat chain may be realized sooner than one thinks. As is, Solazyme has already filed a patent application that could make its products "useful for the manufacture of meat substitutes and meat enhancers." Can you imagine your beef taco stuffing or sausage links partially made out of products derived from algae? The reality is already possible.

Such applications could raise the eyes of Tyson Foods (TSN) and Hormel Foods (HRL), two leaders in the robust meat food products industry. It's unlikely after all for companies like Tyson and Hormel to pass up the opportunity to advertise leaner and healthier meats in an industry already associated with large amounts of fat and cholesterol.

After all, everyone in the food industry is trying to jump on the bandwagon of healthier food products, and these two companies are no different. Such ease of integration into existing product lines could allow for Solazyme's technology to be more powerful than investors dare realize.

For its own part, food and consumer product conglomerate Unilever (UN) has already taken its own measures into capitalizing on Solazyme's technology. In 2010, Unilever became an active investor in Solazyme. In 2011, the company expanded its role with Solazyme by establishing multiple commercial development agreements. Of particular note, Unilever even began exploring the use of Solazyme's tailored oils.

This is an area of proven research that is capable of introducing fit-for-purpose oils that have yet to be seen in this world, and yet are capable of introducing new innovative products with superior characteristics. According to Solazyme's 2011 highlights, in such a short amount of time, the company was successful in developing multiple tailored oils customized for specific market areas.

While far removed may we be from a revolution in food, the introduction of Solazyme's technology in this field may have a very surprising effect on the industry in the coming years as production capacity comes online. Additionally, let us not forget that the company's technology can essentially use waste materials such as switchgrass, corn stover, and forest residue to produce heart healthy edible oils contributing to the products we regularly consume.

The technology is literally expanding the planet's food capacity in light of growing populations and shrinking amounts of arable land. While food products may serve as but one industry that Solazyme is actively addressing, the investors in this company may want to keep an active eye on the progress that is achieved here. Surely, the market is more than ready for innovation, and a solution to be healthier and greener appears to be right around the corner.

Disclosure: I am long SZYM.