After the market's close on February 6, renewable oils and bioproducts company Solazyme (SZYM) issued a press release found here. It included the announcement of a new partnership with yet another well-established company seeking to start a relationship with it. This new relationship with Mitsui & Co, Ltd. (MITSY.PK) comes on the heels of a new partnership with Archer-Daniels-Midland Company (ADM) and the intended expansion of a joint venture agreement with Bunge (BG) found here and here respectively.
In order to dive deeper into the significance of this particular development, I made contact with the company and was given the opportunity to interview Mr. Joseph Zwillinger. As the Director of Business Development for Solazyme, Joseph Zwillinger served as the company lead on establishing the joint development agreement with Mitsui & Co., Ltd. The information that follows contains my thoughts and supported commentary from that interview.
Why Mitsui Co & Ltd.?
For those who have never heard of Mitsui & Co. Ltd., the company remains well-known from a global standpoint. In fact, Mitsui & Co. Ltd. stands as one of the seven largest sogo shosha in Japan and is part of the Mitsui Group, which was formerly one of the Big Four zaibatsu that controlled a significant part of Japan's mining, chemical, and metals industries. The company's ties to the Japanese economy, and in effect the surrounding region, have been well-embedded for many decades. Concerning their expertise in the particular field of oleochemicals, Zwillinger states the following:
"Mitsui has 20 years in oleochemicals. They're one of the bigger buyers and resellers of oils. They know the fatty acid markets. They know the derivatives markets. So this is hugely valuable to pair with our technology platform when you think about their knowledge and their distribution [capability] for actually getting product to market, and selling out our plants."
Mitsui's established business relationships and expertise as a large player in the industry stand as beneficial attributes from Solazyme's perspective. It's important to remember that Solazyme is leveraging the capabilities of its partners in order to quickly and effectively commercialize its technology platform. As the company's technology has such a wide range of application, this would have required a large expense of resources in order to gain ground in each of its markets were the company to commercialize on its own. As it stands, the company's oils can be used in everything from foods, to chemicals, to fuels, and even personal care.
It remains ideal for Solazyme to find distribution partners that are willing to develop products for commercialization. Most importantly, this is why investors should consider the level of class that these partners bring to the table in regards to their respective fields of expertise. Apart from the leadership found in current partners Bunge, ADM, and Roquette as well, shareholders might do well to also recall another joint development agreement found in Unilever (UN). In the case of Mitsui & Co, we get another taste of industry leaders with a global presence that Solazyme is pursuing and has thus far been able to work with.
"[Mitsui & Co., Ltd.] is the largest minority investor in what I believe is now, if you consider in terms of production volume, the largest oleochemicals company in the world which is called KLK Oleo. And a subsidiary of that is Palm-Oleo, which Mitsui is an investor in," says Zwillinger. "[KLK Oleo] is a very well-respected and well-run operation. And seeing that it's a subsidiary of Mitsui, there's obviously a direct link for the products that we're developing, and it makes the partnership with Mitsui make a lot of sense."
Looking Beyond The Research Revenues
The face amount of the joint development agreement appears meager at best for those who fail to understand that these initial research revenues shouldn't be the focus at all. It hasn't been disclosed to the public just how quickly these revenues are to be accrued by Solazyme over the course of its multi-year agreement. Presumably, the $20 million face value will be awarded through milestone payments over several years, but this is open to speculation. When asking Zwillinger about the monetary amount he had the following to convey:
"[The $20 million] is a very near-term component of this deal. What the true implication is, is that they're funding research with us to develop products because we both agree there is a very long-term significant value from [the prices of] these oils long into the future. So this is kind of the starting point of the relationship and you expect a lot more revenue generation out of this initial deal than what might meet the eye from this basic announcement."
Looking at the graphic above, it's clear that Mitsui & Co., Ltd. carries an impressive track record. The company is well known for its investment capability and has a clear need to grow its chemical sector. As it had previously been conveyed by Solazyme's management, the company and its partners appear to be taking a much longer view when it comes to direction of the relationships. They continue to be building the foundation of lasting partnerships that revolve around the innovation of this sustainable technology.
Interestingly enough, these kinds of agreements also suggest that a partner company is intrigued by the technology. As a means of validation, the partner appears willing to pay for the continued research into products it will likely one day buy. Solazyme's pathway to large scale commercialization remains clear and seemingly imminent. Even in the structure of the agreement, Zwillinger articulates how Solazyme will stagger its product introductions with Mitsui in order to get revenue flowing as quickly as possible.
"The way that we thought about this relationship is that we wanted to pick some near-term targets and also some longer-term targets. So we're working on developing a suite of product, and some are more developed than others in terms of the maturity in our labs. So the ones that are very near term are going to come out in the next 12-18 months, 12-24 months maybe, and subsequently they'll be introduced after that."
Mitsui & Co's Interest in Solazyme's Technology
While it's understandable that Solayzme has much to gain from this new partnership with Mitsui & Co, Ltd., it's also beneficial to consider why the relationship is so advantageous for the partner company as well. I'll go into more detail about this in this in the second part of this interview. However, one thing that is clear and should be recognized by investors is the fact that the company's message is beginning to take hold with its partners.
For some time now, Solazyme's management team has been stressing the benefits of its platform's enhanced flexibility and capability. It appears that Mitsui & Co., Ltd. saw this as a positive strength and therefore sought to take on a range of applications through a portfolio of tailored oil profiles. Zwillinger broadly paints this picture as seen in his statement here:
"The beauty of our platform is to take a portfolio approach. Mitsui knows about the oleochemical industry, they have a deep history & experience in it, so they recognize this. You can leverage a platform like ours to take advantage of swings in prices or volatility in the market by taking this kind of portfolio approach and understanding that we can produce one oil one day, and a week later we can produce another oil. So they're fully recognizing that value. They decided, and agree with us that we should take a portfolio approach, multi-product, kind of phased-in introductions over a period of time with some substantial dollar figures."
As it stands today on February 6, Solazyme carries a market capitalization of $485 million. The company recently raised capital through a convertible notes offering that allows for them to operate well into the launch of its first large scale commercial facilities expected to be operational later this year and into 2014. Of the 12 analysts currently covering the company, 11 carry "Buy" ratings and the average price target rests at $17.86 according to the link found here. As of today, the company's ending share price was $7.96.
The agreement with Mitsui & Co., Ltd represents another new chapter for Solazyme as its claims a larger presence in the global market for renewable oils. Through this budding relationship, another industry giant joins the rank of companies that are beginning to line up behind the technology platform Solazyme has to offer. Though the latest agreement may not appear substantial initially, investors would do well to get a better grasp of the larger picture Solazyme continues to draw.
The company has developed a unique technology platform that continues to lure in well-established partners. As these partners continue to finance the development of these future products, Solazyme further defines it's ability to penetrate multiple high-end markets without the hassle of competing against the very companies its now partnering with. Look forward to my next article for the second part of this interview.
Disclosure: I am long SZYM, BG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.