Solazyme's New Oils Set The Bar High For Seed Companies

| About: TerraVia Holdings, (TVIAQ)
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On Tuesday, renewable oil innovator Solazyme (SZYM) reported two key updates in its 2Q Earnings Conference Call regarding its ongoing research within the industrial and nutritional oil space. As the developer of a unique algae-based biotechnology platform that is capable of producing tailored oil profiles, the company has found itself in direct competition with more established seed companies such as DuPont (DD), Dow Chemical (DOW), and Syngenta (NYSE:SYT). Yet as witnessed by the company's research progress to date, Solazyme is already beginning to innovate industry-changing oils that far surpass the capabilities of traditional seed technology.

The evidence is beginning to make its way to the surface as the following charts illustrate. In this oil profile, which was first announced in the prior quarter, Solazyme declares that it's created the highest concentration of oleic acids in a currently available product while effectively eliminating the presence of polyunsaturates. As stated by CEO Jonathan Wolfson in the aforementioned earnings call: "This optimal combination has never been available despite large investment by ag-biotech companies."

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But to build on this impressive achievement, the company announced in the same call that the oil profile has now also been confirmed to exhibit the highest oxidative stability properties in any currently available oleic oil. The shocking fact is that Solazyme's new oil excels past the previous best-in-class oil (sunflower oil) by a factor of more than three times on a natural basis. In food products, this property allows for enhanced shelf life and extended fry life, which provide additional value to food manufacturers as a longer lasting product. In industrial applications such as lubricants and functional fluids, the oil translates into advantageous benefits such as higher lubricity and low volatile organic compounds. By creating an oil that can last longer and operate more effectively at its intended purpose, Solazyme ultimately creates additional value that can be divided amongst the customer and their end client.

Also buried in the earnings conference call was the announcement of a new oil profile that is being developed by the company. In an attempt to address a high-demand, high-margin market, Solazyme has developed a new oil that yields more than two times the amount of myristic acid than the current highest-concentrated products found in palm kernel oil and coconut oil. Myristic acid is a specialty chemical ingredient widely used in personal care product lines and in food as a flavoring additive. The company believes that it is targeting a market worth $600 million annually through this product, which sold for more than $4200/MT on average in 2012.

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Solazyme's unique ability to tailor and enhance its oil outputs utilizing a single process offers a competitive advantage that will be difficult to be matched by agricultural companies. Large competitor Monsanto (NYSE:MON) declares that it takes approximately 8-10 years and between $50-$100 million in order to bring a new biotechnology product into reality. Yet because it's working on a quickly reproduced micro-algae cell and breaking up the growth and oil production phases of the cell's life cycle, Solazyme is able to significantly outpace Big Agriculture's ability to develop innovative breakthroughs in terms of time, money, and quality. More of this can be read in my article found here.

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Though it may seem far from evident now, Solazyme is positioning itself to be a major contender among these oilseed companies down the road. As it stands, the oilseed business remains a highly lucrative market dominated by a very limited amount of large antiquated competitors. In one specific market example found in 2010, Syngenta bought Monsanto's sunflower seed business for $160 million in order to further exert its presence in the $700 million market. With a new market for algal oil that can take away from the usefulness of sunflower oil as illustrated in aforementioned first oil profile, Solazyme stands as a legitimate contender to the established seed oligarchy.

Yet for the limited time being, seed companies have little to fear from the small $822 million new-kid-on-the-block company found in Solazyme. At present the company has very limited manufacturing capacity (which is already being dedicated towards the market of cosmetics). With only $195 million in cash and investments on hand in order to expand out its operations, Solazyme is not about to exercise the power it now wields until it's able to build out its capacity to do so. As a result of this predicament in which the company is constrained by the need for additional capital, the company has successfully turned to pursuing joint ventures with willing partners who are able to finance their capacity build out.

Perhaps what remains the most surprising factor of all is that the companies that should be competing against Solazyme are finding it advantageous and even necessary to join forces. Oilseed giant Bunge (NYSE:BG) has already entered into a 50-50 joint venture with Solazyme in order to address the fuels and chemical market. In the field of nutrition, French starch giant Roquette Freres was even willing to contribute all of the capital requirements of a 50,000 MT production facility in order to establish a 50-50 joint venture for a shot at Solazyme's nutritional products. The company was originally going to compete in the same field until it recognized the strength of Solazyme's intellectual property portfolio. Even Dow Chemical has agreed to an offtake agreement for Solazyme's dielectric fluids, a market to which Dow is already an established player.

With all the progress Solazyme continues to exert upon multiple industries, large seed companies and big agricultural companies stand as the most directly affected through the introduction of Solazyme's now commercially-tested process. Oils used for both industrial and food purposes are often both derived via agricultural means. Investors should therefore be cautiously mindful of this company that conducted a mere $13.5 million in revenues last quarter rather than dismiss it altogether. The company remains on track to conduct over $1 billion in revenues with attractive margins by the end of 2015 according to prior guidance by the company. Reaffirming this position of strength is current research progress that continues to indicate that Solazyme is well-primed to a make a meaningful impact in the years to come.

Disclosure: I am long SZYM, BG.