Solazyme: Poised to revolutionize oil markets?
Solazyme has developed a revolutionary way of synthesizing tailored renewable oils that address various end markets via the use of proprietary algae technology.
Solazyme (or the “Company) is a biotechnology company focused on the use of proprietary technology to employ algae in the conversion of plant based sugars into specialized renewable oils. The specialized renewable oils are used in both branded and unbranded products which span the Company’s various business segments: a) food (i.e., cooking oils and proteins), b) personal care (i.e., Algenist skin care products), and c) industrial products (i.e., diesel, jet fuel, and drilling lubricant), all with huge addressable end-market potential. Below an illustration of Solazyme’s business model.
Solazyme became publicly listed in 2011 (NASDAQ:SZYM). Given its biotechnology startup attributes, the Company has had to adapt its operating model to fit its long term business model. Given these circumstances, the Company has had to prioritize product introduction based on economic viability and capital requirements. This has given the Company the time and resources to develop longer dated and more capital intensive strategies in parallel. Examples of shorter dated product include low scale, high margin personal care and food products that are not dependent on scale for commercial viability.
Although the Company has previously focused on outsourcing production, Solazyme has now transitioned to producing from its own facilities. This has significantly reduced operating costs (approximately $12-$15 million of operating expense savings expected in 2016 alone) and has given Solazyme a higher degree of control over its production process.
Another central part of the Company’s operating model has been to focus product development on existing market needs. Such has been the case with the development of EncapsoTM, a branded oil well drilling lubricant which reduces friction by over 70%, increases the rate of penetration (ROP) by up to 50% compared to standard liquid lubricants, decreases torque by up to 42% and decreases drag by up to 50%. Below a video describing the product in further detail:
To further alleviate capital strains, Solazyme strives to develop long-term partnership that assist the commercialization of its products. Solazyme recently entered into an agreement to supply UPS with 46 million gallons of bio-diesel over a three year period. In addition, the Company expanded its JV with Bunge (NYSE:BG), a leading global agribusiness company, to increase focus on food and animal products. The expansion of the JV could give Solazyme more access to Bunge’s global distribution network, and marketing capabilities. Two potentially huge contributions for a company like Solazyme looking to increase the adoption of its products.
Finally, the Company seeks capital efficient strategies to secure sugar stocks and increase production capacity. Solazyme has been able to achieve this via partnerships. This a) helps Solazyme secure inputs and reduce commodity price volatility and b) obtain capital via partnership agreements to increase production capacity. Partners are benefited by securing offtake of their own production capacity at predetermined volumes and prices, and also allows them a certain degree of vertical integration into a higher margin business.
Despite the solid alignment between business and operating model, the Company has struggled in the capital markets. In 2014, the stock traded as high as $14.00 per share, in comparison to a current price of $2.75 per share (as of December 7th, 2015). This huge decline in stock price is attributed to large decreases in oil price, which is a key input in many of Solazyme’s competing products, and operational issues relating to the ramp-up of Solazyme’s in-house production capabilities. Delays were mainly related to a decision by Solazyme management to reconfigure its flagship facility which was geared towards certain end-markets which were severely affected by the drop in oil prices. The rationale of the decision had a long-term view – make the facility more flexible to address any further potential changes in the various end-markets Solazyme serves.
Even considering the capital market challenges the Company has faced, Solazyme has achieved incredible breakthroughs in its field. It has achieved some of the best cost and yield metrics among its competitors, and it continually replenishes its pipeline of viable future products. These attributes along with the alignment of a strong business model and a solid operating platform keenly position Solazyme to bring revolutionary changes to the global oil markets.
Additional video describing Solazyme:
Sources:
- http://solazyme.com
- http://www.encapso.com
- Seekingalpha.com
- Google.com/finance
- Youtube.com
- Company filings: 2014 10-K and September 30, 2015 10-Q
- Jefferies equity research – Solazyme, Inc. Q3 Review: Turning onto validation road?
Thanks for sharing this! Even though Solazyme has a number of different finished oil products, they all seem to be dependent on the same biotechnology platform to produce. What will happen to the company when the intellectual property on that platform runs out? Or if someone finds a work around? Is there something unique about the process itself that can’t be replicated?
Gaurie, thanks for the post! Although this is all a single platform, they have numerous patents to produce the various tailored oils and they continually strive to come up with new processes that could be potentially patented – this somewhat mitigates the risk you mention. Nonetheless, as stated within Solazyme’s business risks “Our competitive position depends on our ability to effectively obtain and enforce patents related to our products, manufacturing components and manufacturing processes. If we or our licensors fail to adequately protect this intellectual property, our ability and/or our partners’ ability to commercialize products could suffer.”
So this is definitely a significant business risk, but Solazyme has been able to mitigate via solid management of its patent/product portfolio.
Wow! Awesome technology – crazy what single-celled organisms can do with a bit of technological innovation.
I initially had similar concerns as Gaurie’s post (i.e., how long-lived is the IP, how defensible is business model without IP protection) but think the significant decrease in oil price may end up being a blessing in disguise long-term. While we don’t know the cash flow situation from the post, the video highlighted a significant number of supply agreements with high-quality off-takers. Assuming these were longer-term in nature, Solazyme may be able to ride out the demand response that its customers will have toward a lower-priced oil input.
If this is the case, there is a near-term opportunity to focus on process innovation, potentially buy up similar-type companies with sub-optimal capacity, and work on some of the longer-term R&D, all without the threat of significant new competition. Purely conjecture but will be interesting to see whether they put the accelerator down with the expectation they can ride out the downturn or if they turn toward a more “safe” cash conservation approach that won’t necessarily hinder but wouldn’t advance current market position.
Agree 100% – very interesting concept…
Regarding the plunge in oil prices, I believe it forced Solazyme to re-asses its operating model and further improve it (making it viable even under circumstances where the Company’s price floor completely fell from under it). Although I don’t foresee Solazyme being particularly aggressive regarding cash burn (investors would likely be weary), they do plan to continue pursuing expansion of in-house production facilities (which with economies of scale should make more products viable).
I am looking forward to seeing the Company’s fully fledged capabilities in a more favorable pricing environment. Think the potential is pretty huge…