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: